Downtown Condo Stats

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Submitted by davelj on July 21, 2007 - 2:01pm

I subscribe to a website that tracks virtually all SD downtown condo listings and sales (MLS only). Here are some sobering statistics.

The average sales price/sq. ft. for downtown SD condos for the first three weeks of July in '05, '06, and '07 were $657, $602 and $526, respectively. That represents a two-year decline of almost 20%. These numbers might be a little off due to small sample sizes for each period, but they're probably in the ballpark. Even if the decline is 15% it's pretty bad.

There have been 32 closed sales in downtown during the last month and there are 492 condos available for sale per the MLS. (There are probably another 300-500 completed units available for sale by developers.) So, there are about 15 months of MLS inventory available downtown. Add in the developer units and you get a very ugly picture, even after adjusting for developer units sold.

The 32 sales over the last month sold at an average price of 4.6% less than the most recent listing price. Of course we know that most of those prices had already been dropped a few times and the condos re-listed previously. The average days on market for these sales was 73, but of course that's a joke due to the ability to take the property off the market and then re-list. DOM stats have become almost worthless.

Bottom line: it's ugly and getting uglier downtown. But sellers remain pretty stubborn, which of course won't last. I suspect that the average price/sq. ft. is headed for the $350 - $375 range over the next few years, or another 30%-ish decline from here. But, I could be wrong.

Submitted by barnaby33 on July 21, 2007 - 2:37pm.

The burning question is, is your name Dave, or Davel? Oh and do you follow downtown as a canary in a coal mine, or because you want to live there?

Josh

Submitted by sjk on July 21, 2007 - 2:44pm.

Thanks for posting that, nice data points. No, I don't think your wrong on where price per sq.ft.is going. I suspect your price is a little high. It may settle there(in real terms), but it will drop much lower before it recovers.

What we have just seen in the real estate market the last few years will end only with a magnitude of pain not seen since the 1930’s.

Regards,

Submitted by davelj on July 21, 2007 - 3:20pm.

My name is Dave, although Davel would be more exotic and mysterious, yes? I follow downtown because I already own here and would like to acquire more units here, but at substantially lower prices. I bought downtown last year in a very odd transaction under which the seller accepted almost all of the downside price risk in the unit through 2010 while, in exchange, I gave up all of the upside potential over the same period. The two main characteristics of the seller that were necessary for the transaction to work were (1) he had a big chunk of equity in the unit (which I expect him to lose in the transaction), and (2) he was a "true believer"; that is, he truly believed that the unit would increase beyond his original purchase price "given more time" (he was already $80K underwater on the unit when he sold it to me). So, while I own downtown, I would like to see prices crater because I'd like to buy a few more units for investment purposes. But, if they don't, no big deal. I'll just pay the guy off and that'll be that.

Submitted by SD Realtor on July 21, 2007 - 5:26pm.

Dave I believe downtown will indeed crater. My seller is holding their breathe as we are in escrow but another unit in the complex he is in just lowered their price by over 100k on a short sale. He is already in escrow at close to 100k under his purchase price of two years ago. I can see if running down even more as long as investors don't start bailing people out. The other thing about downtown are that HOAs in the nicer places are pretty brutal. In his building they are about 540 a month.

SD Realtor

Submitted by rona on July 21, 2007 - 6:16pm.

rona:

What is the sound of a condo project crashing?

Is my experience in the mid-80's yields anything, it is the knowledge that there'll be projects that convert to rental housing in order to keep the market from totally collapsing. I expect this will be sooner rather than later, but there is no telling the urgency or stupidity of developers!

Submitted by capeman on July 21, 2007 - 10:17pm.

$250 or less per sqft...

and I'm seriously considering it. That's about what they should be if not less.

Submitted by barnaby33 on July 22, 2007 - 9:25am.

Capeman, why do you say 250 is what they should be? What your reasoning?

