Analysis: Diminishing Returns

Friday, June 16, 2006 | “Look at the change in the median home sales price from a year ago, it’s still strong.”

That’s what I’ve been told countless times in the last few months. As inventory records hit and surpassed all-time records. As home prices in San Diego fell month after month. As foreclosures began to double, then triple, there was always the mantra: Prices are still up from a year ago.

Indeed they are.

According to the latest numbers from DataQuick information systems – considered by many as the gurus of home sales data in Southern California – overall median home sales prices in San Diego County increased by 0.4 percent from May 2005 to May 2006.

Now that’s still, technically, an increase, but it’s worth comparing that figure to the last couple of years. In May 2005, median sales prices were up 7.5 percent from May 2004. In May 2004, the median sales price was up an amazing 21.1 percent from 12 months earlier. As the graph on the left shows, year-on-year price increases have been diminishing noticeably since their peak in October 2004. There’s not very far left to go now before that year-on-year value goes negative.

Some experts will argue that it’s unfair to compare this month’s figures to the phenomenal gains San Diego’s home market saw in the last couple of years. The last two years, especially, were times of unprecedented price appreciation, they say, and everyone knew they were unsustainable.

There are also problems, some experts contend, with using the median home sales price as a measure of home values in San Diego. The median – the mid-point in home sales values – is notoriously inaccurate, some economists say, and one should be wary of placing too much emphasis on it.

Perhaps. But it’s all we’ve got.

It’s also good to remember that those very DataQuick figures that the real estate industry are now quick to discredit, were hailed for a long time as evidence that the market was red-hot, and that everyone who could, should, buy a home.

Gary Painter, director of research at the University of California’s Lusk Center for Real Estate, says the drop in year-on-year appreciation rates is indicative of the “soft landing” theory that’s evolved in response to the “bubble” theory that claims homes have been vastly over-valued due to speculation and a prevalence of new and exotic mortgages.

But Painter also acknowledges that there has been something of a sea change when it comes to forecasters predicting what’s going to happen to the real estate market in San Diego and elsewhere. That change of tune is due largely to the sort of statistics DataQuick has churned out in the first few months of 2006, he said. In San Diego, it’s also due largely to the 8,000-plus homes that have come on the market here since the beginning of the year.

“As we see inventories rise, we’re starting to say that prices might have to fall,” Painter said.

David Cabot, president-elect of the San Diego Association of Realtors, doesn’t agree. As far as he’s concerned, the latest median home price figures don’t really mean much for most homeowners in San Diego. He points to the fact that the resale detached home market – arguably the market to watch for most homeowners in town – is still plodding along pretty well.

Home sales prices are being dragged down because of two things, Cabot said. Investors are pulling out of the condo market and are dragging prices down as they leave. Also, home builders are offering all sorts of discounts to anyone who will buy up the brand-new homes they still have left. Those two factors are skewing things for everyone else, Cabot said, and are making the market look much worse than it really is.

“The average homeowner in San Diego County’s buying a resale home; they’re not buying a new home. New homes are a much smaller percentage of the market, and the re-sale market, even on the DataQuick graph, is still going up 3.5 percent.

Cabot is still calling for a 6-percent to 8-percent appreciation rate for San Diego homes by the end of 2006.

But the other important number DataQuick came out with this week was the rate of home sales. Year-on-year, there were 21.4 percent fewer sales in May 2006 than in May 2005 in that all-important resale market for detached single-family homes. That sales rate is another number that’s been diving since late-2005 and shows no signs of recovery yet. Fewer sales generally mean lower prices and those people who have to sell drop their asking prices.

It’s also worth bearing in mind that a 6-percent to 8-percent increase in San Diego sales prices for 2006 was exactly Painter and some of his colleagues were saying six months ago. They have since realized that’s unrealistic.

Whoever is right, one thing’s clear. That year-on-year median price increase is no longer the panacea for consumer confidence that it once was. And if that number turns negative next month, it could even become something of a poison pill.

Please contact Will Carless directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.