San Diego economy poised for rebound

Don’t know if you saw this recent article in The Californian headlined ‘San Diego economy poised for rebound’. The article summarized a positive economic forecast for California and San Diego by US Bank CEO Richard Davis . Had the article confined itself to the positive economic news as forecast it would have been a decent enough article as articles in The Californian go, as articles by Eric Wolf go.

But the article ends with Davis expressing his ‘concern’ for housing in the Inland Empire and especially Temecula and Murrieta – the ‘exurban’ areas. Citing high gas prices and a trend toward apartment renting in big cities, Davis opined “We may have to raze a lot of houses. We may have built a lot of houses in the wrong place.”

Now according to his Forbes Magazine profile, Mr. Davis is a real whiz bang in the banking industry and heaven knows I don’t have a competing profile in Forbes. But then again he is just a banking exec who lives and works in Minneapolis but enjoys a visit to our sunny climes during the dead of the Midwest winter.. They may be ‘razing’ houses back in his neck of the woods but we haven't seen that in SoCal, and certainly not in Temecula/Murrieta.

So I decided that I would ask a couple questions about his supposition that any inquiring mind might want to know – like where the hell did that theory come from, Dick? Because it doesn’t seem to comport with the reality on the street in Southwest California. It’s no great revelation that the current havoc at the gas pumps will have an impact on commuters but you have to ask (well, I have to ask, Eric didn’t feel the need) is it really forcing people to abandon our affordable homes in the Wine County or Menifee to live in an apartment in the city? I’ve got a break-down on that later in the report and the indication is that Mr. Davis should stick to what he knows best, which apparently is not the housing market in Southwest California.

All right, got that of my chest. It apparently comes as quite a surprise to some that our housing market in Southwest County is quite robust. Single family home sales were off just 1% in 2011 from our record setting pace in 2010 when we sold more homes than ever before in Southwest California. Our prices continue to stabilize within a narrow range and for the first time since late 2008, there are more active standard homes for sale than distressed!. Looking at the absorption rate of single family homes in the region, our inventory of available homes is down 20% from last February to just 3.3 months and last month we sold 1.1 homes for every 1 new listing that came on the market. Raze homes? We should be raising homes. Maybe that’s what he meant.

Let’s see, last January we sold 481 homes – this January 561. Last February we sold 533 homes – this February 601. Last February our regional median price was $227,173 – this February $233,190. Warm up the bulldozers? Actually, Davis was right about warming up the bulldozers but for the wrong reason. You may recall my chart showing new housing starts statewide with about 36,000 starts in 2009, 39,000 in 2010 and just 33,000 in 2011 – this in a state that requires 125,000 housing starts a year to stay abreast of demand. Bulldoze lots for new homes, folks.

Jeez, I hope he was closer to the mark on his positive news for San Diego than he was on his housing news for Temecula & Murrieta.

OK. Now it’s off my chest. Sorry, I just get a little defensive when people who can’t find our region on a Google map pontificate about it like they had a clue. There’s a couple economists in the state that have the same problem. Anybody who lumps the Southwest California economy or housing market in with the rest of Riverside County is suspect to begin with. If they lump us in with the ‘Inland Empire’, they don’t even deserve a read.

Of course that’s just my opinion. I don’t even have a Forbes profile.

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Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

Southwest California Homes Single Family Homes

Sales are starting off the year strong. After the roller coaster year in 2010 with a strong start based on the first time homebuyer tax credit, sales lagged during the last half to end the year with a massive spike in December. 2011 didn’t show the spikier spikes nor the troughier troughs yet posted a volume just 71 homes, or 1%, off 2010’s record pace. This year is starting off 8% ahead of 2010 and 13% ahead of last year at this same time. If we can continue this pace of strong sales and inventories continue to shrink, we could be looking at the potential for sustained price appreciation later this year.

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Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake Linear (Murrieta)

Southwest California Homes Single Family Homes

Median Price

Driven by drops in Temecula and Wildomar, median prices for the region are down 2% from last year. However, prices continue in the same stable path they have charted since early in 2009 with moderate increases or decreases month over month while annual prices remain flatlined. Murrieta, Menifee and Lake Elsinore remain virtually even with their year over year median and Canyon Lake continues it’s wild ride with peaks and valleys caused by the disproportionate impact that a sale of a million dollar home has on their median. So far this year there has one $1 million+ home sold in Canyon Lake and Temecula, two in Murrieta. We desperately need to jump start that segment of our housing market in order to encourage our move-up market and increase our median in a meaningful way.