Josh

Submitted by davelj on July 22, 2007 - 10:52am.

capeman, I hope you're right, but I doubt things will get that bad. Here's the problem. It's extremely difficult to find a 2bed/2bath, 1000 sqft. downtown renting for less than $2,000/month, and most of them are in the $2,200 - $2,500 range. Yeah, you MIGHT be able to find the occasional desperate owner with a crappy unit willing to rent it out for $1,800. (While rents might go down in the coming recession, they probably aren't going to go down by more than 3%-5% if the 90s are any guide.) So, assuming a price of $250/sqft. you get a price of $250K for a 1000 sqft. unit. Using traditional financing (20% down, 7% 30 yr fixed) you'll get a total monthly payment (excluding principal) of about $1,800/month including taxes, HOAs, etc. In other words, at $250K most of these units will actually cash flow pretty well. While always possible (isn't anything?), that's a highly unlikely scenario. As was discussed in a previous thread a few months back, it's completely logical for a would-be homeowner to pay a premium to what they would otherwise pay to rent the same unit, although debatable as to what that premium should be (I argued 20%-40% - others argued higher). My point is that if you're waiting for $250/sqft. downtown, you'll probably never buy downtown. $300/sqft. is possible, but also fairly unlikely. Nevertheless, I support you in your pessimism.

Submitted by PerryChase on July 22, 2007 - 12:13pm.

I fully expect Downtown San Diego to be a place of mostly renters with a minority of high-end homeowners.

Right now, Downtown is a "premium" place to live. But give it a few years for those apartments/condos to get old and dirty.

People who grew up in the suburbs think that Downtown living is glamourous (it can be if you've got the money) but they'll soon realize otherwise -- especially if they spend all their money on housing.

The suburban lifestyle is very pervasive and people will get married, or have children (within or outside of marriage), then they'll move. People will get old and fat and I'll need that SUV with room to park so they can easily unload their Costco purchases.

In a boom, it makes sense to buy Downtown, but even with a stable market, it takes 5 years to break even on the transaction costs. Once people start telling each other that buying is a losing proposition, then prices won't recover.

Downtown is barely 5 years old and it's still a work in progress. People wanted in on the grown floor. But like Amway, only a few prosper.

Downtown SD is not Manhattan, people have lots of choices. Except for banking and law firms, Downtown doesn't even have job. Most residents there have to commute out of Downtown.

Submitted by Arraya on July 22, 2007 - 1:28pm.

I agree, I can't figure out what most of these developers are thinking. The "months of inventory" per the MLS are dismal and that is not accounting for the numerous units on the market that are not listed.

My MLS tracking is about 12 months of inventory on the market per MLS and probably another 8 months not listed.

http://www.dqnews.com/ZIPSDUT.shtm

49 units sold in June and roughly 590 listed. Out of the units sold a good portion were bought with a loss to the previous owner.

At this point it seems that the sellers and the developers are in the same posistion. Many of both cannot afford carrying costs and are being forced to dramaticlly decrease there "wish" price and take a big lose. (usually the the expense of the lender. The ones that can afford the costs, I'm sure are not happy with there investments, are making plans as we speak to cut there loses before it gets to bad.

I can understand how the "average joe buyer" would be duped into buying at a bad time but I cannot understand how the developers were so short sighted???

Anyway you slice it downtown will be hurt the most...

Submitted by SD Realtor on July 22, 2007 - 2:13pm.

Could not agree more. I feel downtown will hit the 250-300 sf range depending on the quality of the unit and the view. Those who wait will do great here.

Downtown has the perfect recipe for the biggest fall. Definitely among the top areas where speculation ran rampant. A growing resale inventory along with plenty of new development. I very poor pending to active ratio. High carrying costs (HOA) for the nicer properties. Pretty much a perfect mix for healthy depreciation cycle.

SD Realtor

Submitted by capeman on July 22, 2007 - 2:55pm.

So, assuming a price of $250/sqft. you get a price of $250K for a 1000 sqft. unit. Using traditional financing (20% down, 7% 30 yr fixed) you'll get a total monthly payment (excluding principal) of about $1,800/month including taxes, HOAs, etc. In other words, at $250K most of these units will actually cash flow pretty well.

