REO’s and Short Sales In Del Mar, Carmel Valley, La Jolla, Rancho Santa Fe
There have been a lot of recent reports that the numbers of foreclosures are rising in the top tiers of the real estate market. This seems to be true in San Diego, where the number of San Diego luxury homes for sale has been increasing steadily over recent months. Banks continue to have restrictive lending standards for jumbo loan home mortgages. The result has been slackness in demand for upscale homes. In the meantime, job losses and the general downturn of the economy has made many past buyers of luxury homes want, or need, out.
The combination of decreased demand and increased supply has been putting downward pressure on the prices of San Diego luxury homes. As a result, as many as one in four San Diego home owners may be upside down on their mortgages, owing more on their mortgages than their homes are worth.
The initial adjustment of San Diego home prices had been in the entry-level home market. First-time buyers and investors had driven the bottom rung of San Diego real estate prices above $500,000 for detached single-family houses. When prices stopped rising, the fragile balance of easy financing for under-qualified buyers was disrupted. Demand dried up, inventories of homes for sale grew, and entry-level house prices fell quickly in San Diego. By the time prices fell 30% to 50% off their highs, easy credit had returned for “conforming” loans (under $697,500 in San Diego County), and buyers jumped in to buy at the reduced prices. Inventories shrank and soon demand exceeded supply. Now there has been upward pressure on the prices of entry-level San Diego homes for most of 2009.
The story has been different for the San Diego luxury homes market. Many home buyers in this category had purchased their homes with large down payments, rolling over equity gains from earlier sales of San Diego real estate. And as a general rule, luxury home buyers are traditionally in better financial shape than first-time home buyers or any buyers of entry level homes. So when the economy turned, the luxury home owners were largely better prepared for riding out the storm. But rainy day funds are beginning to dry up, and the old fallback of taking home equity loans for emergency situations is simply not available, especially for self-employed people or those who have seen their house values drop near or below their mortgage balances. Again, falling home prices combined with lack of availability of jumbo loans is the big problem.
According to Zillow, luxury homes (the top third of the housing index) are beginning to outnumber the bottom one-third of houses in foreclosure nationwide. That is being illustrated by the types of loans that are now going sour. More than 58% of foreclosures that began in the second quarter of 2009 were prime loans (as opposed to sub-prime loans), up from 44% at the same time last year. Prime loans were determined by the borrower’s credit scores and documentation. However, there are a lot of prime loans that are “interest-only” and adjustable-rate, so the prime loans that go bad are often the same sorts of junky loans that got entry-level home buyers into trouble. More upscale San Diego foreclosure properties are on the way.
Of course, where there are losers there will also be winners. Right now San Diego home buyers are taking advantage of the increased inventory and downward pressure on prices of homes for sale in Carmel Valley, Del Mar, La Jolla, and Rancho Santa Fe. Right now there are sixty four-bedroom houses for sale in Carmel Valley. Just a few years ago there were no four-bedroom houses in Carmel Valley priced under $1.3Million, so prices are down at least 30% from their highs.
Just as it did in the entry-level homes market, the San Diego luxury homes market will also recover as soon as jumbo loans become more generally available. Inventories will drop and prices will again rise. Just ask anyone who is presently chasing the limited inventory of entry-level homes for sale in San Diego. It’s much more fun and rewarding to buy a home when there aren’t hundreds of people competing for the same property.