The competition among San Diego home buyers has become even fiercer in recent weeks. The shortage of homes for sale in San Diego CA is causing major frustration to would-be purchasers of San Diego homes and investment properties. The average time on market for non-short sale properties has effectively dropped to a matter of hours, not even days. There are lines outside the front door of most homes as soon as they come on the market, and buyers can’t seem to get their offers in fast enough.
The sales statistics do not accurately reflect market times because a large percentage of the sold properties are bank foreclosures and short sales. Bank response times are slow, and during the waiting period most of the MLS listings for these distress sales continue to show as “Active”. The bank strategy of under-pricing their REO inventory of foreclosure homes is aggravating the situation. Buyers don’t know what price to offer, and appraisers don’t know what values to assign to the properties.
San Diego home buyers are again competing with investors who have apparently identified the bottom of the San Diego real estate market. In the past weeks almost every offer that we have put in on behalf of individuals and families looking to buy a home in San Diego has been rejected in favor of another offer. And no one is putting offers in below asking price. These offers have been at or above list price! Most are substantially above list price.
The big issue is that so many investors are able to buy with all-cash, no loans, no appraisal, and short escrow times. Bank asset managers gravitate toward all-cash offers. So even if someone has a higher offer but requires a home loan in order to complete the purchase, the banks will frequently accept the lower all-cash offer. Where there are multiple offers at or near the same purchase price, the sellers will always prefer offers with all-cash, followed by conventional loans and larger down payments, followed at a distance by FHA or VA loans. Prospective buyers hoping to purchase with 3.5% down payment FHA loans have almost no chance of success in the current scenario.
Many home buyers who have been consistently outbid in their attempts to purchase a home this year have been escalating their offer prices. Houses that come up for sale in central-coastal San Diego in the mid-$300,000’s are now receiving offers in the $400,000’s. But this presents another problem. In order to get mortgage financing, the property needs to appraise at or above the purchase price. Appraisers have flagged San Diego as a “declining market”, so purchases far in excess of the asking prices are immediately suspect and often won’t appraise. Here again, cash is king. All-cash buyers are able to waive the appraisal contingency, eliminating the risk that the property will fail to close escrow due to an insufficient appraisal.
It’s truly amazing how much cash has been sitting on the sidelines waiting for the right time to invest in San Diego real estate. In recent weeks our phones have been ringing consistently with all-cash buyers who are looking for a great deal on a San Diego investment property. These clients are confidently making full-price all-cash offers expecting to buy with no problems. But they too are finding that their offers are being rejected in favor of even higher all-cash offers. So if it’s difficult for the all-cash buyers, just imagine how difficult it is for the majority of people who are hoping to buy a home in the traditional manner with a down payment and a home mortgage!
The situation is different at the upper-end of the market where homes for sale in La Jolla CA, Del Mar beach houses, and Rancho Santa Fe estates are still experiencing price reductions and longer market times. There is currently a three-tiered system for mortgage financing. “Conforming” loans are available up to $417,000 at the lowest available interest rates. “Super-Conforming” loans are available up to $697,500 at slightly higher rates for San Diego County (this loan ceiling varies from county to county). Jumbo loans carry higher interest rates for any loan amount over $697,500 in San Diego County. While conforming and super-conforming loans are still relatively easy to get, the jumbo loan guidelines are more strict and many families are having difficulty qualifying. This is leading to increased inventories of homes on the upper end and leading to another form of unsatisfied demand.
There doesn’t seem to be a happy medium in current San Diego real estate market. In order for the situation to improve, banks need to adjust their strategies for selling REO properties and for approving short sales. If there is a backlog of foreclosure homes in San Diego that the banks have not released for sale, then they need to put those homes on the market immediately. Appraisers need to recognize that San Diego is no longer a declining market and give appraisals that accurately reflect current market values. The banks also need to again accept more risk at the upper end and begin issuing more jumbo loans. Otherwise they are creating a self-fulfilling prophesy of further price declines at the upper end of the market. There is unsatisfied demand at every level of the San Diego real estate market.