Two years ago, the San Diego housing market hit a soft patch that likely did not register on the radars of most casual market observers, but it drew the attention of some housing data geeks.
“I had very savvy investors tell me a couple of years ago to stop buying houses because everything was going to fall apart,” said local real estate investor Justin Williams, who runs the investor coaching website houseflippinghq.com. Williams said he and his team have flipped more than 500 houses since he jumped into real estate full-time eight years ago.
What did those savvy investors see in the data?
First, home sales volume slowed. In October 2013, sales of single-family homes and condos declined 4 percent annually following 21 consecutive months where home sales volume was flat or increasing on a year-over-year basis, according to RealtyTrac public record sales deed data.
The 4 percent decline in October was followed by five consecutive months of double-digit percentage decreases in home sales volume.
Second home prices softened. Although average home sale prices continued to rise annually in the metro area, they declined on a month-over-month basis for three consecutive months starting in October.
It was the first string of three consecutive monthly declines in home prices since the three months ending in October 2011.
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This soft patch in San Diego — which was masked by continued double-digit percentage increases in average sales prices that only later slowed to single digits in April 2014 — can probably be chalked up to a rise in interest rates.
The average 30-year fixed mortgage rate crept above 4 percent in June 2013 after 19 consecutive months below that milestone and was up to 4.49 percent by September — which in hindsight turns out to be a 50-month high.
60-day risk windows
But in the face of this softening market and advice to the contrary from other investors, Williams did not panic — he continued to buy and flip homes. He’s now quite happy about that decision made two years ago.
“I’ve made a couple of million dollars in that time,” he said. He noted that as a flipper his risk is limited to about 60 days between when he buys the property and then eventually secures a buyer. “My higher risk is during that rehab time and the time it takes to find a buyer.”
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“I’m not an economist … so I don’t try to be an economist,” he continued, noting that the typical rehab time on his flips is three to four weeks. “My goal is to have an idea of what’s going to happen within the next 60 days. Are we going to be OK in the next 60 days? And if the answer is yes, we are OK with buying a property. I don’t need to know what’s going to happen in a year.”
Robert Campbell
San Diego-based real estate analyst and author Robert Campbell, who produces data-heavy reports available at realestatetiming.com designed to help real estate investors and homeowners time their buying and selling in local housing markets, agreed that house flippers don’t need to be as concerned with the long-term trajectory of a housing market.
“Theoretically flippers can make money in good markets and bad because they are so close to the market … and their time horizon is six months … and typically things don’t change that much in six months,” said Campbell.
He noted that in a down market flippers need to account for decreasing home values. “You have to be careful in a rapidly dropping market because you may be adding value but you are also losing value.”
Stability scares off some flippers
Because the soft patch in late 2013 didn’t metastasize into a full-blown housing downturn in San Diego, Williams and other flippers did not have to deal with the added stress of a depreciating market. That was a welcome relief to real estate investor Doug Van Soest, who cut his teeth in real estate investing in Southern California in 2008 and 2009 when prices were plummeting and foreclosures were flying high.
“I’ve actually been very pleased that it’s been virtually flat with a little bit of an increase over the past couple of years,” Van Soest said. Van Soest said he and his wife, Andrea, started out in 2008 buying three houses and so far this year have done 49 transactions. “I’m not concerned with it being 5 percent lower or 10 percent lower like I was in the foreclosure days.”
Van Soest noted that the more steady and stable market in San Diego and other parts of Southern California has reduced competition from other flippers afraid that the market was crashing again or just not content to operate in a more slowly appreciating market.
“They are kind of sitting on the sidelines now,” Van Soest said. “We’re not sitting on sidelines.” Van Soest and his wife run the website www.socalhomebuyers.net to attract homeowners who might be interested in selling their property off-market. “It’s worked well for us. We’ve been able to do well when others are just kind of sitting on the sidelines.”
Data from RealtyTrac shows flippers have curtailed their activity in San Diego over the past two years. Between the first quarter of 2010 and the first quarter of 2014, flipped single-family homes and condos accounted for 10 percent or more of all sales transactions in all but two quarters with a peak of 12.2 percent in the first quarter of 2013.
But in the second quarter of 2014, flips dropped to 8 percent of all transactions — down from 10 percent the previous quarter — and continued to decline from there. In the third quarter of 2015, homes flipped in San Diego accounted for just 6 percent of all sales, less than half the peak from 2013.
Premature market pullout
Investors who have already pulled out of the San Diego market did so prematurely, according to Campbell, who said that his market timing data does not show the San Diego market as a sell — yet.
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“I’m still advising them to stay long,” he said of his clients who are invested in San Diego real estate. “Stay with this trend until the end.”
Campbell acknowledged that San Diego’s market upswing has exceeded even his expectations.
“I thought we would have a trend reversal in maybe the second or third quarter of this year, and that’s not the case,” he said.
He explained that his real estate timing index for San Diego has only had three “signals” since 1995: buy in December 1996, sell in August 2005 and buy again in April 2010.
“If you’d have sold at the end of 2014 based on what you thought the trends were going to be, you would have been premature. It got close, but it didn’t actually signal a time to sell, and in fact, things started increasing (in 2015).”
Daren Blomquist is the vice president of RealtyTrac.