Market Report: April 2005

Bubble-speak and Other Nonsense by Jim Scott

With the end of the rains, buyers hit the bricks and starting slinging offers at hungry sellers. Market velocity and prices perked up a bit. OK, so we are now at lackluster plus or bull market-lite depending on your point of view. While it is true the market has improved, significant underlying unease remains among the buying public.  Everyone in the game is a bit more cautious. You can really sense this shift in attitude when calling around and speaking with the agents. The usual hubris of the listing agent has been replaced with a tinge of low-level anxiety. Not that this is all bad. 

Real estate professionals are having to cope with the twin evils of the new discounters in town and the lower number of sales. This is particularly painful for the substantial number of newly minted agents. Many of these people have only known the golden years since the millennia. Older hands know that markets can make U-turns.

The first quarter numbers are in and the sky has not fallen on our collective heads. A little market sanity is healthy in the long run even though there were a few sales last month that I could not believe. A few crazy purchases do not make a market and those buyers will be even in about five years. All mistakes in San Diego real estate are generally forgiven.

Peaks and Bubbles

All markets tend to self-correct when they have gone excessively too high or too low. It can be argued that the current bull market in homes, now in the ninth year, is long overdue for a correction. In my view, this process began last June when the Federal Reserve Board served notice that the era of easy money was over. The inevitable combination of fear and greed slowed down the bull to the point where buyers and sellers began to worry about the bubble. The good news is that prices, considered over the past year, are relatively stable.

The reason for this is that there is a real difference between peaks and bubbles. They can be mutually exclusive and generally are. Even though we are past a market peak, a pricing collapse is not in the cards. Job growth and San Diego’s economic strength are just too robust to have a repeat of the colossal implosion of real estate prices in the early part of the decade past. What we are witnessing is the beginning of an extended period of market consolidation. Consolidation is far better than collapse.

Long-term buyers have little to fear in this market. Fixed rate mortgages are under six percent.  This writer has been in this business since 1973 and to me good rates mean seven percent. Fixed money is still cheap and it makes sense to lock in long-term money in 2005. There is plenty of rate risk going forward unless our leaders change their fiscal ways. I see little political traction for change as somehow the idea of taxing less and spending more has great credence in Washington. Because of this mortgages will get more expensive so there is little sense in delaying a purchase.

The Warning Signs or Lack Thereof

I look to four indicators when peering into the teacup; local job growth, market velocity, stock market performance and interest rates.

Construction, Federal dollars, tourism and the dynamic entrepreneurial culture of San Diego drive the local economy. I believe there is something more here in this region other than the ‘weather premium’.

Market velocity, or the rate of home sales, has declined. If the current rate stabilizes there is little to worry about.    

Money has run out of the stock market into real estate. I know this opens a chicken and egg discussion and I am not concerned about causation. Our commercial market is awash in money chasing small quantities of over-priced properties. This enthusiasm influences the residential market in many ways too numerous to discuss in this space.

Rates will have to go up this year and this will surely dampen future appreciation. The good news is that this has already been factored into the market. The likelihood is that residential real estate appreciation will stall as rates inch up over the next 2 years. The Fed will not repeat the mistake of 1979.

It is important to distinguish between bubbles and peaks. The former can be deadly and the latter simply endured. Fortunately this market began correcting gradually last June. This adjustment will continue for some period of time. With a little patience no one needs to get hurt.

Read Jim's back articles at www.sqre.com or call him for selected back issues, 619 920 9511.
I welcome your comments; my email address is jimscott@sqre.com. You can reach Jim Scott at his office, conveniently located in the heart of Mission Hills, at 1111 Fort Stockton Drive. Founded in 1982, Scott & Quinn is the oldest full service real estate firm in Mission Hills and is still locally owned and operated. Jim has been a homeowner in Mission Hills since 1976. He is married and has two boys. He can be reached at 296-9511, extension 100. Scott & Quinn features professional property management as well as 15 sales associates. Click here to see Jim's past Market Reports.

> Send me complementary, custom MLS listings
> Contact Jim Scott for more information at jimscott@sqre.com