SAN DIEGO -- Luxury home values in the San Diego area dropped 2.1 percent in the third quarter of the year compared with the second quarter, and 7.5 percent from the third quarter of last year, a private banking, business banking and wealth management services firm reported Wednesday.

The average luxury home in San Diego is now worth $1.98 million, according to the First Republic Prestige Home Index by First Republic Bank.

Throughout California, luxury home prices declined in the third quarter of 2008 from a year ago and from the second quarter of 2008.

"Values of luxury homes declined in the third quarter in response to turmoil in the financial markets and the underlying weakness in the broader housing market," said Katherine August-deWilde, president and chief operating officer of First Republic Bank. "Further price declines are likely due to the overall slowdown in the U.S. and global economies."

Values in the San Diego area have now declined for five straight quarters, both on a quarterly and year-over-year basis.

For the first time since the first quarter of 2005, the average price of a luxury home in the region fell below $2 million.

Values hit a high of $2.19 million in the second quarter of 2007.

"We're in a depreciating market," said Janet Christ of Coldwell Banker Previews in Rancho Santa Fe. "But the buyers have not gone away. They are just not going to move in an overpriced market."

Agent Jeannie Gleeson of Prudential California Realty in La Jolla agreed that prices are falling and that sellers need to reset their thinking.

She also noted that buyers are still in the market, but that the property needs to be in move-in condition and perceived as a value.

"If the home is turn-key, is in the right location and priced realistically with the comparables in the neighborhood, you should have a sale," Gleeson said.

In the quarter that ended Sept. 30, the Index also indicated the following:

-- Los Angeles area values fell 1.9 percent from the second quarter of 2008 and 4.2 percent from the third quarter of 2007; the average luxury home in Los Angeles is now $2.33 million.

-- San Francisco Bay Area values declined 0.7 percent from the second quarter of 2008 and 3.0 percent from the third quarter of 2007; the average luxury home in San Francisco is now $2.99 million.

First Republic Bank produces the Prestige Home Index each quarter with Fiserv CSW Inc., a provider of automated property valuation services and home price metrics to U.S. financial institutions.