Shadash has some ideas on why, but it is puzzling.
Why are San Diego prices ‘sticky’, compared to other areas that have seen more rapid depreciation, like Phoenix?
Clearfund said that he thinks Phoenix has bottomed, and Vegas is close, but fears that there is more pain ahead for SD.
Oceanside and other parts of SD County have seen 40% to 60% off peak pricing, and could probably be compared to Phoenix.
But what about the higher-end markets, will their day come?
The doomers will say it’s just a matter of time before the real estate crash/depression hits those higher-end sellers who have been reluctant to lower their price.
In Rancho Santa Fe, Del Mar, Solana Beach, and La Jolla there are 696 active detached listings over $1,000,000 currently, and only 327 have sold this year, averaging about 33 closings per month. In 2005, the average was almost double, at 61 per month. So far there have been twenty-eight million-dollar-plus homes that have closed this month in those four areas.
The cost-per-sf is mind-boggling too; in 2005 the solds averaged $717/sf, and this year the average is $665/sf, only 7% less.
You see over-priced junk not selling everywhere. Then a well-priced offering will come on the market and fly right into escrow. There are potential buyers waiting, if more sellers were realistic there would be more sales.
How do you explain it?
Specifically, why has the demand for SD higher-end homes been sustaining?
Some of my thoughts/ideas:
1. Big Money – 114 of the 327 million-dollar-plus closings were cash buys (35%). The percentage of cash buys in 2005 was 15%.
2. Attractive mortgage rates – B of A has 30-year fixed rates up to $1.5 million at 5.625% on it’s website today, at 0.875 points.
3. The uncertainty of tomorrow must be more challenging than the certainty of today’s low rates and lower prices (‘close enough’).
4. Our prices still looks cheaper to folks coming from S.F., L.A. and other richer markets.
Numbers 1 & 2 may be similar in other markets though, as are the dollar devaluation and parents giving money to kids…..could the great weather this year be a reason?
Could higher-end SD prices somehow find a way to stick?
What do you think?
I think there is also a philosophical investing difference between California and other parts of the country. People in California “believe” housing is a better investment than alternatives. Belief becomes reality and prices remain higher than other areas.
For those who like charts and graphs with their psycho-babble, here is Leslie’s latest forecast:
http://www.car.org/media/pdf/econpdf/10-07-09Forecastexpo-FINAL.pdf
Jim – Trump’s wise strategy: “I would rather buy real estate with a low cost and high interest rates vs. a high cost and low interest rates…”
Rates: no where to go but up. Since most now buy homes like cars (based on the monthly payment) holding one’s ability to pay constant, an increase in rates will deflate housing price.
Everything trends toward its long-term averages, rates will, and housing will continue to do so (housing has traditionally risen just a tick above long term inflation). Where would that put us today…interesting to look at on a chart.
Don’t count on Washington to keep this up ad nauseum. Some new flavor of the month cause will pop up and housing relief will be cast aside…
Thanks for the handy advice, but that doesn’t explain why we’ve been stickier than others. If the Fed quits buying trillions of MBS we’ll probably see higher rates cause some more price adjustment, and conclude that lower rates was the reason.
Specifically, why do higher-end SD buyers keep buying? Is the mantra ‘close-enough’ the reason buyers want to get it over with, and buy now?
I wonder how many of these transactions, especially in good school districts, have spouses in the background saying enough is enough, time to buy.
Call it pent up demand.
I think prices in SD stay high for two reasons.
1. CA and specifically SD buyers are just crazy. Willing to throw caution to the wind. Not looking long term.
2. I think the ocean cuts SD in half compaired to places like Phoenix or Vegas. This makes the population more dense because everyone wants to live by the coast.
I guess there’s one more reason. There’s all kinds of NIMBY sentiment. Blocking new devlopment and chastizing those that less for less killing the comps.
My theory about the high end is the the people in the coastal areas simply have more net worth and can afford not to supply homes to this distressed market. These folks are my clients and they are just refusing to sell. They have other options/homes and have millions in the bank. Therefore they just avoid selling now which results in reduced supply which in turn increases price. Sellers in less wealth areas simply have less assets and are forced to sell now.
I like the sound of that one.
Can I extrapolate and say that most people think that SD is the best place to live on the planet, so those with the dough are drawn here, and won’t leave?
