Too often we want to understand the health of our local real estate, 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 local areas in an objective way, PREMIER will be monitoring the health of different San Diego areas in each edition.
Too often we want to understand the health of our local real estate, 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 local areas in an objective way, PREMIER will be monitoring the health of different San Diego areas in each edition. In this edition, we look at Rancho Santa Fe and La Jolla.
Rancho Santa Fe Luxury Real Estate
In today’s environment, the most troublesome analytic issue when comparing historical real estate performance to current performance is the lack of relative sales volume. When comparing Rancho Santa Fe luxury real estate (defined for the purpose of this analysis as all attached and detached residential properties listed with the San Diego Multiple Listing Service for the 92067 and 92091 zip codes) for the first-quarter of 2008 to the first-quarter of 2009, this issue becomes particular apparent, especially when comparing median price changes.
We segmented this market into 3 groups by original listing price: 1) Properties less than or equal to $2.75 million; 2) Properties greater than $2.75 million and less than or equal to $4.5 million; and 3) Properties greater than $4.5 million. A year ago, all three price segments combined had 37 sales for the first quarter of 2008. This year the first quarter has only 23 sales. When we look at the individual price segments, the first quarter of 2009 had 9 sales in the lowest price segment, and 7 and 7 in the other two. Thus, when calculating median price change, a great deal of period-to-period variability occurs, not necessarily from intrinsic price changes, but more from insufficient sample sizes to compare year-over-year changes.
For example, the lowest price segment, properties with an original listing price less than or equal to $2.75 million, ‘mathematically’ experienced a 54.7% median price decline (Chart A). Any Rancho Santa Fe realtor would tell you, “that’s ridiculous”, but technically it’s not. From an intrinsic price valuation perspective, it is. But, from a statistical perspective, it’s not. It’s the result of an insufficient sample size to accurately represent that sub-population’s pricing behavior. Essentially, 9 sales for a quarter to represent all homes less than $2.75 million is not a sufficient number, even in Rancho Santa Fe where one would be lucky to get in for $2.75 million.
Ironically, much of today’s real estate market is experiencing the same valuation issues as the large banks are facing with their assets. Market-to-market valuation becomes dubious, at best, under illiquid conditions. The most common method of residential real estate valuation methods is valuing a home relative to other comparable homes that have recently sold. This is essentially a market-to-market valuation, comparing similar assets to similar assets to derive a price. This is a good practice when there are comparable assets, but when there are so few sales, comparables do not exist, thus leading to false pricing or equally dubious reconstruction pricing where every home is custom and no two lots are equal.
Under these conditions, sub-population analysis loses its value. One most step back to gain a larger population sample at the expense of sub-population precision. When we do that, we see that Rancho Santa Fe, as whole, experienced a 2% median price decline between the first two quarters of 2008 and 2009 (Chart A). We also see further indications of illiquidity, i.e. overall inventory up by almost 18% and sales down by 38%. The biggest factor predicting Rancho Santa Fe’s luxury real estate valuation is now the patience and/or financial wherewithal of its sellers to weather the systemic economic storm.
La Jolla Luxury Real Estate
Overall, La Jolla’s luxury residential 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) experienced almost a 20% median price decline when comparing the first quarter of 2008 to the same 2009 period. Fortunately, due to the naturally higher volume of sales in La Jolla versus Rancho Santa Fe, we were able to discern that much of this price decline resulted in properties equal to or greater than $750,000.
We segmented the market 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. Overall, sales were down 18%, with 98 properties sold in the first quarter of 2008 versus 80 properties in the first quarter of 2009. Interestingly, sales were up 7% for properties less than $750,000, with 29 properties sold in the first quarter of 2009 compared to 27 in that same period of 2008. Consequently, even though total sales were down for La Jolla by 18%, all of that came from properties with an original listing price greater than or equal to $750,000.
This pattern continues even when looking at changes in inventory. Inventory for properties less than $750,000 has declined nearly 25%. Average daily inventory for the first quarter of 2008 was 120 properties. Average daily inventory for the first quarter of 2009 was 91 properties. This is a healthy sign, especially when sales for this price segment are up almost 8%. However, this cannot be said for the other two price segments, both of which have experienced increased inventory levels. The highest price segment, properties with an original listing price greater than $1,750,000 has experienced a 31% increase in inventory levels, going from a daily average of 162 in the first quarter of 2008 to 213 in the same period of 2009. The middle price segment also experienced an inventory increase of 9%. Essentially, properties greater than $750,000 have become more abundant on the market, so much so, they have pushed overall inventory for La Jolla up by 8%.
Not surprisingly, properties with an original listing price greater than $750,000 have also experienced the largest median price declines. Overall, La Jolla’s median price has declined nearly 20% when comparing the first quarter of 2008 to the first quarter of 2009. Much of that decline comes from properties greater than $750,000, which came from this subpopulation’s severe supply supply/demand imbalance cited above. The lower price segment fared much better with only a 3.5% median price decline, largely due to its much stronger supply/demand position. It appears as though this lower price segment is correcting itself before the upper two price segments. Frankly, this is not all that surprising, considering this lower price segment was the first to get hit by the storm. It may just be the first to come out of it too.
Written by Linda and Tom Sansone
Willis Allen Real Estate
Phone (858) 775-6356