May 6, 2010
San Diego County’s supply of new homes has dropped back to more sustainable levels, as buyers scooped up reduced-priced properties in the first quarter of the year and took advantage of the just-ended federal homebuyer tax credit, according to a new report.
“Right now, the market is in balance in actively selling projects,” said MarketPointe Realty Advisors President Russ Valone, whose locally based company issued the report based on sales in the first three months of the year.
MarketPointe found escrow had opened on 645 houses, condos and townhouses in 116 projects, up from 597 in the fourth quarter and 442 in the first quarter of 2009. That left an inventory of available but unsold homes at 15 months for attached (condos and townhomes) and 17 months for detached homes. Valone said an 18-month inventory is considered normal and usually means prices remain stable.
By contrast, the inventory had risen as high as 32 months in 2008, when builders, left with too many completed but unsold homes, had to cut prices and offer tens of thousands of dollars in incentives to attract buyers.
Valone said the balance should continue for the next two or three years, based on builders’ scaled-back plans and moderate buyer interest. About 4,000 houses, condos and apartments are expected to be built this year, up from a record low 3,000 last year, an earlier projection from the University of San Diego said.
If developers ramp up too much construction, inventories grow and prices fall — the situation that occurred as the nation fell into recession in 2007. But if builders don’t keep up with demand as the economy grows, inventories could fall further and prices could spike once again. Some housing developments have already posted higher prices on new phases to reflect growing demand.
“At certain points in time in the early 2000s through 2004, we were down to less than 10 months of supply, where prices started really to push up,” Valone said.
With would-be buyers wary of the overall economy and developers constrained by lenders fearing overbuilding, most economists believe housing construction will rise at a slow pace, closely matching buyer demand, and only in places where the overhang in inventory has dropped off, as the latest figures from MarketPointe suggest for San Diego.
At the end of the first quarter, 74 unsold houses were completed and ready for immediate occupancy and 251 were under construction. Another 1,725 were in the pipeline to be built later.
For attached homes, including both stacked flats and townhomes, the completed inventory was 637, primarily made up of high-rise condo units, and 114 were under construction. There were 1,097 remaining for future phases.
As a sign of balance, there were 10 new detached projects added in the first quarter but seven closed out with the final sales, leaving a net increase of three.
Starting around 2013, if building plans don’t ramp up to meet expected demand, a shortage could develop later in this decade and cause prices to run ahead of inflation, Valone said.
For the first three months of 2010, MarketPointe said, many builders sold more smaller single-family homes than in previous years, reducing the overall average square-footage from 3,018 in the fourth quarter to 2,815, a size not seen since at least 2004, Valone said. Sales of homes smaller than 2,500 square feet doubled from year-ago levels; for those between 2,500 and 3,000 square feet, sales were up 3½ times.
He said first-time buyers wanted to take advantage of the federal homebuyer tax credit, but many had to lower their expectations, because tighter underwriting standards reduced the amount they could borrow. The federal program just ended.
One surprising record occurred in the first quarter, Valone said. The weighted average cost for condos and other attached home types rose to $493,135, which is 10 percent higher than the previous high, set in the third quarter of 2009.
Valone said that boost resulted from sales at several downtown high-rises and a Coronado project, where prices surpassed the $1.4 million mark.
That peak may remain unchallenged for some years, he said, as high-rise developers find it nearly impossible to get financing to build more projects and buyers seek affordable townhouse projects in lieu of higher-priced, stand-alone houses.
A continuing trend in the first quarter was the decline of new condo conversion sales. Since the housing market tanked, many apartments that converted to condo-sale status have converted back to rentals. Valone said there were only four condo conversion projects active in the first quarter, down from 10 in the fourth quarter. Sales dropped from 255 in the second quarter of 2008 to only 16 last quarter.
