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Real estate firm expects a 10% decline in home sales in '06

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With new home construction declining and sales slowing, the predicted 2006 housing market slowdown in San Diego County is very real according to the Sullivan Group Real Estate Advisors (News), who spoke as part of a housing seminar this month.

For the first quarter of 2006 new and existing home sales activity is down by 30 to 60 percent when compared to the first quarter of 2005, according to Peter Dennehy, senior vice president with the Sullivan Group.

"This (change) comes at a time when San Diego's economic fundamentals are more positive than they've been in five years," Dennehy said.

Tim Sullivan, president of the Sullivan Group concurred, saying incomes have increased, the regional economy is good, and the area is experiencing solid job growth, an aspect that is directly linked to the housing market.

Employment growth in the county has been accelerating since the summer of 2003, Dennehy said, citing a 1 to 1.5 percent increase in job growth for this year. In a different seminar in November 2005 he predicted 30,000 new jobs in 2006.

Looking forward, Sullivan predicted a more than a 10 percent drop (in sales) for 2006, while Dennehy said there will be around 40,000 sales this year, which is not historically appalling.

The construction sector is one area where employment will slow down, as builders consolidate operations and year-end permit levels are expected to decline to around 12,000 units. However the decline in construction jobs will be offset by the job increases in the service and tourism industries.

While local economic fundamentals are positive, that is not carrying over to housing as buyers are sitting on the fence watching how the market will react following a period (2005) that experienced the second most home sales in history.

But 2005 new home sales figures are slightly deceiving as condominium "conversions really masked the reality of the market," Dennehy said, adding the majority of the nearly 5,000 conversions sales were not actually new construction but more renovations.

"Conversions are still the largest market in March 2006 in terms of sales," Dennehy commented.

Housing appreciation, similar to amount of sales has also declined.

"In the detached market we have declined almost to no appreciation. In reality, a five percent appreciation rate is not really what we're dealing with," Dennehy said. "This market pricing will probably be flat for a year or two."

The decline in appreciation rates and amount of sales equates to increased inventory and time on the market.

The attached inventory in the county is 3,000 units, with 80 percent of those units residing in downtown. The detached market appears to have less of an inventory problem, according to Dennehy who said there were 850 first quarter '06 detached sales.

At the end of the first quarter the average days on the market for a home was 56 days, which according to Sullivan is not terrible, as even 60 to 70 days on the market is considered healthy. He said a key to selling homes in this type of market, from a builder or developer's standpoint, is differentiation through location or design.

"That's how we battle a down market. It's being able to see your buyer and build to them ... sameness is what hurts us right now in the market," Sullivan said, adding developers offering incentives as part of a home sale is another sign we're in a down market.

Often times a down market in one region can affect nearby markets, which is why the seminar partially focused on the Imperial County.

According to Adam McAbee, vice president of the Sullivan Group, Imperial has experienced rapid growth spanning the past few years, with 2005 representing a record year in terms of new home sales and median home price.

While the amount of new building in San Diego County has decreased, there are currently 26 active selling projects in Imperial up from 14 in September 2004. Prices have also increased, as everything is not in the $300 to 400,000 as it was in 2004 and 2005, McAbee said.

If increases in employment are any sign of the housing market then Imperial's market should remain healthy this year, as job growth is predicted to be stronger than 2005, which represented the county's strong job growth year. However it appears Imperial's market, as far as activity, is similar to San Diego.

"This market also appears to be stabilizing," McAbee said.

While the San Diego market is on a decline Sullivan reminded the attendees that the market is cyclical and perspective is key, as average inventory and time on the market figures are still below historical averages. Additionally the unemployment rate is below the average of five percent and interest rates remain historically low.

Send your comments, thoughts or suggestions to erik.pisor@sddt.com

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