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Thursday, March 30, 2006 | Springtime is almost always a period of seasonal strength for the housing market. The holidays are behind us, the weather is (usually) good, and sales activity really shifts into high gear. Home prices often wake from their winter slumber and start heading upward again.

The “spring rally” has certainly been a fixture in recent years. Memories of the early-2004 bout of the euphoric, if rather panicked, bidding up of home prices will doubtless live on for years. And while 2005’s springtime price increase was more subdued, it nonetheless put the rest of the year to shame. According to DataQuick, the median single family home price rose over 4 percent between March and June of 2005 – and then spent the rest of the year going nowhere. Condo prices displayed a similar seasonal pattern.

Now that spring 2006 is upon us, can we expect home prices to start rising again?

The answer might seem like an obvious “yes,” considering the well-established tendency towards springtime price increases.

In fact, there are a couple of reasons to suspect that the typical seasonal pattern may be broken this time around.

A major headwind facing the market is an imbalance between supply and demand that San Diego has not seen for quite a while. There are, simply put, an awful lot of homes for sale. According to ziprealty.com, San Diego county sports over 16,000 condos and single family homes listed for sale on the Multiple Listing Service. This is an increase of 87 percent over the amount of homes for sale at this time last year.

That’s not a typo. Last year’s spring rally began with a supply of inventory that was barely more than half of what it is now.

Meanwhile, demand has waned despite the increasing availability of homes to choose from. DataQuick’s figures indicate that recent months have seen sales volume drops of between 20 and 30 percent compared to the same period a year ago.

The combination of increased supply and decreased demand does not foretell of a significant price increase. But to my eyes, there is an even bigger hurdle on the path towards higher home prices: adjustable mortgage rates.

It’s been well-documented that San Diegans overwhelmingly prefer adjustable-rate mortgages (ARMs) to their fixed-rate brethren. Last year, 80 percent of all homebuyers chose ARMs. The very simple reason is that ARMs have lower rates than fixed-rate mortgages, and in San Diego, buyers do what they can to ease the burden of those sky-high monthly payments.

The problem facing the market today is that ARM rates have risen substantially over the past year. At this time last year, the average rate on a 1-year ARM was 4.24 percent. Last week, the same mortgage averaged a rate of 5.41 percent. (See accompanying graph.)

For anyone with an upper limit on his or her monthly house payment, this rate increase represents a loss of purchasing power. Let me illustrate this point with an example.

Let’s say you are a potential homebuyer with a $2,000 budget for monthly mortgage payments. At last year’s ARM rate, you could have afforded to take out a mortgage for $407,000.

Now let’s move forward one year. We’ll give you a 3 percent raise, to account for the yearly rise in incomes, and say that your monthly payment maximum is now $2,060. Despite the increased budget, at today’s prevailing ARM rate you can only afford a mortgage for $367,000.

All things being equal, then, today’s ARM borrowers can handle a home price of about 10 percent less than they could have at this time last year.

This is a real problem. San Diego homebuyers may still be willing to stretch their monthly payments to the limit, but that limit now translates to a lower price tag on purchased homes.

There is doubtless a strong tendency for home prices to rise substantially in the springtime. But a tendency is not a guarantee. Even as inventory grows and demand remains weak, mortgage rates are placing downward pressure on home prices. This is not exactly the fertile soil from which a meaningful spring rally could be expected to issue forth.

Rich Toscano is an independent real estate analyst residing in Hillcrest and working in La Jolla. He writes extensively about San Diego housing at Piggington’s Econo-Almanac.

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