San Diego real estate performed exactly as I thought it would in 2008; the lower-priced homes (under $500,000) dropped like a ball off a table while the mid-priced homes ($500,000-$1,000,000) declined and the luxury homes($1,000,000 plus) were soft.  The key theme for the San Diego housing market decline in 2008 was foreclosure activity.  Loans were made to borrowers who had no chance of paying them.  Those failed loans resulted in increased inventory.  That market’s key financing component (non-prime loans) dried up so fewer buyers could buy the lower-priced homes; priced dropped…a lot.

In my 2009 San Diego Housing Industry Forecast, I said:

I mentioned on another post, that weblog since disappeared, that the San Diego County housing market would bifurcate.  I suspected that any income growth would happen on the top end and that the bottom half would see little to no income growth.  Combine that with a liquidity crisis and the lower-end homes would get slaughtered while the upper-end would just decline a bit. That happened in San Diego County; lower priced homes are starting to make lots of sense right now.

I explain in my 2009 San Diego Real Estate Outlook that the low end of San Diego’s housing stock is actually approaching reasonable prices:

Communities like Oceanside, Vista, San Marcos, and Escondido in the North County declined as much as 55%, peak to trough.  The entire South Bay experienced severe declines.  Lower income areas of the City of San Diego and the East County experienced steep declines.  Some areas declined so much that their prices have retreated to point where investment makes complete sense.  The fundamental value of those properties, as measured by the price to rent ratio, is such that it’s less expensive to own rather than to rent; we haven’t seen that phenomenon in San Diego County since 1999.

Investors, looking to plunk 20% down and receive positive cash-flow, are finding that bank-owned homes, (as opposed to short sales), in distressed areas, are priced so well that they can achieve that objective.  We expect those opportunities to remain plentiful throughout the first half of 2009.

There’s the potential boom.  Home prices have declined and financing is plentiful.  There is a ready, willing, and now ABLE group of buyers for these homes.  I expect prices to firm up in the lower end next year and perhaps rise in some severely battered areas.

The cause of that bifurcation may serve as the catalyst of the convergence, next year.  There is no financing for the mid-range market.  Again, from the real estate market outlook:

The cautious real estate buyer will avoid the mid-range priced homes ($500,000-$1,000,000) in San Diego throughout 2009. As more folks in mid-priced homes lose jobs, foreclosure activity will rise.  The problem with that price range is that there will be little or no financing available for buyers due to the loan limit of $625,000.  This means that if the mortgage payment on your Carmel Valley home, worth $1.1 million, is causing you financial discomfort, you’ll be selling that home into a market where a willing (and well-heeled) home buyer can’t get mortgage financing unless he puts a minimum of a half a million bucks down.

How many people do you know that have a half a million bucks liquid?

…and that’s the problem with the mid-ranged priced homes; there is no money for them.  The market is shifting to the fundamental values driven by financing.  The lower-priced stock rushed to the REAL value while the mid-priced stock will spend 9-12 months going through, what we call, price discovery.

What should the industrious San Diego real estate agent do then, in 2009?

Focus on home buyers in the lower end or listings in luxury market.  If I were to recommend HomeGain services, I’d suggest:

1. AgentEvaluator® for communities like Rancho Santa Fe, Del Mar, La Jolla, and Coronado.  These luxury markets are less susceptible to the volatility of credit markets.  Competing for listings in those communities should be fruitful as well-heeled buyers generally have cash.
2. BuyerLink™ for areas like Oceanside, Vista, San Marcos, and any of the South Bay cities.  These areas went through price discovery already and financing is widespread for those markets.

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