There are many far worse things to do with your money than put it into a nice piece of single-family-residence with no HOA or Mello Roos in San Diego cf putting the money into the bank, bonds, gold, and a stock market where guys like Goldman make $,$$$,$$$ for even lowly secretaries by taking the other side of trades made by people just like you. People are people – they don’t change very much… there’ll be another mania – if you have enough time & money you can ride it out – especially if you’re not servicing massive debts. Prices are cheaper – than they were. Many californians want it now – they deserve it. People got used to paying 800K for a home, 700K is cheap in comparison – same for was 1.5m reduced now to only 1m
Captain Obvious here! The low end bubbled much more percentage-wise than the high end. It also dealt with a disproportionate amount of volume in both buyers and speculators. Low end tended to use completely different loans than the high end, which even a smaller percentage of down payment than the high end. For that reason, the correction happened harder, faster, and by a larger margin than the high end.
Which is to say, the high end may well continue to decline as the low end recovers, but it will not crash percentage-wise as much as the low end. That said, even a modest decline will make the news.
The only way for the high end to really crash is for the low end to crash a second time (making recent progress a false bottom). Otherwise, the tiers would cross contrary to the substitution effect.
my advice is better than Trump’s : I would rather buy at low prices and low rates than any other scenario. Ok I am just being sarcastic : )
I can say first hand that given a choice between Cupertino home prices and SD NC Coastal, I would pick North County. Been there done that. Oh what I can get in SD is major candy. I’m looking forward to flying into Lindbergh Field in a few days. Not many people can say that 🙂
I do agree with Trump’s philosopy, but in our case, we happen to have the best of both–Cheap prices (at least compared to the top) and Cheap interest rates! Prices have come down in most areas at least 20-25% from the top–that is NOT chump change–$200-250K on a $1M home. Those who don’t buy thinking the market is going to drop are the ones that are speculating.
Some people are wealthy because they are smart about money. Not everyone got crushed in the housing market, and not everyone got crushed in the stock market. A wealthy person who sold at the peak and sat out a while can look at a 20% discount and feel good about it. Even if their home value drops going forward, since they rode the tide up and missed much of the down, it’s still a net gain for them. And because they sold high, cashed out, then sat out, big down payments are easy. They sat around waiting for this, and now their time has come.
First-time buyers like myself, on the other hand, should only look at pricing compared to base trends, NOT the peak. Though we’ve been waiting like the group mentioned above, we haven’t had the opportunity to ride the tide up, and therefore have to be much more careful. We don’t have the same cushion. I think it’s also safe to say most first-time buyers aren’t looking in the $1 million+ range.
No argument here regarding NC Coastal being great place to live. The residents of these areas tend to live in their own world and may be oblivious to current economic realities. I have a few friends in the area who have been unemployed for several months and have tried to tough it out but are now forced to consider job offers on east coast.
It’s the ocean, stupid (to misquote Bill Clinton). Vegas or Phoenix or the Inland Empire don’t have ocean views; much of San Deigo County does.
I know there are many people out there with good jobs, or both people working that just buy a house for what it is, a house. Not worrying too much about it as an investment or where the market is at, or going or was. They don’t over analyze it to death like many of us do. Hey honey, found this great house in Aviara, it 1M, right at the lagoon trail head and walk to Aviara Oaks for the kids. Lets go look at it! Coastal North Country is going to stick, it already has through 2 years of beatings inland areas have taken and yes people have money and it is a relative value to other CA cities. Sticky like fly paper!
I shouldn’t have feed the housing heads.
I think one of the biggest reasons SD prices are “stickier” than other places is because lenders aren’t foreclosing. Allowing deadbeat homeowners to live for free and not sell.
i don’t think it’s just the ocean, Miami’s high got hammered:
ZILLOW MIAMI DATA
First, I think San Diego has the distinction of having the best climate in the USA – which makes it a very desirable place to live if you can afford it. If I had that kind of cash to throw around, I’d be buying in Coastal SD.
I do still think there is some price reduction coming to the mid-higher end over time. At some point, the well runs dry of people who are willing to pay that level of premium for Del Mar, La Jolla, etc.. The place where it seems to me that the prices are the most sticky are the coastal cities with a lot of name cache. Some people will pay for marquee name, some won’t.
The market will dictate prices in the long run. At some point buyers out there willing to pay for prestige location will thin out now that the magic equity machine has been silenced. It doesn’t seem to me like any of the action on the high end is move up – more like people who’ve been sitting on the sidelines waiting for the right property/right price. The unknown is how many of those buyers are there. If I were trying to sell, I’d be out there dropping my price until it sold just to get out ASAP.
