Market Report: December 2005

Hey!  Buyers! by Jim Scott

Wake up. It is time to stop worrying about being punished for our collective past profligacy. The market will not self-destruct; Charles Dickens is still dead.

I know there is plenty of ugly around. The number of condominiums and homes available on the MLS is five times that of the spring of 2004. Owners want the spring 2005 prices (plus ten percent) but have also realized that a price cut, generally a traditional and dependable remedy for generating a sale, does not necessarily work. Developers, for example, have been lowering prices for months now and have found lukewarm success. Buyers are failing to respond to all of the old blandishments. What happened to price elasticity? (has supply and demand gone the way of dial-up?)

Agents and sellers are still wondering why the traditional post-Labor Day market is AWOL.  The former are scrambling around trotting out every marketing scheme imaginable just to get people to view a property. (me included) What is selling today are very special properties at ordinary prices and ordinary properties at very special prices. That leaves ninety percent of the market unloved and unnoticed.

What seems clear is that buyers are on strike and this I can understand. What I don’t get is their collective reasoning, especially considering some of the bargains around. It makes no sense given San Diego’s probable economic landscape for 2006. I recognize sellers are still a tough lot when it comes to price but there are always a few needing to make a deal.

A Few Theories

Of course the price of money will rise next year and all the usual gang of economic thugs is lurking around every corner. This is nothing really new. Unfortunately most of us have to figure out the future by staring into our rear view mirror. I am more than guilty of that, straining to see links to recessions past in the bottom of my teacup. I am probably looking for answers in the wrong places or maybe asking all of the wrong questions.

And that brings me back to the buyers. If they were behaving normally they would be writing aggressive offers trying to force down prices from needy sellers. Instead they are on the sidelines waiting for the other shoe to drop. One seasoned broker I particularly respect argues that this slow period is nothing more than a transition market. In the financial world this is called market consolidation; prices and volume take a breather while demand and supply readjust. This period generally sets the stage for the next leg of the market. If you buy this idea, opportunities will be available for at least all of next year and potentially into the spring of 2007. Incomes, population growth and demand will eventually give sellers the upper hand. This window of opportunity will eventually close.

While I definitely subscribe to the theory of market consolidation lasting about eighteen months, there are other factors dampening demand that may extend or shorten this temporary lull. As I have argued in this space many times, residential purchases are more about faith than economics. I am not speaking of the Greater Fool Theory but about our national character. We buy real estate because we have confidence in our collection future.  As an economic culture we have been operating with low-level anxiety over the past two years; ballooning Federal deficits, uneven and low quality job-growth and an open-ended and expensive war. Hurricane Katrina was the last straw. Motivated buyers dropped out of the market because they had doubts about their ability to sell their own home and about our local economic future. The prophecy becomes self-fulfilling. This market would be entirely different if potential buyers felt any confidence they could sell their own homes for a reasonable price and if they felt more comfortable about the direction of this country.

Some Modest Ideas About 2006

Non-contingent buyers, those who do not have to sell their own home first, will be back this spring as economic fundamentals protect against any precipitous decline in prices. Buyers will get this message hopefully this spring and not next. Developers will continue to cut prices in order to liquidate inventory and this will help get the market moving. There are also plenty of contingent buyers ready to write offers if sellers and their listing agents can be more open to contingent offers. Lastly, sellers need to adjust asking prices to reflect sales that closed at the end of 2004. The peak of the market last spring was just that—a peak and not the market maker.

Sellers will need to trim about ten percent from their asking prices to get this market moving. Discouraged sellers who take their property off the market and successful sellers will reduce inventory. The re-pricing and lesser inventory, along with the historical seasonal adjustment, will motivate buyers to take the plunge. Rates will be up but no so much as to spoil the party. We will see about six percent in property appreciation next year and not a price implosion similar to 1991-1994. 

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