 

You're assuming that in the next year rates on a 30 yr fixed are still going to be 7% or south... Take a look at how the MBS bond market is unwinding and the possible outcome of 1.4T dollars in bonds getting marked to market. Real interest rates are likely to nearly double in the next 12-18 months and with that goes south the prices on all housing. Downtown doesn't have the business it needs to support people wanting to live down there. On the front page of the UT yesterday it stated how California job growth has now officially stalled. We're near or currently in a recession and I don't think that will bode well for all the high end restaurants/$30 cover clubs that have sprouted up recently downtown. Business down there isn't doing as well as it has been in the last few years of hayday. Less business leads to fewer businesses which leads to less desirability to live there. Couple this with a recession and possibly double rates on the mortgage and you've got massive depreciation and roughly equivalent mortgage payments to rental payments. Just watch and be patient. I could eat my hat on this prediction but I'm willing to sit with money in my pocket to wait and see. In the end I will have a great deal or at least still have the money in my pocket.

cheers,

chris

Submitted by deadzone on July 22, 2007 - 3:56pm.

Outside of investors there is very little real demand for downtown condos, or condos anywhere for that matter. Not sure why you people thing that this is such a premium place to live. Just look at the beating the Harbor Towers took in the early 90s. Now there are about ten times as many condos, where do you think all the demand is going to come from to pay premium rent for those places?

Submitted by mixxalot on July 22, 2007 - 4:59pm.

I agree-

Most jobs in biotech and tech sector are concentrated in either Sorrento Valley, Del Mar or Carlsbad area. If I stay in San Diego that would be area for me to consider buying to be close to jobs.

Submitted by Arty on July 22, 2007 - 6:02pm.

Agree too, and don't forget the school districts near Sorrento Valley, Del Mar, Carmel Valley, and anything near 56 are closer enough to San Diego. I want to an open house today for a hillcrest condo studio, it want 430,000 for a 750 sf studio (573/sf)! Nice studio but at $573/sf?

Submitted by davelj on July 23, 2007 - 2:22pm.

Perry Chase, et al...

I agree that downtown is a work in progress. However, it becomes a more attractive place to work and live each year. And I would argue that SD, in general (not just downtown, but including downtown), has become a much more desirable place for people to want to live over the last 15 years. Longtime residents may disagree (and perhaps with good reason), but the population growth and image of the city as a "glamour city" (to use Robert Shiller's words) speak for themselves. SD is not the sleepy beach town with no downtown that it was in the early-90s. For this reason, I think there's a floor underneath prices (which is well below current prices but above where the uber-bears think it is) that didn't exist in the last down cycle. I hope I'm wrong - I want values to plummet. But I just don't see a peak-to-trough decline of 50%+ in absolute terms.

A few anecdotes. There are twelve units on my floor of the building where I live. It's the top floor and the units are a bit nicer (with 18-ft. ceilings, etc.) so perhaps these aren't entirely representative of the rest of the building. Nevertheless, of the 12 units, four are owned by absentee owners who don't even bother to rent them out. One couple lives in Phoenix, one in SF, one in El Paso and the other in Rancho Santa Fe (they wanted a place to go before and after ball games). These are not flippers - they use the units one or two weekends a month and have no intention of selling. The three out-of-towners just wanted to have places in downtown SD. Fifteen years ago these buyers didn't exist for SD. I know several other people who live in north SD County (and in other parts of the country) who want to buy downtown just to have a place here, but they're waiting for prices to come down a bit. Now these are not average people from an income standpoint. They have the dough to blow and these buyers can't support the kind of inventory that's building up right now. But my point is that there are lots of buyers for downtown (and other parts of SD - La Jolla, RSF, etc.) that weren't around 15 years ago.

The four most expensive words in investing are "This time it's different." But sometimes you do have to re-evaluate and say "This time it's a little bit different."

Lots of people sold stocks back in the late-50s when for the first time the dividend yield on the DOW went below the yield on 10-year treasuries. Those that didn't change their thinking never bought back in...

Again, I think there's still a long downward spiral for downtown ahead of us. At least I hope so. But SD and downtown have changed since the last downtown - we pull from a much larger group of buyers these days. I think these buyers will emerge before prices get so attractive that even boneheads can make the math work from an investment standpoint. But I hope to be proven wrong.

Submitted by Allan from Fallbrook on July 23, 2007 - 2:44pm.

