Mid-year Report
by Jim Scott

The first half of 2004 in the Metro real estate market has not surprised. The market anticipated higher interest rates and temporarily distorted the pricing structure early in the year. Ordinarily the first three or four months of the year are perilous times for buyers. Most of each year's price inflation seems to occur during the early months. This year the market followed historical patterns with a twist. The joker in the deck was that buyers anticipated higher mortgage costs. What seems a paradox is not; an upward shift in the direction of the price of money is always a terrific catalyst for a buying binge. This year was not an exception. In 1994 for example, during the worst part of the recession rates moved north and dramatically revitalized a moribund market. Buyers seem to ignore aggressive pricing and other dangerous signals if they believe mortgages are about to become much more expensive.

If you managed to get your property on the market during this golden hour you came up a winner big. As we slide into summer buyers and sellers typically take a break. Since this market has been consolidating gains from the extraordinary first ninety days of the year, this summer in particular promises to be a relaxed period. The Fed probably will have raised rates by the time you read this but that is old news. Bondholders, not needing to accommodate the President, will continue to ratchet up the price of thirty-year money as long as there is a whiff of inflation in the air and Federal borrowing is on the move. Still the market barely noticed a 1.25% increase in fixed mortgages over the past year. The seven percent note is right around the corner but it is entirely possible no one will be looking, only buying.

Certain parts of the market are operating in the Teflon Zone. A good example of this is the seeming unending demand for downtown condominiums. Many Cassandras have been predicting a colossal disaster in that arena due to an over-supply of both units and eager speculators. Perhaps where people are getting it wrong is in evaluating the ownership base of downtown residences. On the whole they are far more affluent than someone struggling to hold on to a house in Claremont. I think the former have a lot more staying power if things get ugly. The local economy's job engine will see to that. At the other price end, our appetite for entry-level attached housing grows monthly. Those investments make perfect sense to me. Rents and prices in the affordable chunk of the market will out perform the upper end over the next few years. People sacrificing to jump from the rental market are doing the right even if it hurts.

For now greed and exuberance rule the roost. Non-believers have to endure cocktail party chatter about someone's latest condo-coup. You should be careful, as this cycle is very mature. Even the prospect of a regime change, more expensive money and higher oil prices doesn't seem to dampen our collective enthusiasm. The change over the past ninety days is that now buyers are demanding more value and getting away with it. Buyers desperately want to join the party but not at any price. Higher rates have encouraged rather than discouraged them. Many fence sitters and those waiting for price corrections have thrown in the towel.

Higher inventories are the product of wishful thinking. Sellers, after digesting the glowing reviews of real estate prices in the local daily, decided collectively to over reach a bit. In the North Mission Hills market, for example, sellers of the 25 or so homes on the market as of this writing are asking an average of $623 per square foot. (By way of history, that figure in December 2002 was $385 per foot) The homes that have gone to escrow after May 1 st had an average asking price of $511 per square foot. The sales average for all of 2004 up until mid-June was about $510 per square foot. Am I missing something?

Of course it can be argued we are already in a corrective phase. I prefer consolidation. The era of really incredibly cheap money is over and we will slip into a period of just plain cheap money. And that is not so bad. Buyers are still bellying up to the bar. The difference is that they are ordering well scotch instead that 18 year-old single malt. Buyers are not willing to pay $600 a foot but they will pay over $500 all day long—their perception of the correct market price. So if your property is not selling, take a look at the list price.

SWEEPING WATER VIEWS!

This 2660 square foot 4-bedroom home is ready for Move-in. Very breezy and sunny, 2-car garage, two Offices, and two fireplaces. Around $1 million.

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 .You can also download Jim's 26 page research paper on San Diego County apartments.