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Pending Closed (Demand) Days on Market Months Supply Absorption rate *

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* Absorption rate - # of new listings for the month/# of sold listings for the month

Inventory continues to slide – down 9% from January and 19% from a year ago. With available listings down and sales up, our months of supply has again shrunk to just 3.3 months.

From Temecula’s inventory we could back out the 48 homes listed in excess of $800,000, 47 in Murrieta and 13 in Canyon Lake. That’s abut 10% of the inventory in each of those cities and the part of the market that is selling the slowest. With 1 $million dollar home sold in Temecula in the past 2 months, that’s an 8 year inventory of those homes on the market, 4 years in Murrieta. So the 2.7 and 3 months of inventory showing is actually even less than that.

As far as our ability to continue to absorb new inventories, as the banks keep threatening, last month they sold nearly 1.5 homes in Murrieta for each new listing. In Temecula it was 1.1, 1.3 in Wildomar for an average absorption rate of 1.1 properties sold for each new property listed.

Pending sales are off slightly this month indicating that March sales may be down by 8 – 10% from February.

February Market Activity

By Sales Type Standard Sale Bank Owned Short Sale

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Temecula 239 57% 50 37% 48 11% 32 24% 135 32% 53 39%

Murrieta 276 59% 64 42% 33 7% 37 25% 160 34% 50 33%

Wildomar 48 52% 8 24% 14 15% 12 36% 31 33% 13 39%

Lake Elsinore 105 37% 25 32% 44 16% 29 37% 134 47% 24 31%

Menifee 171 43% 52 42% 59 15% 29 23% 166 42% 43 35%

Canyon Lake 69 66% 8 42% 13 12% 6 32% 23 22% 5 26% Regional

Average 908 52% 207 37% 211 13% 145 29% 649 35% 188 34%

Days on Market v. Median Price By Sales Type

Standard Bank Owned Short Sale

ADOM Median ADOM Median ADOM Median

Temecula 57 $318 48 $292 129 $251

Murrieta 80 $298 47 $249 138 $262

Wildomar 64 $247 45 $195 198 $202

Lake Elsinore 61 $205 46 $173 154 $173

Menifee 72 $185 43 $165 161 $161

Canyon Lake 115 $421 27 $279 230 $246

Regional Average 75 $279 43 $226 168 $216

For the first time since late 2008, standard sales have pushed above the 50% threshhold for active inventory. They’re still just 37% of the sold market but climbing. Bank owned homes now make up just 13% of our active market, down over 70% since 2009. Nearly 70% of bank owned home transactions are successful compared to 29% of short sales and 23% of standard sales. The last chart is a new one showing what so many of us have suspected or known ###. It takes a little over 2 months to close the average standard sale but they are selling for as much as 19% higher than bank owned homes across the region and up to 33% more than short sales. A short sale in Temecula will sell for 31% less in, 12% in Murrieta and 42% in Canyon Lake. A bank owned home will sell for 8% less in Temecula, 16% less in Murrieta. Looking at the Average Days on Market (ADOM) you can see why short sales are not known for their brevity. If you’re one of the lucky 30% to close a short sale it will take you nearly 4 times as long as it will to close on a bank-owned home, more than double the time required to close a standard sale.

The Last Word…

In my introduction, I cited a recent presentation by US Bancorp Chairman Richard Davis on the San Diego economy. I’ll credit him with some assessments I consider valid – namely: • The national economy is at ‘halftime’ with the worst of the recession behind us. • California is already stronger and coming back faster than the rest of the country. • Recovery will be slow – 5-7 years for job loss and GDP recovery. • The housing market has a tough road ahead, in part due to overly restrictive lending policies. • People would rather live in an apartment in the city than a house in the country.

Wait. What? Not according to a recent survey by Pew Research that found 81% of people still consider buying a home the ‘best investment a person can make’. And another showing that 80% of apartment dwellers are hoping to buy a home at some point. Sorry, Dick, not buying that one.

