Coronado

Over the last 12 years, Coronado (defined for the purpose of this analysis as all attached and detached residential properties listed with the San Diego Multiple Listing Service for the 92118 zip code) has seen its inventory (or the daily average number of properties listed for sale) fluctuate. However, only in the last 2 years has Coronado set record inventory highs (Chart A). Prior to 2 years ago, the highest inventory level reached was in 1997 with 200 properties available for sale. Since then, inventory declined and ultimately leveled out at 150 properties on average. Today, inventory is bouncing around 250-300. That’s an 80% increase in inventory. Unfortunately, sales have not been keeping up with this rise in inventory. Actually, they have declined. While inventory levels are at record highs, sales are at record lows. From 1997 to 2007, the average number of sales for the first 11 months of each year has been approximately 270, compared to 161 for the first 11 months of 2008.



That’s a 40% decline in sales juxtaposed against an 80% increase in inventory. If we plot average daily inventory per month by the number of sales each month, we can see that ratio has been increasing over the last 2 years (Chart B). The ratio of ‘Inventory/Sales’ has gone from a historical trend of 6 to now 17 (with some sharp periodic upward spikes over the last 2 years). Essentially, what this means is that historically for every house sold 6 were for sale. Over the last 2 years, that number has averaged 17 and climbing, nearly a 200% increase



That’s the macro picture, but, when we look at the micro picture, we see that some subpopulations in Coronado are behaving better than others. We segmented Coronado real estate into 3 groups by original listing price: 1) Properties less than $1.5 million; 2) Properties greater than or equal to $1.5 million and less than $2.4 million; and 3) Properties greater than or equal to $2.4 million. For each of these price groups, we compared their performance in the first 11 months of 2007 to the same period of 2008. The difference in inventory behavior was particularly evident (Chart C). The inventory of properties with an original listing price less than $1.5 million grew 22.5%, while the inventory of properties above $1.5 million contracted slightly. Not surprisingly, median price changes reflected this inventory situation. Properties with an original listing price less than $1.5 million witnessed a 9.1% median price decline, while those above $1.5 million either stayed flat or increased nominally (Chart D).





Consequently, of the three subpopulations, the bottom tier looks the most vulnerable to price weakness going forward, due to its excess inventory. However, this does not mean the two upper tiers are out of the woods. If we go back to our macro inventory analysis, we estimated historical mean inventory levels around 150 properties and current mean levels around 250. Even if the inventory level of properties with an original listing price less than $1.5 million corrects back to its January 2007 level, that is only a total market reduction of 50 properties, 130 – 80 (Chart C). That still leaves the market with an excess of 50 properties on average above historical mean levels. Also, given that sales probably will not be as active under more stringent lending guidelines, inventory will have to further adjust from historical levels, pushing total inventory market reduction beyond the 50 properties. However, all-in-all, given their relative inventory levels to Coronado’s macro real estate market, properties with an original listing price greater than $1.5 million look the best positioned for this future correction.

Downtown San Diego

If anyone has any doubts about the growth of Downtown San Diego (defined for the purpose of this analysis as all residential properties in the 92101 zip code) over the last 12 years, just look at Chart E. This chart depicts how residential inventory or the daily average number of properties listed for sale has grown, since 1997. At first sight, this chart is rather ominous, especially when we have been discussing excess inventory. However, remember, inventory is only half of the story.



As we have detailed in previous editorials, downtown’s inventory has grown dramatically because of the addition of new, large luxury condominium buildings now flanking its shore line. Higher inventory is not a problem, if there is a proportionate increase in sales or demand to accompany the growing inventory. These new buildings did just that. Chart F shows that listed sales have in fact grown too. However, to assess whether sales of grown enough to keep up with the growing supply, we need to compare Inventory to Sales. One way to do this is by watching how the ratio of Inventory over Sales changes with time. As we saw when analyzing Coronado, this ratio essentially tells us how many properties are for sale given every property sold.



When we plot ‘Inventory/Sales’ for all listed properties and sales, we get Chart G. Interestingly, unlike the other areas we have covered, Downtown San Diego already had an excess supply situation. Between 2001 and 2003, Downtown San Diego watched its Inventory to Sales ratio go from below 5 to in the 20s, then back down below 5. If we look at the Inventory for that period (Chart A), we see there was a growth in inventory during that period. This was the effect of new supply from condominium construction increasing inventory faster than sales. However, as we can see from Chart G, this excess inventory was eventually absorbed to where inventory and sales once again reached equilibrium.



Since then, a new excess supply condition has been created (Chart G). It started back in 2005, peaked in 2007, and has since been declining. Currently, it is about at mid-level compared to the 2001-2003 condition. Essentially, for every listed property sold, there are 10 available. This is about twice the level where the 2001-2003 condition bottomed out at and about twice the normal condition of Coronado, its neighbor across the bridge. However, given that turnover is higher with condominiums, normal levels might turn out to be slightly higher than the 2001-2003 bottom.





Frankly, Downtown’s situation looks better than expected. Equally promising is that we can see from 2001-2003 that Downtown has experienced and corrected itself once before from a similar Inventory/Sales scenario. Furthermore, it looks well on its way to correcting itself once again. Even when we look at inventory at the micro level we can see that inventory has either remained relatively flat or declined (Chart H). We segmented Downtown San Diego real estate into 3 groups by original listing price: 1) Properties less than $500,000; 2) Properties greater than or equal to $500,000 and less than $700,000; and 3) Properties greater than or equal to $700,000. When we look at how inventory has changed from 2007 for these three groups, we can see that properties with an original listing price greater than or equal to $500,000 and less than $700,000 have drastically reduced their inventory nearly 50%, while the other two subpopulations have remained relatively flat. Given the longstanding worries many have had about an inevitable inventory glut due to new construction, Downtown San Diego looks no different than other high end areas that had relatively little new construction over the last 5 years.

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