 Market Report: January 2005
The Things We Know, Part II by Jim Scott
June 2004 could possibly be described as the top of the market depending on how you look at the numbers. Last month in this space I spoke of several factors, some known and some unknown, that will affect the residential market in 2005. For those who missed the article, the list included the usual suspects; interest rates, the effective demand for housing, the lack of easily produced new housing, the price of oil, the cost of the war in Iraq and the decline in the value of the dollar. Any one or two of these determinants could wreak havoc on prices and market velocity. But no matter how mischievous anyone of these may be, their respective impact is mitigated by history and inertia. Each of these variables will have to play out on the stage set by the past.
The Story Last Time
One common characteristic of each of the past three real estate recessions is in the relationship between sales volume and prices. Not unlike stocks, changes in volume are often precursors to price shifts, both up and down. Tracking monthly sales volume during the periods preceding the recessions of 1973-1975, 1980-1984 and 1990-1996 illustrates this principal. During a normal bull market cycle, the rate of monthly sales increased roughly at the same rate as price increases. Sales volume began to decline in all three previous recessions approximately 12 to 18 months prior to the beginning of the recession. The real story is volume with56 homes sold in the first part of the year and 28 sold in the second. This is more than significant given past sales patterns.
The historical sales average in Mission Hills is about five to six closed sales per month. Looking at 2004, the rate was seven houses per month, an above average year. If you prefer the half-empty glass approach, the sales velocity of the past six months would seem to indicate a real estate recession around the winter of 2005-2006. If sales remain sluggish next spring, prices will surely be under downward pressure by next summer.
The flip side of low volume is unusually high inventories. The seller’s market each spring is ordinarily fueled by low inventories and seasonal buying patterns. The December inventory of homes for sale is about twice historical averages. This does not necessarily indicate a coming real estate recession. That might be the consequence of that fact that the current prices being offered by sellers seem about 10 to 15 percent higher than the true market.
Last month I wrote that the market should appreciate in the Metro area about five to seven percent. This assumes that sellers adjust their expectations as noted above. For example, in mid- December there were 29 homes offered for sale in North Mission Hills with an average asking price of $637 per square foot, $114 more per square foot than the market average for all of 2004. More interesting is looking at the homes that went to escrow over the past 30 days. Those successful sellers were collectively asking $564 per square foot, about 10 percent less than those not able to sell their homes. The sold price per square foot was nearly the same for each half of the year, $523 for the last sixth months and $524 for the first. Average market time came out as close at about 45 days.
2005
2004 was still a solid year for the upper end of the Metro market finishing 19% higher than 2003. There were far more gains being made at the lower reaches of the market. As I have mentioned in the past, there is no way to lose by buying entry-level product. La Jolla, Mission Hills and the Ranch will have a good but not spectacular year in 2005. If market velocity does not improve, reflected by a lackluster spring market, there is little question in my mind that we will slip into a mild recession toward the end of this year. Given that possible scenario, other questions need to be explored and answered. But that is the subject of a future column. There is also a question of jobs and the national economy. That will be discussed next month.
2004 was a banner year for Scott & Quinn Real Estate. On behalf of our staff and my family, I want to wish everyone an excellent new year. There are always plenty of things to worry about; it is easy to predict a recession, as eventually you are right. I feel confident that 2005 will work out just fine. Beyond that we have to wait and see.
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.
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