La Jolla

Over the last 12 years, La Jolla (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) has seen its inventory (or the daily average number of properties listed for sale) rise and fall, mostly due to seasonality. However, only in the last 2 years has La Jolla set record inventory highs (Chart A). Typically, La Jolla’s inventory levels would fluctuate between 300 and 450 properties. Over the last 2 years, inventory levels have been fluctuating between 450 and 600 properties, creating almost an entirely different market.



However, before we throw the baby out with the bath water, there is some positive news to consider, if we look closer and depending on whether you are a buyer or seller. While inventory levels have been fluctuating between 450 – 600 properties (higher than the historical norm of 300 – 450), over the last 4 months inventory has come down to approximately 450 properties. Not only that, but if we look at individual price tiers within La Jolla, some are in better shape than others from a supply/demand perspective. Remember, an overall ZIP code statistic represents the subpopulations within that ZIP. It is a mistake to presume they look like each other, just like it is a mistake to presume a ZIP looks like its county.

For example, we segmented La Jolla real estate 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. Immediately, we can see that the inventory of properties with an original listing price of less than $750,000 has been trending down significantly (Chart B). When we compare the first 10 months of 2008 to the same period of 2007, inventory has declined 25%. Not only that, but new listings have decreased, sales have increased, and marketing times have become shorter for this price tier (Chart C). Albeit, median price has declined 8%; nevertheless, this price tier has made tremendous headway towards establishing normal market conditions.





On the other hand, the two upper price tiers have not made such a steady inventory decline (Chart B). Only since summer has the middle tier reduced its inventory, most likely the result of seasonality, and the upper price tier is still at record levels with relatively no change since last year. With sales down nearly 30% from last year for this upper price tier, and marketing times nearly 40% higher, this subpopulation appears the most vulnerable to the supply/demand dislocation occurring in La Jolla. While the middle tier still appears to be soft, it also looks like it is further along with correcting itself. Prices have come down, accelerating closings and helping to maintain year-over-year demand.

Going forward it will be important to keep an eye on the overall supply and demand trends cited above, particularly with respect to properties above $750,000. However, at the same time, it would be unreasonable to expect to fully reach historical norms. As we all know, going forward, credit or underwriting guidelines will be tighter than before…and rightfully so. Consequently, fewer will be eligible to purchase a home. Less eligibility means fewer potential buyers, thus fewer sales. Fewer sales, means less turnover or flipping due to artificial appreciation. The end result will be lower historical norms; however, a much more stable and accurately priced market.

Solana Beach/Encinitas

Coincidentally, when we look at the historical inventory or the daily average number of properties listed for sale over the last 12 years for Solana Beach/Encinitas (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), it looks a lot like La Jolla. Historically, inventory has trended between 200 – 450 properties. However, like La Jolla, over the last 2 years Solana Beach/Encinitas inventory has veered off its historical trend, creating higher lows and highs (Chart D). (This is not a global phenomenon within the county. For example, Rancho Santa Fe, the neighbor of Solana Beach and Encinitas, has not broken out of its historical inventory trend levels. See the November 2008 edition of this editorial.)



The positive news is that these new higher inventory levels have not been increasing over the last 2 years. They initially spiked 2 years ago, pushing inventory levels around 650 properties. Since then, inventory has been fluctuating in a downward direction, but never dropping below 400 properties: a number that was once near the ceiling of the historical trend, not the floor.

However, even though inventory levels have been trending down off their highs from two years ago (Chart E), it probably does not feel like it to the Solana Beach/Encinitas real estate market. As we mentioned above, in the La Jolla segment, what the market “feels” is not the absolute inventory level, but the ratio of inventory-to-sales, or supply-to-demand. What this ratio represents is the number of properties available for sale per every property sold. Historically, monthly sales have had a mean trend between 80 – 100 properties. Towards the end of 2004, sales have been trending down. The last 12-month sale trend has been between 40 – 60 properties. Consequently, even though inventory has been declining from its 2-year high, sales have been declining faster, resulting in an increasing supply/demand ratio. To the average Solana Beach/Encinitas buyer and seller, the trend continues to be more homes available for sale per home sold.



When we segment the market into price tiers and look at how the supply/demand ratio has been trending for each tier since January 2007, we see some disparity between the tiers. For this analysis, we segmented Solana Beach/Encinitas 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. Like the overall population, the two upper-price tiers have been trending upward since 2007, essentially doubling the number of properties available for sale per every property sold. From an absolute perspective, the highest tier, properties with an original listing price greater than $1.3 million, has the largest current supply/demand ratio, then the middle tier, and finally the lower tier. The lower tier, properties with an original listing price less than $750,000, is the only tier to have essentially same supply/demand ratio today when compared to January 2007. Part way between January 2007 and November 2008 it rose like the other two tiers, but it was the only price tier to come down and correct itself back to January 2007 levels.



It is important to realize that even though the lower tier has corrected itself to January 2007 supply/demand levels, these levels are still on the high side of historical norms. However, this tier is at least within range of historical norms, yet it only represents one subpopulation of the Solana Beach/Encinitas real estate market. Going forward, properties with an original listing price greater than $750,000 still have unprecedented excess supply relative to demand, leaving them exposed to further valuation deterioration or at least more so than the bottom price tier.

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