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San Diego housing inventory dropped again last month, but supply may be even tighter than it appears. I’ll talk about that more below, but first, let’s have a look at the data.

The number of existing San Diego homes for sale last month was 32 percent lower than the same time last year, while the volume of sales was 19 percent higher. These two trends combined to make for the lowest supply of for-sale housing in years.

The accompanying graph shows the number of months’ worth of inventory for each month since January of 2007. This figure is calculated by dividing the number of sales in a given month by the number of homes available for sale that same month. The resulting figure provides an idea of how much supply is available compared to demand. To put it in perspective, 6 months’ worth of supply is considered to be a fairly normal market.

The 4.7 months’ worth of inventory available in May was pretty comfortably on the low side of normal, indicating a market that was undersupplied.

Realtor friends have explained to me that the market is even tighter than it appears in the graph as a result of all the short sales sitting around with as-yet unapproved offers. As a matter of fact, last week one of them described the issue so thoroughly via email that I got his permission to reprint his explanation wholesale. The person in question is Dan Cassidy, occasional voiceofsandiego.org quotee and (his own words) “Realtor and nerd based out of Hillcrest.”

Dan’s missive follows:

For the purposes of this writing:

“Bank” means any real property debt holder.

“Bureaucracy” means the administrative procedural decision-maker without personal stake.

“Bank sale” refers to the sale of a property by a real property lender who has repossessed it.

“Short sale” refers to the sale of a property with negative gross equity where the negative is being forgiven or forgone at present.

The setting:

Historically, bank sales and short sales constitute less than 5 percent of active “for sale” stock in the MLS. Currently, they represent the vast majority in many markets both locally and nationally. Since both short sales and bank sales require the approval of bank officers, this means that most of the business currently happening is being overseen by bank employees, contractors, or agents. Just as a trivial point of context, currently, bank sales alone often constitute the majority or plurality of closed sales in any recent sampling.

The problem:

Banks take for freakin’ ever to issue decisions on anything. This is especially true when realizing losses (which is necessarily involved in bank sales and short sales). Banks, by design and practice, are bureaucracies. They require a diligence and dispassionate service in the interest of the firm. Acting hastily or without due prudence and risk management is how we ended up with a 15 percent foreclosure rate in Las Vegas. This is in a constant tension with residential real estate (as distinct from investment), which by design and practice is emotional and requires quick decision-making by consumers to spend huge sums to get unique goods that have a major impact on quality of life.

In other words, after finally running the numbers, getting qualified to borrow, and working up the courage to look for houses, Mr. Buyer is left feeling frustrated upon finding out that all four of the houses he looked at today (which are ostensibly “for sale”) actually have offers and that everyone is just waiting for the bank to sign off to open escrow. Can you blame him? He just spent all day looking at unattainable goods that have for sales signs and are priced within his budget. When he finally does get an offer accepted by the seller (maybe a month later), he is informed that it will be 2 weeks (or even 2 months) before somebody at the bank finally blesses it.

This information lag (where items listed “for sale” really are sold already) has the effect of dampening buyer enthusiasm and distorting the market value. Things appear to not be selling for absurdly low prices while in reality they have sold and are just waiting on approvals from far away offices.

At a nerdy level, this is what Nash would term an “information set” (which isn’t good for business when applied to the market value or conveyability of an item).

The solution:

The MLS has designed a new status to indicate that a property is effectively spoken for but that all interested parties have not yet accepted the terms of the sale. They call it “contingent”. This removes properties that are not really active from the “active” category. This status went live on May 20, 2009.

Facts on the ground (as of this writing):

In the zip codes I work (92101, 92102, 92103, 92104, 92116) there are 903 properties active. There are 210 properties contingent. Upon reviewing these listings I would estimate that there are another 200 or so that should be listed as contingent. I suspect the fines that Sandicor is handing out will take care of this in the next month or two. That will mean a 20-40 percent minimum drop in standing inventory.

MLS-wide, there are 10,376 active and 3,466 contingent. That means already 25 percent of inventory has been re-classed as non-active. Likely that number will increase (by a lot).

Conclusion:

Bottom line, this solution will reduce active inventory by a large percentage everywhere it is implemented. A valid criticism is that this reduction is really just a re-arrangement of the existing categories. An equally valid counter-argument is that the new designations more accurately reflect consumer demand and consumer desire. The reality is that contemporary information transmission is a huge component in market dynamics.

OK, back to Rich. I’ve talked a lot about “shadow inventory” — foreclosed homes that will most likely end up for sale, but that are not yet showing up in the listings. Well, Dan describes a sort of reverse-shadow inventory: homes that are showing up in the listings, but that aren’t actually for sale any more.

It would have been cool if Sandicor named the new listing status “reverse-shadow,” but I’ll admit that “contingent” is a bit more pithy. So let’s go with that. I suspect that a decent chunk of contingent inventory will end up as active again — not all offers get approved, after all. Aside from that little issue, the contingent listing category should do a good job of separating what’s actually for sale at a given moment and what isn’t.

Dan talked a bit about what type of effect this will have on buyer sentiment. I don’t have too strong an opinion on that, though it seems plausible that the drop in the active inventory stats could knock a few potential buyers off the fences.

The point of greater interest to me is that the number of active listings — low as it already seemed — has been overstating the number of homes that are actually for sale. And now we will have a better idea how much.

— RICH TOSCANO

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