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Experts say low inventory will push up home prices

Supply and demand, and San Diego’s low housing inventory, combine to bring up prices in a competitive market, experts said at the San Diego Association of Realtor’s fourth annual Regional Real Estate Summit on Friday.

“As I look at 2012, a big change has been I don’t think people are waiting for the market to bottom anymore,” said Leslie Appleton-Young, vice president and chief economist for the California Association of Realtors.

She forecasted sales to increase 3.7 percent in 2013 and the median home price to increase 4.1 percent.

But the housing market – nationally, statewide and locally – isn’t out of the woods yet.

Lawrence Yun, chief economist for the National Association of Realtors compared the economy to a Charger’s game – where the team was down eight touchdowns and came back four – which is good, “but it’s not time to smile yet,” he said.

Nationwide, interest rates are expected to increase in the next three to five years, said Yun, and the housing market recovery will continue over the next three to five years, with rising rents causing renters to “pull out calculators and see if it’s [better] to buy,” he said.

“I can stand here and tell you that things are totally rosy, that the economy is all fixed and everything is positive," said Dan McAllister, San Diego County treasurer-tax collector. "That would not be truthful. There are still some issues out there. We see them, we hear them and we hear about them on a regular basis.”

The county’s annual tax sale auctioned off 125 properties in March because the owners hadn’t paid taxes for five or more years – the beginning results of the 2007 housing downturn, McAllister said.

The dollar value of sales is slowly increasing, said Appleton-Young.

There has been an 8 percent increase in 2012 and an expected increase of 5 percent for 2013. McAllister said the assessed valuations of homes are moving up.

“They are down from the peak five years ago but they’re on the way up,” McAllister said.

Reasonably priced homes are staying on the market for a shorter time and receiving multiple offers, he said.

Prices bottomed in California in February 2009 and were up 34.1 percent in July from then.

In San Diego, the bottom occurred in March 2009 and prices are up 21 percent since then, Appleton-Young said.

Gary London, president of The London Group, said he expects prices to get “higher and higher and higher” but not form a bubble, and instead form a “repeaking of high points in the housing market.”

“Prices always peak out at higher levels. It’s just a function of a lot of demand against very little supply,” London said.

Peak to trough dollar volume in California dropped 54 percent, hitting a bottom in 2011, according to Appleton-Young.

There will be about an 8 percent increase this year and another 5 percent increase in 2013, “so things are getting better,” she said. “And it’s not the level of sales, it really has to do with the price environment.”

With 30.5 percent of mortgages underwater and 4.4 percent close on the cusp, Appleton-Young said the market won’t recover until this is remedied.

“It’s not until this issue is dealt with that we’re really going to see a market that’s going to look more normal,” Appleton-Young said, referring to underwater mortgages. “What’s the biggest problem in the housing market today? Inventory. Until these issues are resolved either with a short sale, or loan modification, or foreclosure, or prices went up and I’m not underwater anymore – something’s got to happen to kind of shake that population through.”

In January 2009, 60 percent of California’s sales were bank-owned, about 10 percent were short sales and 30 percent were equity sales.

Since then, equity sales have doubled, Appleton-Young said, REO sales are down by two-thirds and short sales are up slightly.

The biggest constraint on the housing market is inventory, Appleton-Young said.

Statewide, equity sales have 3.8 months of inventory, short sales have 4.2 months and REOs have 1.5 months, Appleton-Young said.

In San Diego County, 3,221 units closed escrow in August and there were 2.6 months of supply.

From a supply-and-demand standpoint, McAllister said low inventory “bodes well” for price increases.

There were 2,700 transactions last month, London said, and a normal market would be between 5,000 and 7,000 per month.

“The dynamics of the marketplace are changing dramatically,” London said.

The county will continue to grow by 40,000 to 50,000 per year, he said, according to SANDAG’s projections, through 2030.

The population grew through net immigration in the 20th century, said London, and now 62 percent is a natural increase caused by more births than deaths.

But San Diego County has run out of developable land, and London said there’s a concern about additions of inventory to accommodate growth that’s going to come into the economy.

The only way to accommodate the growth, he said, is to build up instead of out.

“Housing is going to get very vertical -- it’ll be apartments, slightly mixed use… it’s going to be on infill property; think old shopping centers… this is the future of the building industry," London said. "It also means by definition that we’re going to be building smaller homes.”

Housing permits hit a bottom in 2009, said Appleton-Young, with an increase of about 5.2 percent in 2011, showing a greater growth in the multifamily sector.

“I’m sure everyone in the room knows a college graduate who moved back in or maybe the parents moved back in with the kids or maybe it’s a three-generation household -- so there’s a lot of accommodations that have been made because of the economic cycle,” Appleton-Young said.

“Conservatively, there’s about 377,000 households that would have been looking for a place to own or rent that aren’t right now because of the downtime and the hard times," she said. "That will change, that will come back and we’ll see an improvement in new construction in California.”

The Generation Y population is starting to get jobs though, London said, and are starting to move out. Apartments are the “sweet spot” of the real estate sector, mostly because of the Generation Y renters.

While baby boomers were able to buy homes at age 30, Generation Y-ers have a tough time accumulating equity to purchase a home and may not want to buy a home, London said.

There is also “residual rental demand” for those who shouldn’t have bought a home and are back in the rental market.

The number of California Realtors fell by more than 50,000 over the past five or six years, Appleton-Young said.

The ones who are missing are the people who came into the market as new Realtors when it was hot, and left when it dropped.

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