But it was his supposition that high gas prices will be driving citizens from our area, which, if the reporter is to be believed, he called by name, saying ‘we may have built a lot of houses in the wrong place that we may have to raze’ that caught my attention.

Hmmmm. Let’s see just how well that gassy supposition stands up, shall we?

For the sake of argument, let’s say a person lives in Murrieta and drives to San Diego to work every day – as many of our residents do. According to Google that’s a 65 mile trip, or 130 miles a day. The price of gas is up almost a buck over last year so let’s use $1.00 as the fuel differential in this equation. If you drive a reasonably fuel efficient vehicle you might get 32 mpg or you can drive an SUV and get 12 mpg so let’s use 20mpg as our baseline. That means today you are spending $130 more per month to commute than you were a year ago. (130 miles X 5 days X 4 weeks / 20 mpg X $1.00 = $130). $130.00

Now rather than use my own numbers, I’m going to use figures from Zillow so no one can accuse me of a local bias. Zillow says the median price home in San Diego is $359,000 while in Temecula it’s $265,000 and $238,000 in Murrieta. We’ll split the difference on those two and call it $251,500 for Southwest California.

By the numbers, a principle and interest payment on the place in San Diego will be $1,713.92 while the place in SWCal will be $1,200. At that rate, you can spend the extra $130 for gas every month and still have $383 left to take your family to dinner a couple times – as long as you don’t drive to San Diego for dinner. (Home price / 30 year term X 4% interest).

But lets look at a more plausible scenario – because aside from our great climate, well run cities, award winning schools and low crime rate, people move here because nice housing is more affordable – waaaay more affordable.

Again according to Zillow, the average price per square foot for a home in San Diego currently stands at $246/SqFt. In Temecula that same figure is $119/SqFt and in Murrieta it’s $104/SqFt. Let’s meet in the middle at $111 for our hypothetical SWCal home, OK? Now last month the average home sold in SWCal was 2,332 Square Feet. That means it sold for $258,852. If you were to buy that same home in San Diego it would have set you back $573,672.

Just for giggles, let’s do the math on that one. To buy an average 2,332 SqFt home in Temecula or Murrieta you’d expect to drop $1,235.80 for your monthly payment. That same 2,332 SqFt home in San Diego, would set you back $2,738.80/month just for principle and interest. We won’t even add taxes and insurance to that, nor will we factor in the additional difficulty in qualifying for ½ million dollar loan or the problem you’d have finding a jumbo mortgage today.

Now let’s add in that extra $585/month you’d be spending for gas (130 miles X 5 days X 4 weeks / 20 mpg X $4.50/gal = $585). Now I’m no banker but my smoking calculator tells me I could buy my nice big house in Temecula, drive to my job in San Diego and still pocket over $900 bucks a month differential. Sorry, Dick, having a little trouble with your math here.

Let me just make one final point. Unfortunately Mr. Davis’ supposition plays right into the hands of what some in the real estate industry have been concerned about for the past 3 years – namely that it is the agenda of some in this administration to devalue housing and decrease the prevalence of homeownership. Articles I’ve cited here in the past from Time Magazine, Fortune, The Wall Street Journal and others have pointed to this bias toward an effort to increase renters and reduce owners. Why? Well, renters typically have shallower roots in their community and are therefore more mobile so they can relocate in pursuit of job patterns. They are also more malleable – they have no ownership interest , have less interest in protecting private property rights and are more easily sold on some issues – like the ‘unfair’ preservation of the mortgage interest deduction or capital gains that favor homeowners over renters. Not saying Mr. Davis is part of the plot, just saying…

Ah well. What do I know? I’m just a small town Realtor. My numbers are probably incorrect and my theories suspect. Of course that’s just my opinion – I could be wrong.

SOURCE: Pew Research Center’s “Home Sweet Home. Still. Five Years After the Bubble Burst”

8 in 10 Americans (STILL) Agree: Buying a Home is the Best Investment One Can Make

8 in 10 Renters Would Like to Buy in the Future

“…renters are hardly immune to the allure of homeownership, even in the face of the five-year decline in prices. Asked if they rent out of choice

or because they cannot afford to buy a home, just 24% say they rent out of choice.”

Survey says… There is no ‘trend’ toward people preferring to rent an apartment in the city rather than own a home in the ‘exurban areas’. Sorry Dick