Davelj: Very thoughtful and well reasoned post. While I would agree with the overall assessment, I think you nailed the one important fact dead on: Given the amount of inventory due to be added in the next 2.5 years, there simply aren't enough buyers at these prices to sustain the market.

Another thing to think about is this: Lending guidelines are tightening, as is credit and interest rates should follow (in spite of Bernanke's yeoman efforts to stem that tide). When that little trifecta comes completely into play, the cost of funds and the ability to secure financing (especially for some of those nosebleed units) will be severely curtailed.

While I concur with your assessment of both San Diego and the new breed of affluent buyer that chooses to live here (even on an absentee basis), I would also argue that those buyers represent a small subset.

Speculation in downtown condos has been rife over the last few years and, combined with the other factors (excess inventory, tightening supply of money, etc), should cause a correction in pricing. How much? Who knows. But 6,000 fresh units in a struggling market can't be good.

Submitted by deadzone on July 23, 2007 - 3:26pm.

There is just no way demand for downtown living will ever match the number of condos they are building. Downtown living, in general, is a very niche market. Condo living is also a niche market. Put the two together and sprinkle on a bunch of overbuilding and you have a recipe for huge price declines as well as declining rent.

Submitted by PerryChase on July 23, 2007 - 3:48pm.

I agree with some of your statements davelj.

But, as much as I love San Diego, I hate to burst your bubble. On the list of glamour cities in the world, San Diego ranks pretty low -- lower than Auckland, New Zealand, in my opinion.

About the rich people you're talking about, they are the most fickle and they will bail out way sooner than permanent residents.

Let's agree to disagree. We'll let time give us the answers. I'm willing to sit back and see how this real estate downturn unfolds.

Submitted by Borat on July 23, 2007 - 4:15pm.

San Diego is a really glamorous city. Here's a sample of the glamour you can see every day in my neighborhood:

Submitted by sdrealtor on July 23, 2007 - 4:57pm.

I just got back from South Florida and the number of uber high rise buildings near the beaches strech for many many miles. These buildings are all much larger than what we see in SD and far more numerous.

While I am hesitant to compare the two, I think it's a bit naive to say there is no way they could ever fill all of what they are building downtown. Of course they need to get prices back in line, but I'm pretty sure they could sell all they are building and more once they do.

Submitted by davelj on July 23, 2007 - 5:23pm.

deadzone, your comment that "There is just no way demand for downtown living will ever match the number of condos they are building" is incomplete, in my opinion. I think it could be ammended to, "There is just no way demand for downtown living will ever match the number of condos they are building AT CURRENT PRICES." I would agree with you there. Knock another 20% off prices and I guarantee you that demand will pick up considerably. Enough to put bodies in all the units for sale? That's what we'll find out. We'll only know after the fact. (Do you really consider condos a "niche market"? My guess is that 15%-20% of all single family residences in San Diego County are condos. Is that what passes for a niche these days?)

Perry, although you may put Auckland below SD in a list of glamour cities, the populace disagrees - compare populations of people who have enough money to choose between the two and there's your answer. I don't understand why people live in NYC but I defer to "the tape" that more wealthy people want to live there than in SD. While we may disagree on what constitutes a "glamour city," Robert Shiller came up with the list(which includes SD) and the moniker, not me.

Borat, you proved my case. That's a great picture of Santa caught napping. Hell, even Santa Claus wants to live here. (That was tasteless. But, that's my bag, baby.)

sdrealtor, yeah, our problems are minor in comparison with Miami, with a condo inventory that's going to be 10x that of SD over the next few years. I don't know where all of the buyers are going to come from. Sure, there are a lot of well-heeled foreigners that want to live in a big US city near the beach... but that's a lot of inventory.

Submitted by Borat on July 23, 2007 - 6:08pm.

Hahahahaha -- Santa Claus! He does look like St. Nick! But when even Santa can't afford a condo to relax in during the off-season, you know prices are too high...

Submitted by deadzone on July 23, 2007 - 8:41pm.

Condos are definitely a niche market. In a down market, the only real demand for condos are from 20 somethings and retirees who are downsizing. Look at condo prices in San Diego in 1996, they couldn't give them away, even in the beach areas and they were dirt cheap.