80-90% of the buyers out there are wholly unsophisticated when it comes to an asset investment like a house. Whereas the unknowing spouse is fed up with renting and can’t take it anymore, are they savvy enough to link that emotion with the reality that in a place like Careml Valley they will likely pay $2-3,000 per month of sunk cost to satisfy their impulsive urges? Especially when that asset is certainly not going to go up in value anytime soon (5-10 years). We can debate how “sticky” these areas are on the way down, but we would all probably agree that there will be no asset appreciation in the short to medium term.
Why would I buy a $1 million house in CV when I can rent the same caliber house for $3500/month? If anyone answers that question by saying any of the many emotional reasons often given, then they are an unsophisticated buyer. The only reason that makes financial sense is if that house will appreciate in value. And in CV, it won’t anytime soon.
Coastal areas will come down, only matter of time. I live in Solana Beach, one in foreclosure, bought 2005 for 2.34M spent over 150K, could not sell for less than what they payed, on and off market for about 2 years. Another one on Granados, bought for 2.795M brand new 2006, spent over 100K on landscape, just lowered price to 2.495, not foreclosure. Several in foreclosure at Saratoga west condos overlooking Del Mar Fairgrounds, 2006 asking prices were over 800K, now mid 500K.
The most desirable cities and region are sticky. AZ and NV is just not as desirable as San Diego. AZ is where the midwest snow birds move because they can’t afford San Diego where they would rather go… It’s really that simple.
Well the whole point here is high end vs. low end. Low end prices were definitely not sticky. 50% drop in 2 years blows away the First Great Depression numbers (30% drop).
Big money indeed.
Your first question should be where are these charlatan buyers getting their monies from?
I’m not quite sure what appeal SD has anyway. You’re surrounded by military crap and a mere 20-30 miles inland you’re already in areas that resemble the rundown garbage seen in the Inland Empire near LA.
I’m not sure what’s so desirable about SD.
My 2 cents
1) In SD, there is a stable population that grows up but never moves away from SD county. Very very different from SF and LA which have higher transitory populations. For a certain group, they could never imagine moving from SD.
2) SD is more geographically tough to build on (mesas, canyons, military land) than LA or the OC so the absolute housing density is lower
3) People in SD love, absolutely love real estate. It is an obsession here
4) Jobs in SD are ok but not great. It is hard to get rich working in SD county so you need to invest to get wealthy. RE is a very tangible way to do that
5) People do like to retire to SD if they can afford it. This creates demand in RSF, LJ and RB among others.
But the single biggest factor is why SD is different from PHNX is that most home buyers in PHNX need to sell their other home 1st. When that 4/2 in MN doesn’t sell, you can’t buy in AZ. Lack of demand for a lot of the SFH product in AZ during the crisis
Miami, Arizona, NV, etc all contained a large amount of ‘investment’ properties – and a fair number of them from out of state ‘investors’.
Much quicker to be let go when the ship is taking on water.
When it’s a primary residence – the fight gets more involved. Especially with more affluent ‘combatants’. Throw some good lawyers into the mix, and you could probably play the free rent/kick-the-can game a lot longer then someone in the lower end who can’t afford to do so (a couple grand in legal fees could get you a year or two free rent. It pays for itself!).
‘There are potential buyers waiting, if more sellers were realistic there would be more sales.’
Isn’t the fundamental problem the fact that they can’t be more realistic, because they are underwater?
Just looking at my RedFin map… there’s probably 50 homes I’d be interested in that have 150-250+ days on market. I don’t think a single one has $1 of equity.
“Can I extrapolate and say that most people think that we’re the best place to live on the planet, so those with the dough are drawn here, and won’t leave?”
I dunno about that one. South Florida is much nicer imho and more expensive. Expensive by far far far..
San Diego is nice no doubt and the weather is great but the ocean isn’t, that is unless you surf.
I think prices here are different in part because San Diego likes restricted supply. That’s what I see, a careful but steady demand met by restricted supply. And I think they learned how to do this from the rail-roads.
Does anyone know of a site similar to Bubbleinfo in the Tampa/NoFlorida area? Mom is retiring to the warm weather. I’ve learned a lot as a consumer (and gotten plenty of chuckles) here, and was hoping to find some local info to aid her decision making.
Noz, You are in the minority, and that’s fine. I have a cousin that lives out his days in Kansas, which he thinks the the best place on earth.
Wow, I feel like we are in 2005-2006 again with this “SD is different” talk.
