Buyers Struggle to Find Homes in San Diego, as Inventory Plummets

San Diego neighborhood. Source: Flickr, dmcdevitCurrently, the San Diego real estate market can be summed up with a single phrase — inventory shortage. Home buyers are having a hard time finding suitable properties, especially in hot neighborhoods near the coast.

The supply-and-demand situation has completely reversed itself over the last few years.

Given all of this, it’s no wonder prices are rising. According to the San Diego Association of Realtors, the median sale price for single-family homes jumped 13% over the last year. The median for townhomes and condos rose by nearly 19% during the same 12-month period.

Inventory is Way Down in San Diego

According to Realtor.com, the number of homes for sale in San Diego County fell by nearly 35%, from October 2011 to October 2012. Some of this is the work of investors who sensed the ‘bottom’ months ago. They are now scrambling to purchase homes before prices rise any further. Investors typically pay cash, and they are willing to bid over the asking price in many cases. This makes it hard for regular home buyers to compete, especially first-time buyers who don’t have a lot of capital.

Real estate inventory has fallen for 15 months in a row, according to the San Diego Association of Realtors. The trend will likely continue into the first quarter of 2013, and possibly beyond that.

Investor demand for housing is still strong. But the level of demand among regular buyers is growing more slowly, tempered by high unemployment. But the job market is improving. San Diego’s unemployment rate fell to 8.4% in September, down from a high of 10.9% in January 2010. If demand continues to grow while inventory remains tight, we could see home prices rise even further next year.

Looking Ahead: More of the Same in 2013?

So what does the San Diego real estate market look like in 2013? Here’s a likely scenario for the first quarter, at least:

Mortgage rates are expected to remain low into the first part of 2013. This is partly the result of actions taken by the Fed. Earlier today, Freddie Mac announced that the average rate for a 30-year fixed mortgage had fallen to 3.34%, the lowest in more than 40 years. This will act as a powerful incentive for San Diego home buyers in 2013, especially if the job market continues to improve.

Demand for housing is growing across the price spectrum. Investor activity may level off as prices continue to rise and there are fewer deals to be had. But this should be offset by rising demand from live-in home buyers. Low mortgage rates and a slowly improving job market will bring more of these buyers into the market.

Inventory will probably continue to fall over the next few months, as it has since the summer of 2011. All of these factors combined will make the San Diego real estate market highly competitive in 2013.

According to RealtyTrac, foreclosure activity in San Diego fell by 26% in the third quarter, compared to the same period last year. This means there will be fewer distressed properties coming onto the market in the months ahead — always a boon for home values.

Next year, we will likely see buyers paying over the asking price for homes, in many cases. Buyers will also have to make numerous offers before getting a home, as investors bid properties right out from under them. The low-ball offer will become a thing of the past.

In fact, we are seeing some of these trends already. The North County Times recently told the story of a couple who made offers on nearly 100 homes, offering $20,000 above the asking price in some cases.