Too often we want to understand the health of our San Diego luxury real estate market, but can only find either raw data or broad statistics which seem disconnected, contradictory, or without explanation
Too often we want to understand the health of our San Diego luxury real estate market, but can only find either raw data or broad statistics which seem disconnected, contradictory, or without explanation. In order to help keep you informed about your local area in an objective way, Premier Magazine will be monitoring the health of different San Diego luxury real estate areas in each edition. In this edition, we look at La Jolla luxury real estate, Solana Beach luxury real estate and Encinitas luxury real estate. The other areas we are monitoring are Downtown San Diego luxury real estate, Coronado luxury real estate, Rancho Santa Fe luxury real estate, and Del Mar luxury real estate.
La Jolla Luxury Real Estate
A quarter ago, we analyzed La Jolla’s luxury real estate market (defined for the purpose of this analysis as all attached and detached residential properties listed with the San Diego Multiple Listing Service for the 92037 zip codes) over a 12-year period. For this analysis, we decided to zoom back in and focus on the most recent 12 months, 2/1/2008 – 1/31/2009, and compare it to the previous 12-month period, 2/1/2007 – 1/31/2008.
Overall, inventory and new listings were relatively flat, year-over-year (Chart A). However, sales were down 15% from 602 properties sold to 512 properties. Average marketing times have also increased 25% from 115 days to 143 days. Unfortunately, median values have declined as well. Technically speaking, overall median values have declined year-over-year 27%; however, this number negatively distorts the actual valuation change.
If you look at Chart A, you can see that we have segmented the La Jolla luxury real estate market into 3 price tiers by original listing price: 1) Properties less than $750,000; 2) Properties greater than or equal to $750,000 and less than $1,750,000; and 3) Properties greater than or equal to $1,750,000. Only 2 of the price tiers experienced a median price decline and neither of those was as severe as 27%. Frankly, this is how most press articles distort reality by blindly quoting a 27% median price decline, leaving the reader with an exaggerated sense of reality.
Instead, let’s look at the reality. Properties with an original listing price less than $750,000 had a median price increase of 3.5%. Properties above that but less than $1,750,000 had a median price decrease of 17.4%. And finally, properties above $1,750,000 had a decrease of 10.4%. Consequently, worst case scenario, one would expect overall price decline to be somewhere less than the extreme of 17.4%, definitely not a price decline of 27%. The reason this overall median price is distorted (and an inaccurate indicator of overall prices) is because the proportions of each of these groups that made up total sales has changed from one year to the next. Let’s not forget that a median number is simply the middle number in a given sequence of numbers, so if the proportions of the price groups change that median number gets skewed.
If we look at how the number of sold luxury properties has changed from one year to the next, we can see that the lower end price tier represents a larger percentage of overall sales than it had from the previous year. The number of sold properties has actually increased 8.8% for properties under $750,000, while the number of sold luxury properties has actually decreased for the two upper price tiers by 13.3% and 37.4%, respectively. This means that when we compare all the solds from 2/1/2008 – 1/31/2009 to all the solds from 2/1/2007 – 1/31/2008, we can see that the representation of the price tiers has not remained constant, thus distorting the overall median price.
If we compare the percentage contribution the lower, middle, and upper price tiers make to the median value for the 12-month period 2/1/2007 – 1/31/2008, we get 28%, 39%, and 33%, respectively. When looking at the same price tiers for the following year, we get 37%, 39%, and 24%, respectively. Essentially, more lower-end properties were sold and less upper-end properties were sold. It’s this change in market demand for the price tiers that is distorting median value. Yes, values did decline overall, but not as much as the overall median price suggests. Consequently, when looking at any median number change from one period to another, remember that changes in market demand between the subpopulations can positively or negatively distort the statistic.
Solana Beach Luxury Real Estate and Encinitas Luxury Real Estate
Believe it or not, but we are finally starting to see inventory headed in the same direction as sales for the Solana Beach luxury real estate and Encinitas luxury real estate market (defined for the purpose of this analysis as all attached and detached residential properties listed with the San Diego Multiple Listing Service for 92075 and 92024 zip codes, respectively). This may not sound like much to celebrate about, when the number of sold properties has been declining year-over-year, but actually it is a very good sign, considering historically each quarter inventory has been climbing as sales have been declining. Essentially, we are starting to see some normal vitals in the patient, albeit faint ones.
If we compare the previous 12-month period, 2/1/2008 – 1/31/2009, to its equivalent year-over-year period, 2/1/2007 – 1/31/2008, we can start to see that supply and demand are moving in the same direction. Finally, inventory and new listings are declining with sales. Inventory and new listings declined 4% and 7%, respectively, while demand or the number of properties sold declined 17% (Chart E). However, when we compare our most recent inventory data from 2/1/2009 to 2/1/2008, supply is even more in line with demand. When comparing this most recent data, inventory fell from 299 properties to 243 properties, nearly a 19% decline: the result of a precipitous drop in supply over the last quarter.
Also, on a per-subpopulation basis, the Solana Beach/Encinitas market seems to have fared well considering being under one of the most challenging environments in decades. For this analysis, we segmented Solana Beach luxury real estate and Encinitas luxury real estate into 3 groups by original listing price: 1) Properties less than $750,000; 2) Properties greater than or equal to $750,000 and less than $1.3 million; and 3) Properties greater than or equal to $1.3 million.
The strongest of the price tiers was the bottom tier or properties with an original listing price less than $750,000. Not only did it have the smallest median year-over-year price decline of only 2%, but also its marketing time fell by 26%. Interestingly, there was no real year-over-year change in inventory or the number of properties sold, seemingly hinting at some semblance of stability.
The second strongest price tier was the next level up or the middle tier, properties with an original listing price greater than or equal to $750,000 and less than $1.3 million. This group experienced only a 1% greater decline in median price than the lower tier, but did experience the largest changes in supply and demand of all three tiers. Based upon the nominal median price decline, this supply/demand change was most likely a reversion to a norm. Both inventory and the number of properties sold declined, but so did marketing times. Given only a 3% year-over-year median price decline and fewer sales, it is hard to construe the shorter marketing times as the result of anxious sellers.
Lastly, the weakest group was the upper tier, properties with an original listing price greater than or equal to $1.3 million. It was weakest only by virtue of it having had the largest decline in median price of 5%. However, over the last quarter it has managed to reduce its inventory by nearly 20%, taking a lot of its supply off the market to offset the reduction in demand. This alone will create price support that was not fully represented within the year-over-year comparison. This is more of a leading indicator of price stability, than an explanation of past performance. Going forward, all else being equal, the Solana Beach real estate and Encinitas real estate market is looking brighter than it once did a couple of quarters ago.
When reviewing the data that we put together for La Jolla luxury real estate, Solana Beach luxury real estate, and Encinitas luxury real estate, it is important to remember that these areas are comprised of sub-populations, some behaving much differently than others. For example, properties that are on the beach can behave differently than other areas. Likewise, detached properties can behave differently than attached properties. What we have presented here is a partial sub-population analysis. A complete analysis would identify the subpopulation of a property then assess that particular subpopulation’s behavior. In next month’s edition, we’ll examine Coronado luxury real estate and Downtown San Diego luxury real estate.
Written by Linda and Tom Sansone
Willis Allen Real Estate
Phone (858) 775-6356