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This week the newspapers were awash with upbeat news about the San Diego real estate market and other major housing market nationwide. The Case-Schiller index of home prices was released for the month of May 2009 (that’s right, May… even though we’re at the end of July) and the index showed home prices rising in 13 of the 20 major markets. San Diego’s May price index increased 0.63% from April. The San Diego housing price index was still down 18.5% from May 2008, but this was the smallest annual decline since January 2008. Other cities fared even better, with Cleveland up 4.1%, Dallas 1.9%, Boston 1.4%, Denver and Washington D.C. both up 1.3%.

I have to note the irony of the timing of this “news.” On May 14, after experiencing several months of wild buyer demand, I began blogging about buyers overbidding San Diego homes above list price . I returned to the subject on May 20 by talking about prices of San Diego homes rising. Then on June my blog referenced a reputable forecasting company which was calling San Diego homes undervalued. It seemed clear to me that prices were heading back up, particularly for entry-level houses priced under $500,000. But the response to my blogging was less than enthusiastic. I received an unusually high number of hate emails about those articles.

Now, almost three months later, the newspapers are coming out with the same information that I was reporting in May. All of a sudden it is big news, and believable news, since even the Wall Street Journal and the San Diego Union Tribune put it on their front pages. Well, it’s old news if you’ve been reading my blog.

So what’s in store for the future? First of all, expect to see similar a similar story in the August newspapers. I don’t need a Case-Schiller index to tell me that prices rose again in June. I blogged about the uptick of houses in the super-conforming price range (in San Diego, that means under $697,500) when I started the series about San Diego real estate prices on July 14. The demand for entry-level homes in San Diego has risen (or at least remained steady) since May, while the inventory of homes has dropped substantially.

But moving forward, I may once again need my long-lost crystal ball. As I’ve also been saying over these past months, the future of San Diego home prices is going to depend largely upon two things: 1) Interest Rates; and, 2) Bank Foreclosures.

Interest rates have ticked up a bit this week. There was a huge auction of Treasury bonds at the beginning of the week, with more than $115 Billion worth of notes sold in a single week. With such a large auction, prices were guaranteed to dip, sending up yields, and bringing interest rates up with them. The good news is that the institutions and governments are still buying treasuries, but the bad news is that some $340 Billion more treasuries are scheduled to be sold in third quarter 2009, and there’s really no end in sight. If the demand for the treasuries dries up, interest rates will increase. But so far mortgage rates are settling back down in the days following a flurry of Treasury bond sales. Hopefully that trend will continue. If so, mortgage rates will stay down and demand for San Diego homes is likely to continue unabated. If not… no one knows. Prices may go down a bit, but the affordability of home is not likely to change, since mortgage payments would be higher.

The second component, foreclosures, is also pretty touchy right now. In June there were 1,630 foreclosures in San Diego County, up from 985 in May. Notices of default were also up, with another 3,436 San Diego home owners going delinquent on their mortgage payments. The large majority of these defaults and foreclosures are in the inland communities of San Diego where home prices are lower than the coastal communities. The upper-end has still managed to stay out of the foreclosure mess to a large extent. But there are a lot of San Diego luxury homes on the market right now, and the upper-end is not selling quickly. There are price reductions and losses being absorbed. It’s hard to say whether or not we’ll start seeing more foreclosures at the upper end. Chances are, probably.

Right now if interest rates remain low and the banks start releasing their foreclosure inventory gradually, prices are not likely to decline at the entry level. Demand for entry-level homes in San Diego appears insatiable and prices are still being bid up. The risk is that the banks, which so far have not been displaying a great deal of competence with their foreclosure processing, might dump a whole lot of foreclosure properties on the market all at one time. Rumors have been spreading that this bank foreclosure policy travesty might begin in September. People in the know are saying that the banks have been adding to their overworked loss mitigation departments, and there may be a whole load of San Diego foreclosure properties for sale in September and October. But again, these are just rumors for the time being.

Check back often for fresh and timely market perspective from your San Diego real estate professionals at RE/MAX. Leave comments using the form below. We’d love to hear your thoughts. If you are considering buying or selling a home in San Diego County, contact us today to get started.

2 Responses

  1. The banks have to unload that foreclosure inventory at some point. The process by the banks has been terribly slow and those inventories do not seem to be shrinking – so I think you have to expect much of that inventory to be dumped soon. Some banks have tried to hold back hoping that prices would improve for that inventory and other banks just have had a flawed procedure for reducing that inventory. But either way, the banks will be pushing the inventory out the doors soon.

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