Rancho Santa Fe

When comparing 2008 to 2007, two factors remained constant for the Rancho Santa Fe 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 92067 and 92091 zip codes): inventory increased (Chart B) and sales decreased (Chart D). Contrasting this year-to-year data shows that inventory was on average 10% higher in 2008, while the number of sales was 20% lower (Chart A).


The degree of this divergence between inventory and sales has been growing steadily, after normalizing for seasonality and natural volatility. Plotting total inventory over the number of properties sold provides a glimpse into this divergence. At the beginning of 2007, there were approximately 15 properties available for sale per every property sold. Through 2007 and 2008, that number has grown, nearly doubling to approximately 30.



The consequence of total average daily inventory growing from 290 properties in 2007 to 318 properties in 2008 as well as total annual sales declining from 208 in 2007 to 167 in 2008 has been an extension in marketing time and a reduction in median sales price. Properties that sold in 2008 took 20% longer to sell than properties in 2007. Nevertheless, despite all of this, sold property prices have remained relatively stable, with median sale price declining only 3.1% between 2007 and 2008.



At first, this nominal price decline appears suspect, given the increasingly challenging market conditions. It leads one to think that possibly the median price change was skewed upward by a greater percentage of higher-end homes selling in 2008 than 2007. To test this hypothesis, we segmented the 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. For each price group we compared their annual percentage contribution to the total number of properties sold in 2007 versus 2008. For 2007, groups 1, 2, and 3 contributed 45%, 36%, and 19%, respectively, to the total number of sales. For 2008, they contributed 47%, 34%, and 19%, respectively. Based on these percentage price-tier contributions to total annual sales, there seems to be an upward bias to 2007, not 2008, providing us greater assurance in our -3.1% median price change statistic.



This modest price decline appears to have come more from sellers discounting off their original list price, rather than starting out with a lower original list price. Discount from original list price represents the percentage between original list price and sale price. The discount is usually arrived at serially as an accumulation of price reductions and/or sale negotiations. In 2007, the median discount was 11.5%. In 2008, the median discount grew by 40.8% to 16.2% (Chart A), resulting in sellers giving up 4.7% more of their original list price. The implication is that sellers seemed to start out with roughly the same original list prices in 2007 as 2008; however, in 2008, those that sold, waited longer to sell and eventually gave up more of their original list price. All the above, appears to exhibit a market of patient sellers.

1) Increases in inventory.
2) Large decreases in the number of properties sold.
3) Significantly longer marketing times.
4) Nominal reduction in median price.
5) Price reductions driven largely from discounting, rather than from original outset. Unfortunately, this market is severely out of equilibrium. There is a large, protracted supply/demand imbalance. The question is primarily of duration. How long can the market be seized up from patience and to what extent will prices be affected if duration outstrips patience? That is, how long can sellers hold tight until cracks start to emerge in the market’s foundation? And, does a smaller population of sales accurately represent the fundamental market? Ironically, it is these questions that preclude buyers and sellers from correcting the increasing market imbalance, i.e. the proverbial catch-22.

Del Mar

Like Rancho Santa Fe, Del Mar’s 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 92014 zip codes) continues to experience a worsening supply/demand imbalance. However, the decoupling of supply from demand between 2007 and 2008 was larger for Del Mar. Total average daily inventory grew 15% from 2007 to 2008, while the total number of properties sold fell by nearly 30% (Chart E). Specifically, total average daily inventory went from 146 to 168, while sales fell from 191 in 2007 to only 136 in 2008.


This divergence of supply and demand resulted in more properties available for sale per every property sold. After normalizing for seasonality and natural volatility, at the beginning of 2007, there were about 7 homes available for sale per every property sold. From the beginning of 2007 to the end of 2008, that number grew steadily by almost 200%. By the end of 2008, there were 20 homes available for sale per every property sold. (In fact, the absolute number is even higher. The 20-homes statistic came from running a regression through the actual data, in order to smooth out the peaks and valleys of the data, so to some extent the 20-homes statistic could be considered conservative.)



The result of this supply/demand change from 2007 to 2008 was a 15% increase in marketing time and a 7% drop in median price. This is over twice the median price decline as Rancho Santa Fe, but the increase in Del Mar’s marketing time was less. It appears that Del Mar sellers were more motivated to sell from the point of listing. On a percentage basis, they priced their homes to sell from the beginning and opted for a lower median price but quicker sale time. Specifically, Del Mar’s discount from original list price only went from 10.3% to 12.5%, while Rancho Santa Fe’s went from 11.5% to 16.2%. Also, Del Mar’s marketing time only increased 14%, compared to Rancho Santa Fe’s 20%. What this represents is the difference in the motivation of sellers in different areas and how prices are affected thereby.



There also appears to have been a slight change in the types of properties purchased in 2007 versus 2008. To highlight this change, we segmented the market into 3 groups by original listing price: 1) Properties less than or equal to $1.2 million; 2) Properties greater than $1.2 million and less than or equal to $2 million; and 3) Properties greater than $2 million. In 2007, groups 1, 2, and 3 represented 36%, 38%, and 26% of the total number of properties sold, respectively. However, in 2008, 21% of the group 2, the middle price tier, or 8% of Del Mar’s total number of sales, were redistributed to partially the bottom price tier, but mostly the top price tier. This new relative demand interest helped the bottom price tier maintain its 2007 median price level; however, due to the top price tier’s excessive supply, this new relative demand could not keep its median price level from declining 6% (Chart E).



It is important to remember that this new demand is relative percentage demand between price tier subpopulations, not new absolute demand. As mentioned earlier, Del Mar’s absolute demand is down nearly 30% from 191 properties sold in 2007 to 136 properties in 2008. The looming unanswered question going forward is if those 136 sellers fairly represent Del Mar. The contraction in sales given the large growth in supply seems to suggest there is another more reticent population of sellers, yet to be statistically accounted for.

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