Thursday, June 15, 2006 | Walking through Del Mar Villas, a condo conversion project just off the 56 Freeway in Carmel Valley, is a little eerie.
It’s impossible to walk more than a few paces among the tightly packed green-and-white condos – that used to be rental apartments – without spotting at least one “for sale” sign. In some parts of the project, one can look around and see half a dozen of the placards, which range from shiny Century 21 signs to hand-written plastic boards, tacked up on balcony walls.
Russ Valone, president and CEO of MarketPointe Realty Advisors in San Diego, said that since 1996, 21,563 apartments have been converted into condo conversions. Of those, some 14,576 have been sold. Valone estimated that 80 percent of those sales took place in the last three years.
Valone and other experts said that a slew of condo conversions hitting the market must be at least part of the reason why new home prices in San Diego took a huge dive from April to May. The median price of a new home in the county dropped 17 percent or $71,500 in that time, according to figures released Wednesday by DataQuick information systems. The median sales price for new homes is also down 4.4 percent compared to last year at this time.
This huge drop in the median sales price for new homes could mean nothing. It could be an anomaly of the market – a fluke. But it could also signal the first domino to fall in a real estate market that’s seen unprecedented gains over the last few years, and most analysts are stumped when it comes to explaining why new home prices dropped so much.
Those new homes include both single-family homes – “detached” units – and “attached” units, which are condos and condos that were recently converted from rental apartments. DataQuick wasn’t able to provide an estimate of how many of the new home sales that took place over the last month were condos or condo conversions, but local experts are betting that most of the sales were of lower-priced condos and conversions that have pushed the median sales price figures way down.
That sounds complicated, but it’s quite simple really. Basically, the monthly median sales price is the mid-way point for sales prices across the board. Therefore, if most of the properties being bought or sold are less expensive units like condo conversions, then it stands to reason that the overall median price is going to be lower.
But while the large number of condo conversions being sold may go some way towards explaining why the median sales price dropped so much, analysts cautioned that it doesn’t fully explain DataQuick’s statistics.
“There’s no possible way prices fell that much in one month,” said Chris Thornberg, a senior economist at the University of California, Los Angeles Anderson Forecast. “It’s just not possible.”
Thornberg wasn’t saying that DataQuick are inaccurate, merely that there must have been some major change in the makeup of the new properties being bought and sold during May in order for the median price to have dropped so much, so suddenly.
Valone and other analysts are inclined to agree.
“You’re going to be really hard-pressed to figure out what’s going on with the new homes,” Valone said.
Gary London, president of the London Group Realty Advisors in San Diego, said the year-on-year drop in the median price of new homes was to be expected in today’s local real estate market. As a result of the very high number of homes on the market – as of Wednesday there were 21,854 homes listed for sale on the county’s Multiple Listings Service – and the uncertainty among consumers about where home prices are headed, London said the homes that are being sold currently are being sold by people who simply have to sell.
Discretionary sellers – who tend to own higher-priced properties – are more likely to pull their homes off the market at the moment, London said. What’s left, and the properties which are ultimately sold, are all the properties that must be sold by their owners for one reason or another.
“[A 17-percent drop in the median price of new homes is] not going to happen month-over-month,” London said. “I think we’re at that transitional point in the cycle where we’re seeing a combination of some people that just want to sell now, fearing that the market may decline further, coupled with other people who just take their homes off the market, which are higher-priced houses.”
London doesn’t see any reason why the group of sellers anxious to sell would consist of a higher proportion of condo conversion-owners.
However, there’s no escaping that forest of “for sale” signs in the Carmel Valley condo conversion project. Clearly, a good proportion of the homeowners in Del Mar Villas think this is a good time to sell. Why?
Richard and Judy Lambertus own one of those condo conversions. They recently moved out of their property and into a home in Rancho Penasquitos. Richard Lambertus said their move was based more on the fact that they just had a new baby than worries about timing the real estate market. However, he did offer one reason why so many homes in his project are for sale: The project recently turned two years old. In other words, it’s been two years since the first condo owners moved in and the renters moved out.
That’s significant because, under federal law, anyone who lives in their home for more than two years does not pay capital gains tax on any profit they make from the sale of that home. Therefore, there’s a strong incentive to wait two years before selling a property.
Richard Lambertus thinks that’s why there are suddenly so many homes for sale at Del Mar Villas. It would also arguably go some way toward explaining the softening in resale condo sales prices, which have been flat for a year. If, as Valone said, 80 percent of the condo conversions were sold in the last three years, it’s about time at least some of those condo conversions started showing up on the market.
Whether the influx of those properties will continue to impact the median sales price of new homes in San Diego, and how significant such an impact is likely to be, won’t be known for another month or so.