Is the San Diego real estate market softening in 2014? This is the question my clients have been asking me, and this is the trend that I've been tracking for several years. I am an exclusive buyer's broker, which means that I've been working with buyers-only for the past 7+ years in San Diego. We've seen ups and downs in that time, but I've always looked at each new client and each new transaction from the buyer's point of view (and with the buyer's interests in mind). Buyers want lower prices, lower interest rates, lower closing costs, lower monthly payments, lower property taxes, less hassle, less work to do after they buy the home, less bad surprises after closing, etc., etc. I speak to new potential home buyers on a weekly (and often daily) basis, and this is the question that I've been hearing more and more this year: Is the San Diego real estate market softening in 2014?

My answer is this: Yes, the San Diego residential real estate market is softening in 2014, and we will know more about the full extent of the softening once we get through this summer. In a market that is softening, homes sit on the market longer (before they get offers), more sellers are doing price reductions, there is less competition for the motivated buyer, and home values are either increasing at a lower rate than before or possibly decreasing. What we know concretely is what has happened in the past. What is more difficult to discern is what is happening at this very moment. Let me tell you what the story has been from 2006 until now.

In 2006, the market was humming along with San Diego home values higher than they've ever been in the county's history. Between 2006 and 2009 the market began to soften and home values at first began to increase less quickly (which soon turned into a nose dive). Between 2008 to 2011, San Diego home values tanked... losing between 40% to 60% of their worth (depending on the area, price range, etc.). Foreclosure and short sale listings flooded the market and drove down home values. During this time interest rates were also going down (the market's way of encouraging people to buy). Interest rates reached their lowest levels around late 2012/early 2013.

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Guess what... momentum started building in 2011 (with more and more people trying to buy). From 2011 to 2013 the San Diego market experienced growing demand combined with a shrinking inventory (less foreclosures, less short sales, and many homeowners still underwater and unable/unwilling to sell). This led to a total seller's market in much of 2012 and 2013 (with many areas experiencing such a shortage of listings that bidding wars were commonplace and many, many homes sold higher than the list price on the day they entered the market... often to a cash buyer). What we experienced in 2012-2013 could only be described as a buying frenzy. It was no fun for the average home buyer. Especially when a buyer kept missing out on offer after offer for months until he/she finally gave up (or finally got one to stick). The result of that perfect storm of low inventory and high demand was increasing property values. The median value for a home in San Diego increased by about 18% from the end of 2012 to the end of 2013.

Something very interesting happened at the beginning of last summer (2013). The U.S. Federal Reserve chairman made some eye-opening statements that caused interest rates to jump from 3.25% to about 4.25% almost overnight (a significant increase in rates for a conventional 30-year loan). I began to sense (like many other local Realtors) last summer that the market was beginning to soften every so slightly. 70% or so of San Diego home buyers get a loan when they purchase. Most of these people can't purchase what they really want unless they get a loan. People who are getting a loan are most concerned with two things (1) how much do they have to put down and (2) what will their monthly payment be. With the jump in interest rates, people all of a sudden had to put a lot more money down to keep the same monthly payment. If buyers aren't willing or able to put more money down, and interest rates rise, then buyers either need to accept a higher monthly payment or start offering/paying lower prices for the homes they're buying. What I'm saying is that the increase in interest rates from last summer has contributed to a softening effect on the market. Couple the higher interest rates with overzealous property owners (who didn't realize they just missed the perfect chance to sell at a peak) - people who had been waiting to list their homes until they saw enough appreciation, and you we are now seeing a market that is softening (increasing inventory combined with softening demand). It had gotten so bad (for buyers) in 2012 and 2013 that I barely remembered what a "price reduction" was (they were pretty much non-existent back then). This year (and towards the end of last year), however , I am seeing price reductions more and more (most often traditional homeowners or investors who were hoping the market was still booming and overpriced their homes at first). That's not to say that demand has gone away. On the contrary, I am already working with more buyers this year than I was at this time last year. However, buyers this year are being a little more cautious and the inventory this year is a little bit bigger. 

See Also: About the Author: Justin Gramm

So... YES, the San Diego real estate has been softening in 2014. To what degree we won't know until we get past this summer. Please keep three things in mind as you re-read this article: (1) I am not an economist. I am just a real estate agent who specializes in representing the best interests of the home buyer. I could be dead wrong, but I am only telling you what I've been seeing (from my point of view as a buyer's broker). (2) Keep in mind that the market is "softening" from a drastically unbalanced seller's market. That does not mean that we are in a pronounced buyer's market. It does mean that the market is becoming less of a seller's market and more of a buyer's market. That being said, I am still seeing some properties selling the first weekend they are listed. I am still seeing some $2 Million homes accepting offers in a week or two of being listed. I am still seeing some properties sell over the list price. Still seeing some properties with multiple offers (one last week had more than 40 offers a couple days after it was listed)... Just not as many as I was seeing in 2012-2013. I hope (for the sake of my buyer clients) that it doesn't get as crazy as it was last year for a long, long time. (3) Please keep in mind that real estate is hyper-local. I have been speaking in generalities about the wide San Diego County real estate market. Not every hyper-local market reacts the same. There are seller's markets and buyer's markets happening at the same time within San Diego County, depending on which area/price range you are looking in. It's important for you and your buyer's agent to do your own research about the area that you are considering in order find out what sort of marketplace to expect. For example, here are some notes from a few markets that I track once or twice a year for fun:

1 Bedroom Condos in Downtown San Diego Under $500K - They went from a 4-week supply in May 2013 to a 3+ month supply today. Becoming more of a buyer's market. The downtown market is it's own animal and behaves very differently from the rest of the county.

$1M-$2M homes in Del Mar - 4 month supply then (May 2013) to 3 month supply today. Pretty healthy market, but possibly still a slight seller's market.

$400K-$600K homes in Rancho Penasquitos - 2 week supply to 6 week supply. Still a seller's market (but moving in the right direction for buyers).

$4M to $7M estates in Rancho Santa Fe - 30 month supply to 20 month supply (still higher than the 14 month supply I tracked in November 2012). Rancho Santa Fe luxury estates are still in a total buyer's market. 

A Home in Eastlake (in Chula Vista) for less than $400K - Less than a week supply last May and now a 6-7 week supply. Still a seller's market, but drastically different from a year ago.

$600K-$800K Carlsbad Home - 4 week supply then to a 5-6 week supply today. Not much change.

If you are buying in today's market, you will likely pay more for a home than you would have two years ago. Your interest rate will be higher than it would have been last year, but rates are still at near-historic lows. You will hopefully be able to search and buy a little more comfortably (with a little less competition) than my clients experienced in 2012 and 2013!  If you are already a homeowner, don't fret too much about a softening market. It was inevitable. Markets are always cyclical. Most projections that I am reading still suggest that San Diego's median home value will increase in 2014 (just not as much as it did last year). If you have questions about the San Diego real estate market, feel free to contact me. I look forward to hearing from you.

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Justin Gramm is the founder and principal broker of Globella Buyers Realty, yourSan Diego Exclusive Buyer Brokerage. He also writes this blog, "For San Diego Home Buyers."

Exclusive Buyer Agents do not list homes for sale and never represent sellers. They have no "inventory" to try to sell you. They can represent you in purchasing any home. They are specialists at representing buyers only on the buyers' side of the transaction. Exclusive Buyer Agents work to get buyers the best price and terms when they buy a home.

If you have excellent credit and plan to buy a home or condo in San Diego County within 90 days, contact Justin Gramm to hire an agent on your side of the transaction. Call Justin at (858) 437-2662 or E-mail.

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