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Wednesday, March 16, 2005 | The white-hot San Diego housing market is showing signs of cooling off – fast. After a period where the value of many homes doubled in as little as three years, lower sales figures, longer waits to get properties into escrow, and a lack of bidding by buyers are signaling what many analysts said was inevitable – a slowdown in the San Diego real estate market.

Sales figures of existing homes in the region from the San Diego Association of Realtors show the trend.

In February of this year, 2,144 homes were sold. Compare that to February of 2004, when 2,765 homes closed escrow. Another sign of the slowdown is the time the homes stayed on the market. In February 2004, it took an average of 36 days for a home to enter escrow. In February 2005, that number rose to 57 days, an increase of 41 percent.

For all of 2005, the total number of existing units sold, attached and detached, is off 18 percent, and the time they are staying on the market has increased by one-third.

Bubbling Is Over

In a 2003 report on housing issues, two economists for the Brookings Institute, Karl E. Case of Wellesley College, and Robert J. Shiller of Yale University, defined a housing bubble as “a situation in which excessive public expectations for future price increases cause prices to be temporarily elevated.”

But Chris Thornberg of the UCLA Anderson Forecast says the economic performance of the housing inventory is also important.

“A bubble is when the underlying fundamentals in no way support the price of the asset,” said Thornberg. “Do real estate prices reflect a change in the fundamentals? What has changed in the market to cause 25 percent appreciation over the last year?”

Thornberg points to rental rates as an indicator of a bubble. Unless buyers are walking in with substantial down payments, even as much as 50 percent, they will not be able to cover their mortgage payment if they decide to rent the property. That’s because rental prices have not kept pace with the price of housing

Thornberg believes a real estate bubble does exist here in San Diego and most of Southern California. He says it’s driven by the low interest rates, expectations of continued rates of high appreciation, consumer spending and a strong job market.

“If the job market stays strong in San Diego, the bubble won’t pop, the air will be let out gradually,” said Thornberg. “What you (will) really see is asset prices flattening. Then you have a period of flattening until the market stabilizes.”

One reason for the drop in sales figures could be the heavy rains in January and February of this year, but a look at the figures shows the slowing trend starting in the summer of 2004.

Truce in the Great Bidding War

“You don’t have the kind of silly bidding that you had as late as last summer,” said Alan Nevin, the director of economic research for Market Pointe Realty Advisors in San Diego. The company provides market analysis for the real estate industry in Southern California.

“The market has slowed down to the point where [buyers] are no longer receiving multiple offers on properties unless they are priced well,” Nevin said.

People who sell houses for a living say the playing field between buyers and sellers has leveled off.

“I would say we have a good balance right now between buyers and sellers,” said Linda Artiaga, a local real estate broker who works in central San Diego. “We are not in a situation where either buyers or sellers have an edge.”

The slowdown may also signal that appreciation rates of 20 percent per year on homes are a thing of the past.

“I see a 5 to 10 percent appreciation rate every year,” said San Diego County Assessor Gregory Smith. “I think things are going to go more moderate.”

Smith, who has worked in San Diego since 1972, noted the last time housing prices tanked in San Diego was about the time of the savings and loan crisis of the early 1990s.

“From 1990 to 1995 housing prices decreased 20 percent to 25 percent. Since then, it’s just shot up because there is not enough supply of housing,” said Smith.

In January 2002, according to figures from the California Association of Realtors, the median price of a detached, single-family home in the San Diego Area was $304,160. In January, 2005 that figure is $580,220. That’s a 91 percent increase.

No Shortage Here?

Apartment vacancy rates in San Diego are rising and the rate of rent increases has slowed. Figures from MarketPointe show on average rents increased 6 percent in 2002. Last year, they only rose 3 percent. The apartment vacancy rate is 3.8 percent, according to the San Diego Housing Commission. U.S. census figures show the total number of rental units in the county at 440,479. That means there are over 16,500 vacant apartments, houses, townhomes and mobile homes available for rent in the county.

“There is no housing shortage in San Diego,” said Thornberg. “What there is, is a shortage of homes in the higher income brackets for people who can afford them.”

Nevin says signs point to a strong market for the rest of 2005. Others say the long-term picture may not be so rosy.

“I think interest rates are going up. They are at historic lows,” said Dr. Stephen Cauley, the research director for the Richard S. Ziman Center for Real Estate at UCLA. “If interest rates go up, the value of homes goes down.”

Patrick Heald is a freelance journalist who is also pursuing a teaching degree. He lives in San Diego.

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