Really, the only difference is that SD has more established high-end neighborhoods than Phoenix and Vegas. The established, high-end neighborhoods are always the last housing segment to crash after a housing bubble.
I am very familiar with Phoenix and the established, high-end neighborhoods are very sticky as well (see, for example, Biltmore area, Central, Paradise Valley). The low-end developments in Phoenix are the ones that crashed, just like the ones in SD and surrounding areas.
Another point to consider about rich folk- in a credit crisis they aren’t as threatened because they may not need debt leverage/credit to transact a deal. And in a recession they may be not be threatened because their means to ends are not directly production driven.
However they are sensitive to two things- prestige and the stock market. SD meets the first and DC met the second.
I think Shadash’s theory is also correct, but does not only apply to SD:
“I think one of the biggest reasons SD prices are “stickier” than other places is because lenders aren’t foreclosing. Allowing deadbeat homeowners to live for free and not sell.”
My prior landlord owns three homes in the $700k – $1.3M range in Encinitas and SW Carlsbad. They defaulted on the loans of all three homes well over a year ago. They have been playing the mortgage modification game since. No modifications have actually gone through and none have been foreclosed on yet.
Banks are taking “extend and pretend” to a new level with the high-end homes.
Yes, the mentality lately around here is trending back to what it was back in 2005-2006. We were crazy to ever think housing prices would fall back then, and now we’re crazy for thinking that housing hasn’t bottomed. Is SD more “different” now than it was in 1998? If not then I guess the fact that SD is special doesn’t explain the stickiness.
The people in the higher end areas are typically more solvent (I have nothing to back this assertion up) and thus are not forced to sell. If something were to somehow force liquidity into these regions they would fall just like the lower end.
It think it is weather, prop 13, and the limited choice of great zip codes. I think the choice of great areas is what’s sustaining the high end because people aspire to get into just a small number of zip codes.
There are limited choices if you want to live in a nice area. Pretty much La Jolla (old money), Del Mar (new money), and Rancho Santa Fe (old money and very successful entrepreneurs) are the best places to live and there are few other super-primo locations. CV, Solana Beach, Cardiff, and Carlsbad are “very nice” but not quite at the same level as the first three. So there is so much competition for those zip codes because they are head and shoulders above the rest of the county. Other large cities like Los Angeles have 15 to 20 different great neighborhoods, plus 20 or 30 more “very good” neighborhoods so there is so much more choice for a quality place to live elsewhere. Here most of competition is for a smaller number of neighborhoods.
Once you get that nice home in La Jolla or Rancho Santa Fe, you are done. So everyone is on the lookout to grab one as soon as it gets into their wheelhouse. There is always someone saving or making some money somewhere, and they’ll want that beach front in La Jolla or that estate in Rancho Santa Fe once they make enough of it.
Military and Defense contractors ARE the reason prices are sticky. . .someone mentioned “military crap”. . .well, I for one LOVE driving through Pendelton – the 20 miles of open space that protects US from THEM (LA). The Navy creates 10’s of thousands of jobs, and most officers retire here, and then go to work for a defense contractor (SPAWAR,etc) and get a pension AND a big salary. . .Despite SAIC moving its headquarters to DC, thousands will stay here. . .then there is Qualcom which has come through the recession very well – thank you. Many downtown condos are full of Navy officers who get $1700 to 1900 a month living allowance, and if there wife works, they can afford a nice $2600 rent, and walk across the street to the Broadway complex. . .
The Military isn’t the only reason for prices sticking, but they certainly offer a solid foundation.
Anonymous 5:35 wrote:
“Here most of competition is for a smaller number of neighborhoods.
Once you get that nice home in La Jolla or Rancho Santa Fe, you are done. So everyone is on the lookout to grab one as soon as it gets into their wheelhouse.”
If that were true, then RSF wouldn’t have the huge inventory sitting on the market for months and months on end that it currently has.
I always love the arguments about ocean proximity, climate, wealth, etc. You’d think those things magically appeared during the bubble and thus somehow justify higher prices.
Oh, and the fact that cash rich people are still buying multi-million dollar homes shouldn’t surprise anyone. They have a lot more money than they do time, so they’ll jump when they see what they want.
Yes, the nicer parts of SD are sticky, as are the nicer parts of LA/OC/SF. That just means it’ll take longer for them to come all the way down to their historical trendline.
Hey “alles klar”, sprichst du Deutsch?
