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San Diego’s real estate market correction has been nothing short of extraordinary over the past 12-18 months. It has taken some by surprise and rewarded those homeowners who have withstood the market correction of the past 8 years, as well as those who took a risk and entered into the market in the depths and despair of the local market recovery.A home that was purchased for $300,000 in 2011 or 2012 would now be worth about $450,000 in 2014. This is due in part to an over-correction of the market in the first place, but also in part to a long-term real estate listing shortage; there is simply not enough homes to buy and the demand is greatly outweighing the supply.This article identifies what happened in the past 12 months and what to expect in the next 12.The San Diego housing market started out incredibly strong for 2013, but sales hit an air pocket once it became apparent that the Federal Reserve’s intent was to wind down its monthly securities purchases (a.k.a Quantitative Easing) in mid-2013.The market was ON FIRE for the first six months of the year, but the earlier-than-expected talk about “tapering” by the FED briefly sent mortgage rates soaring up to 5% right in the middle of the key home buying season. Up to that point, prices were increasing each month at a rate reminiscent of the peak/boom years from 2004 to 2006, and when the interest rate increase was coupled with higher home prices, many potential buyers suddenly developed a case of cold feet, leading to a slowdown in the sales of new and existing homes. (source: Wells Fargo)At the same time, potential home-sellers saw homes on their street sell for prices that they could not believe. The San Diego market has been brutally beaten down in price since the great recession began in 2007. Some areas of San Diego experienced a 60% decline in their real estate values due to the massive amount of short sales, foreclosures and distressed properties that were a cause and effect of the recession. Many people lost their homes or did a short sale to the point at which nearly 40% of the market between the years of 2009 and 2012 were distress sales in the market. There was a lot of fear and uncertainty throughout the market and economy both locally and nationally – ironically this was the best time to be purchasing real estate.At the height of the peak market in 2005-2006, there was about 5000 homes on the market, and at that time people thought it was an incredibly low amount of homes for sale. This amount includes all homes and condos throughout the entire county from the $50,000 condo in El Cajon to the multimillion dollar mansion in Del Mar. Buyers were clamoring for every property that hit the market; there were offers being written on hoods of cars and a bidding frenzy of demand. This was the mentality that, along with loose lending requirements, created the momentum for prices to get as high as they did. We all know what happened after that.Flash forward 7 years later and we are fully in recovery mode for 2013 in the San Diego market. In April of 2013 there was only 4000 homes available throughout San Diego. This was a ridiculously low number of homes available for sale – even less than the 2005 market and at this time there were much more people and many more homes developed and built since 2005, making it that much more significant. Also at this time, mortgage rates were at historic lows in the low 3%’s. (source San Diego Association of Realtors; Dataquick)This time around, lending standards are tight, and only buyers with good credit could purchase, allowing for a more-sensical approach to the market compared to the sensationalism that preceded us in the booming years.It was this environment of an incredibly low supply of homes combined with incredibly cheap money to borrow which led to the red hot market in the early part of 2013. It was only as prices rose quickly throughout the year, interest rates began to increase as a result of the overall improving national economy as well as more listings hitting the market where things began to shift.All the homeowners who purchased at or near the peak of the market, and who bit, fought and scratched to stay in their home and make the payments and avoid foreclosure or short sale no matter the adversity they faced now realized a market where the prices were again where they originally bought, and could finally have the opportunity to sell and get out of the home that became a ball and chain.Take for example a young couple who purchased in 2006 in North Park – They bought their home, a 2 bedroom, 2 bath 1000 square foot residence for $625,000. They expected to live there for a few years, save money, build equity and then buy a bigger home that they could raise a child in. Their mortgage is at 6.25% and they owe nearly $550,000.In 2011, their home is worth $425,000. They have a 2 year old. The home is too small but they are $125,000 underwater and $200,000 below what they originally paid. This was the point in which many folks cut their losses and did a short sale or let the property go to foreclosure. This couple however had a good $75,000 of their own money in the house and they would be dammed if they let that home go. They made due, and now in 2014 that home is worth $625,000 again. Now they can sell and take the proceeds into a newer, bigger home so they can continue building their family. There are many, many families just like this in San Diego that only 12 months ago were nowhere close to having the move-up choices that many sellers now have. This as well as record prices caused many new sellers to put their home on the market through the middle and to the end of 2013. The amount of active listings rose as high as 8000 properties, doubling the amount for sale just a few short months prior.The increase in interest rates, prices as well as available properties all served to settle the market in 2013 from its white hot start.As we moved into winter, mortgage rates pulled back to less than 4.50% and employment conditions improved. Many listings sold, and demand revived a bit toward year-end.The total amount of volume of transactions was the highest since the peak/boom years. Your average condo increased by 30%, and your average home increased by nearly 20% in value. By all accounts 2013 was a banner year for real estate and homeowners equity. (source voiceofsandiego.org)We remain in a supply-constrained market, and this will continue for the next few years. This has been due in part to so many consecutive years where no new properties were being built or developed. Nationally, the US needs to build 1.2 Million dwellings to keep up with population growth and to replace properties that are no longer habitable. Between 2007 and 2013, an average of 350,000 dwellings were actually built, leaving nearly a million-dwelling deficit of homes for 6 years. It is because of this that we have a housing shortage today, and will continue to have a housing shortage for the next several years as we build, develop and grow our way into full recovery. A normal market in San Diego would have about 15,000-18,000 homes for sale at any given time. Last April of 2013 there was only 4000. In November it was nearly 8000. As of January 2014, we have under 6000. This supply-constrained market will headline San Diego real estate for the foreseeable future as we cannot build new homes the way places like Phoenix or the Inland Empire can. Rather, we must re-sell our way out of this housing shortage. As long as we have a lack of supply, we will continue to see prices rising to meet the demand of the market. (source buffiniandcompany, yahoo news)Rising home prices will encourage more homeowners to put their homes on the market, adding much needed inventory to the marketplace. As a result, the real estate industry appears to be generally upbeat going into 2014. Homeowners also seem to be more upbeat.With all this in mind, I expect prices to continue to rise throughout 2014. The level of increase will be tempered by how high increases in interest rates will be as well as the fact that the government won’t be supporting the housing market as much as they have been in years past.2014 will be one of the most balanced and normalized markets than in any year in the past decade. We will see prices approach and surpass the peak values seen in 2006 (if they haven’t happened already in your neighborhood).Move-up buyers have the best opportunity to make a move this year – up to this point its been the bottom part of the market that has recovered fully, which pushes its way up the affordability ladder to allow more mobility for more expensive homes and potential sellers (including the example of the family in North Park) and sellers who have been waiting on the sidelines now have a great selling environment to take advantage of.Many analysts predict that San Diego will experience appreciation in the 10-14% range, but I believe we will see a more modest 6-9% improvement because the large moves have already been made and we have “corrected” the over-correction.Nevertheless, the market and our economy are doing quite well as we move further into a broad-based long range economic recovery. Here’s to a wonderful and successful 2014.