Tips for Scouting Out a Market
Before Making a Home Purchase
Question: My wife and I will be moving to San Diego in September. Originally we were planning to purchase a house in a good school district using most of our sizable nest egg that we have worked very hard to accumulate. But we have now decided to rent until we get a better sense of the housing market. Do you think this is a good idea? What do you think will happen to the San Diego market over the next five years?
-- Name and location withheld upon request
Answer: If I could predict what's going to happen over the next five years, I'd jump into my DeLorean, turn on the flux capacitor, and fly to Vegas to place bets on the Super Bowl, the Kentucky Derby and the U.S. mid-term elections.
Alas, I can't predict anything that far out -- and neither can housing economists and academics who spend their lives gazing into economic crystal balls. That's because what happens in a market is a delicate interplay between supply, demand and affordability that can be thrown off by events like a factory moving out of town, a natural disaster or a flood of new immigrants. Trying to predict these events years in advance is impossible.
But in the short run, we can get a sense of the direction of the market by looking at recent performance. And in this case, the latest signs, May 2006 statistics from the San Diego Association of Realtors, are mixed, and I think, troubling.
True, median single-family home prices were up 4% for the month over the year before, to $598,000, but sales were down a whopping 29%. Time on the market increased 32% to an average of 62 days. Attached homes had a 2% decline in prices to $374,000. Attached-home sales were down 25%, and days on the market increased by 8% to 59. Inventory levels are also high: according to DataQuick Information Systems, there are currently 19,800 unsold homes on the market, a 7.1 month supply -- the highest level in the region since the mid-1990s.
All of this points to a distinct weakening of San Diego's long housing boom, but does that mean it's going to bust? Not necessarily. Most of the price-cutting is happening in new homes, according to DataQuick. Although that tends to put downward pressure on existing-home prices (who wouldn't choose a cheaper new home over a more expensive resale?), it's also an indication that builders are dumping inventory and pulling out of the market. Indeed, according to the Construction Industry Research Board, San Diego County builders took out 41% fewer permits in the first quarter of this year compared to the year before.
Although this doesn't seem like much of a vote of confidence from the home-building community, it's good news for sellers, since fewer new houses means less competition. Over time -- and five years is a long time in a housing cycle -- a drastic cutback in supply could prevent severe price declines.
So what should you do? Keep reading newspapers and blogs to track what's happening in the market, and use your time as a renter to scout out where you'd eventually like to live. Use online tools like RealEstateJournal's Find Comparable Sales tool and Web sites like Zillow and ZipRealty, as well as experienced real-estate agents, to find out what's happening on the neighborhood level -- which for buyers, is the only one that really counts. Pay particular attention to the difference between asking and selling prices, the number of homes for sale compared to the same period last year, and how quickly homes are selling. Visit lots of open houses. And if and when you do find something that you think is a good deal -- and bargains can be had in a buyer's market -- think twice about putting all of that sizable nest egg into one brick-and-mortar basket. The best protection all of us have against the twists and turns of economic cycles is to diversify our investments.
-- June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005). Her "House Talk" column appears most Fridays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.
Email your comments to june.fletcher@wsj.com.