Great input everyone, thanks a million!
Real estate in California’s major urban areas has been through multiple boom and bust cycles for the past 50 years or so. There is a natural tendency for people to assume in every bust that another boom of some sort will be along eventually. If only we were able to say with any certainty whether or not that would happen and what the next boom would be based on if and when it did come along…
RSF, La Jolla, and Del Mar are currently being insulated from price erosion due to:
Stock Market gains (40-60%)with a high aprox 8% of the residents having a net worth of over 10 mill (mostly in stocks and equity in personal owned corps.(Business, Commercial properties, etc).
The other 92% are very leveraged, but many have stable employment in health care, and other high end professions such as attorneys, etc
The question we should be asking is how long the people who have under 10 mill liquid assets, can afford the current burn rate with money rates paying 1-3%(think of La Jolla retiree’s)
What happens to those attorneys income when the “free rent” and chap 20 ( 13+7) bkcy packages run their course?
SD has a very low ratio of high net worth indviduals when compared to NY, SF, Boston, Chicago. LJ may be the exception but at some point those big estates become cumbersome to manage. Will their kids/heirs be able to fill those shoes?
As for the high end buyer of RSF, etc I developed ‘mid range’ spec homes during the last run up (sold the last one in fall 2006 so lucky us).
Our price point was the $3mm – $6mm range. Nearly every single buyer of our homes was pushing the limits of their financial borrowing ability and was explicitly planning to flip the equity out and sell in 3-5 years. All but one, who backed out of a purchase in fall 2006 saying the crash was coming and he could get the house cheaper the next year. I believed him and slashed prices and ran fast. Best failed transaction ever!!!
I guarantee every single home has dropped to a point that they all the equity, and then some, is gone.
We sold at $600-$700/psf and now we’re seeing $450/psf (if they actually sell). I am targeting the point where a new generation custom/spec in a decent RSF/Fairbanks type location begins trending toward hard const costs of $300/sf for 5,000sf+ as that seems like a logical equilibrium point of paying for the house and getting the dirt/plans/permits for free.
ps: the guy who backed out and said the crash was coming, was the wealthiest buyer I had who was worth well over $100mm liquid. Funny how that works
Jim wrote:
1. Big Money – 114 of the 327 million-dollar-plus closings were cash buys (35%). The percentage of cash buys in 2005 was 15%.
Would you happen to have the statistics for 1995-ish? I’m wondering if 2005 was just a particularly speculative (low cash) year. Based on what I’ve seen regarding the RSF buyers, many/most of them could have afforded cash purchases going back decades.
=============================
As to my guesses on what’s holding up the prices, especially in the higer-end areas — which, as mentioned above, is NOT exclusive to San Diego…
This bubble in particular, was fed from the bottom-up. As “newly qualified” buyers with 100% LTV mortgages swarmed the starter market, the sellers of these homes were able to realize gains of hundreds of thousands of dollars. They were able to put down 20-50% (or more) on their move-up purchases. Basically, they have more equity to cushion the price declines if they should need to sell. The no-doc/neg-am crowd with the 100% LTV loans in the starter market had absolutely nothing standing between them and a foreclosure.
Add to this that the PTB didn’t really begin to actively and drastically intervene in the housing/mortgage markets until AFTER the damage was largely done on the lower end. If the govt had stayed out of the market, I have no doubt we would have seen similar drops in the mid-higher end, relative to their starting points.
BTW, I’ve also heard the same types of stories mentioned above about the RSF-type crowd. People there are very nervous, and the stock/bond markets play a very big role in how well these residents fare. Also, while there are many cash/high-down purchases in the higher end, there are a significant number of people who HELOC’d and cash-out refi’d their way to unmanageable mortgages.
“Real estate in California’s major urban areas has been through multiple boom and bust cycles for the past 50 years or so.”
100+ years. 🙂
The more things change the more they are exactly the same.
“What happens to those attorneys income when the “free rent” and chap 20 ( 13+7) bkcy packages run their course?”
They’ll have to go back and figure out how to produce something, like how the machine is supposed to function. Unlucky for them, California is no place to be to do that these days.
I’ve seen several people claim that the higher priced areas will fall inline with their historic averages. That may be true, but how do you determine what the historic averages are in those areas? I don’t think price-to-median income (or price-to-rent, etc) are relevant for high price areas since median income doesn’t tell you anything about the net worth of the wealthiest individuals in the county. So, what metric is relevant when comparing housing prices in higher end areas over time?