Bottom line, in a down market you don't want to own a condo. And especially not in downtown where there is a condo glut to a magnitude never before seen in San Diego. Check back in 3-5 years and let's see how many people really want to live downtown.

Sorry, but in the long run I don't see a very big market downtown at any price. Like everything else, sheeple got caught up in the "trendy" marketing of downtown but most of the market was artificially propped up via speculators.

Submitted by KIBU on July 23, 2007 - 10:29pm.

I am wondering about a day when downtown is going to go for zero dollar per square feet. Think it's imposible? All it takes is just a big earth quake......

I guess I am growing old now, no longer want to live downtown.

Submitted by PerryChase on July 23, 2007 - 11:36pm.

KIBU, what is your experience Downtown? I want to hear the downsides of Downtown from people who actually live there. Not interested in hearing why Downtown is great -- I know already.

A friend who lives there says he has to sleep with earplug in his million dollar condo because of the train. He's absolutely sick of it.

Submitted by capeman on July 24, 2007 - 12:35am.

I can appreciate what you guys are saying that "This time may be a little different" and "San Diego is a desirable place to live." That all can be true but the numbers don't lie. The argument here and the argument in all housing (minus the help belligerently large credit availability) is affordability. The numbers... affordable payment of 1000sqft condo is say ~$2500 a month. At a currently conservative rate of $500 per sqft that condo will cost you 500k. Considering good credit and a whoppingly unlikely down payment of 100k your 400k loan 30yr at 7% will cost you $2661 per month not including HOA , Uncle Sam's yearly cut, insurance, etc. Seeing that I'm not expecting average Joe to have 100k for a down payment this whole scenario is highly unlikely in the first place.

 

Secondly with the credit market going down the toilet at a beyond historical rate, interest rates north of 10% are not at all unexpected in the next couple of years. Let's take a nice doubling (14%) as a round number that is not out of the question. Shooting for the same number as a payment in this environment gets you a 200k loan considering the 100k cash is still in your account for a down payment after dealing with high interest credit card and auto loan payments. That right there is a 40% decline in price due to affordability and ~$300 per sq ft. $2600 plus taxes, HOAs and associated costs is quite steep for 1000sq ft. With my pretty respectable family income and having an actual family to put in there that is an undesirable cost/benefit living scenario anyways and is still likely to be well above the rental costs on the same small condo in that environment. All one has to do is take a look at the ABX to see that higher real rates are coming and they will come with a vengence. That will likely knock Chuckie First-Time Home buyer (and likely family starter) away from paying anywhere near current pricing on a small place like that.

 

 

Submitted by KIBU on July 24, 2007 - 8:23pm.

Perry Chase, downtown has many great things, the only bad things about downtown for me are:

1.Downtown has more sex offenders than elsewhere in the county and its school
http://www.signonsandiego.com/uniontrib/...

http://www.signonsandiego.com/uniontrib/...

Not ideal for family with kids.

2. Parking problems
3. Traffic

I go downtown almost everyweek for fun. But I can't afford down there for price they want.

Submitted by nodunk on July 25, 2007 - 10:01am.

I am a baby boomer who just listed his home near Beverly Hills 2 weeks ago with the intention of buying a condo in downtown San Diego for my retirement residence. After reading all these posts this morning from people who seem to know whats happening in your downtown, I am wondering if I am making a mistake in wanting to live in downtown San Diego. We visited downtown for the first time in about 10 years last summer and came away thinking we could retire here-walk to shops and restaurants and enjoy the best weather in America! My impression of downtown overall was that it eventually in 10 years or so it could potentially be a mini Manhattan-with all the new construction bringing in businesses to serve a large affluent population. After reading most of these posts on this blog one would think if I buy an 800k new or used condo and don't like it I would be stuck with a lemon.

Submitted by NotCranky on July 25, 2007 - 10:23am.

Nodunk,
You might consider getting help from the participants here towards working out a best case scenario lease for downtown?
Maybe get your feet wet with a one year lease with an option to renew?(with a landlord who isn't at risk for foreclosure)

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