Real-estate analysts, economists and housing industry leaders agree the market is down, as evidenced by slowing transaction volume and declining average sales prices in all segments of the housing market: single-family homes, apartment properties and condo conversions. The softening trends in San Diego County have been brought about by buyer hesitation and sellers reflecting general concern in the marketplace about future interest rates, job and wage growth, population migration and widely projected downturn in the national housing market.
In 2006, sales of apartment properties, including those intended for condo conversion as well as for production of rental income, reflected the general softening in the real-estate market, in terms of the number of transactions and prices paid. Based on sales reported in CoStar Comps in 2006, there were 139 sales of apartments with 10 or more units intended for rental income production, a 28 percent drop from the 194 such sales in 2005. In 2006, the average price per unit was $132,000, a 7 percent decrease from the 2005 average of $142,000. During the year, the average price fell 25 percent from a high of $158,000 in the first quarter to a low of $119,000 in the fourth quarter 2006. This was the lowest quarterly average price per unit on properties intended for rental income production since the first quarter of 2004, when the average was $110,000.
The decline in sales of 10 or more units intended for condo conversion was even more precipitous: 26 sales in 2006, a 75 percent decrease from the 102 sales in 2005 intended for condo conversion. In the second half of 2006, there were only four reported sales of apartment properties (10 or more units) intended for condo conversion, compared with 47 sales in the second half of 2005. The average price paid per condo-conversion unit peaked in the first quarter 2006 at $210,000, and plummeted 37 percent during the rest of the year down to $133,000 in the fourth quarter.
The fall in the volume and prices for condo-conversion properties reflects the slow sales absorption that all conversion projects have been experiencing in the past year. There is so much stagnant converted inventory already that the premium for condo-mapped apartments is gone unless they are exceptionally desirable from a retail-marketing standpoint. Condo converters are now seeking help to work out financing issues on their nonperforming properties. The combination of a market flooded with converted units, slightly elevated interest rates and sluggish consumer confidence has stalled the conversion market; developers who entered the fray late in the season prepared to reap their share of profits are now scrambling to stay afloat.
However, there is a silver lining for savvy investors now that prices are becoming more realistic. Cap rates (the property's net operating income divided by the purchase price) on conventional multifamily product are returning to levels supported by old-fashioned real-estate fundamentals.
For properties without a condo map, the average cap rate on 2006 fourth-quarter sales was 5.67 percent, up from a low of 5.17 percent in the fourth quarter 2004. Investors are likely to require cap rates in the 5.5 percent to 6.5 percent range, depending on location, so that a target return can be generated from rising rents without fuel from condo-conversion mania. The desirability of Southern California is always going to be reflected in lower cap rates compared with other regions. The most recent rental survey published by MarketPointe shows strong rental rates and historically low vacancy of under 2 percent. More realistic cap rate expectations, on the part of both buyers and sellers, should result in a more active and sustainable market.
If buyers trade in real estate for the short-term, they will probably want to play in a different market for a couple of years. But if buyers invest with a longer view, they can't own a more desirable asset than San Diego real estate, especially with a housing shortage that's not going away.
If you would like to get loan information from recommended bank's, or get started and view all homes, condos, investment properties, pre-foreclosures or bank owned foreclosures (REO's), please visit our website at: County Properties San Diego or County Properties Riverside