South Coast Market:
2003 Year in Review and Expectations for 2004
2003 was an easy year to summarize for local real estate: (1) fewer properties selling but for higher prices; and (2) the lower the price range, the stronger the market.
For the South County, median and average prices again posted double-digit gains in 2003. The average priced sale is now over a million dollars ($1,023,599). Despite the increase in prices, once again the number of sales is off (7% compared to 2002 and 18% compared to 2000). Low inventory levels continue to be responsible for the decline in the number of sales.
Attractive mortgage interest rates continued to drive activity for condos and entry-level homes. However, more expensive properties were less sensitive to interest rates than to uncertain overall economic conditions. Many prospective estate Buyers chose to sit on the sidelines. As a result, inventory levels built up and Sellers expectations softened.
Current Market Conditions
2004 has started with a bang for all segments of the market. While all price ranges are booming, improved conditions are most notable in the estate market. While there were only 10 residential sales above $5 million along the entire South Coast in 2003, I anticipate that there will be four times that number in 2004. As a result of estate Buyer’s wait-and-see attitude in 2003, there has been a build up both of prospective Buyers and homes for sale. Now that
activity has increased for estates, Buyers no longer have the luxury of sitting back and watching inventory levels build. Instead, they are seeing a rapid shift back to the Sellers market of the late 1990’s.
Expectations for 2004 (and Beyond)
If current conditions continue, 2004 will be a record year for local real estate, most notably in the estate market. After several years of flat prices, highend values appear poised to rise.
For estate properties we are seeing a shift in the demographics of our Buyers. Families with young children, who dominated activity in the 1990’s, have been priced out of the market in many cases. Instead, we are seeing a return of retired Buyers and wealthy
families looking for part-time homes.
In the long-term we are going to continue to suffer from a shortage of inventory for the following three reasons:
(1) Elimination of I.R.C. 1034 exchanges. In the past, homeowners could shelter unlimited gain on the sale of their primary residence by buying another home of equal or greater value. That opportunity has been eliminated. Now, single homeowners can avoid paying tax on only $250,000 of gain on the sale of their primary residence ($500,000 for married homeowners). For many owners along the South Coast, their increase in value over the past several years exceeds these thresholds and any sale would result in a taxable event.
(2) Property Tax Considerations. As a result of the dramatic increases in property values, most homeowners property taxes are considerably less than they would be if they were to buy a similar house today. A nicer house or even a lateral move would result in significantly increased property taxes.
(3) Increased Interest Rates. Almost everyone with a mortgage has either bought or refinanced recently to take advantage of record low interest rates. If rates continue to drop, owners will continue to refinance. However, when mortgage rates begin to climb, many people will not be able to afford to abandon their attractive loans, and will remain in their current homes. Attractive fixed interest rates have changed many homeowners from a “move-up” to a “fix-up” mentality.
All three of these reasons will tip the balance for many owners against selling, which will continue to diminish the supply of homes offered for sale.