The Broker's Record

Santa Cruz home sales rising, prices falling

February 15, 2009

The February 2009 edition of my newsletter is available, and once again I give you the skinny on the Santa Cruz Real Estate market for the previous month. As has been the case for several months, there is a bit of good news – the sales volume (number of houses, condos, etc., which have sold) has increased for the seventh month in a row, year-over-year.

Unfortunately, sales were not up month-over-month; in December of 2008, there had been 112 sales of single-family residences in Santa Cruz county; in January ‘09, that number had sunk back down to 79. It’s normal, though for January sales numbers to be quite a bit lower than sales in December. The important thing to look at, I feel, is the year-over-year gain or loss, and this year, sales were up a whopping 21.5% from January 2008.

The median price of a Santa Cruz home, however, continues its march downward, but at a slower pace than for most of 2008. The median price for January sales of single-family residences was $445,000, compared to $452,500 in December 2008. However, the median price in January 2008 was $610,000, representing a year-over-year price drop of 27%. Ouch.

It’s an interesting market, that’s for sure. If you watch TV or listen to the radio, you may have heard a commercial or two from the National or California Association of Realtors telling you this is a great time to buy, that there are a lot of homes for sale. In Santa Cruz, this is patently not true. There are not many homes for sale at all – the amount of inventory is down 21.6% from January a year ago, and inventory has been declining for nine straight months.

This low inventory, however, is not a result of blistering sales figures. Rather, inventory is low for one simple fact: this is a terrible time to sell your house in Santa Cruz, and sellers know it. There are many people who would like to sell their homes, but fear they will face a market of buyers with their knives out.

And, they are right. Buyers are definitely looking for a bargain. Any seller which wants to sell their home needs to ask themselves a simple question: can I wait to sell my home for, oh, 3 years? How about 4? It could easily be that long before prices are higher than they are today. If you have a house you need to sell in the next year, or even two, I have a hot tip for you: sell now. Price it under market to generate multiple offers, get over asking price, and get that property sold. Even though the market is dropping, your house is, right now, worth more than it’s going to be for some time to come.

Posted by SantaCruzBroker at 9:02am
No Comments »

Santa Cruz Rental market in decline?

February 09, 2009

I was having a conversation with a colleague of mine in the office the other day. I was talking about how I feel that the market is still declining, and will decline considerably over the coming year. She asked me if I tell my clients that – and if so, how do I sell any real estate?

Of course I tell my clients that! I feel it would be a breach of my fiduciary responsibility not to tell them that, if I believe it to be true. However, that does not mean that I am telling people not to buy real estate at this time – depending on your situation, it may be a fine time to buy. For example, if you are doing a 1031 tax-deferred exchange, then obviously, this would be a great time to buy some investment property in Santa Cruz.

As another example, I said perhaps you are a renter, and you’ve lost your lease or something, and you’ve got to move. I said that prices have now reached the point where, in some situations, for some people who want to make Santa Cruz home and plan to be here, either as property owners or not, for some years to come, that it may be about the same expense to buy as to rent – or less, depending on where they want to live and what kind of home works for them.

My colleague then said something I had not heard before: “rental prices are dropping in Santa Cruz.” Well, I had heard the first part – that in many parts of the country, rental prices are declining. More specifically, rental prices in San Jose saw 3rd largest drop in the U.S. in the 4th Quarter of 2008. However I had not heard that rental prices were dropping in Santa Cruz – that is something I don’t expect to hear until real estate sales start to turn around.

My colleague figured that the reason rental prices would be dropping in Santa Cruz is that many sellers, rather than selling in a declining market like this one, have opted to just put their houses up for rent rather than try to sell in a market like this, and wait to sell when times are better. Well, I thought, that’s a possibility – I believe there are a lot of would-be home sellers, especially in the mid-county area, who are bursting at the seams to sell their real estate but are putting it until the market exits this cycle.

As it happens, I have a couple of friends who are right now looking for rentals. I met up with them the other night at a birthday get-together, and I asked them: how are you finding the rental market? Now, this is totally anecdotal and not the kind of empirical evidence you’d want in order to prove anything one way or another, but they said: yep, the market is softening.

However, they speculated that the market is soft at the moment because it’s the middle of winter, and this is a time when students are not looking to move into housing, they should have settled in by now.

Curious, I went over to Zilpy.com to see how rental rates are in the 95060 zip code. According to Zilpy, rental rates are pretty flat overall. There does not appear to be any precipitous decline in rental prices. And the Santa Cruz Sentinel wrote an article recently claiming that Santa Cruz County has rising rental prices.

From where I sit, it seems that rental prices in Santa Cruz remain high, and remain steady. We can thank the University of California at Santa Cruz and Cabrillo College for that, to a large degree. There are many other factors as well – many people who would be buying are not, and are continuing to rent, waiting for the market to bottom out. And of course, many people are losing their homes in short sales or foreclosures, and, rather than leave the area, instead decide to stay as renters.

Which brings me back to what I tell my clients – home values are still dropping. Given what it costs to rent a place, and given that rental demand here is likely to remain strong indefinitely, it may make sense for you to buy, even in this market. You’d want to talk to your accountant or financial planner about that, of course. But depending on where you are in your life, it may be this is a fine time to buy.

Posted by SantaCruzBroker at 8:15am
No Comments »

What to Know about REO in Santa Cruz

February 01, 2009

I don’t have the figures handy, but a large percentage of homes sold today in Santa Cruz county are bank-owned REO (”Real Estate Owned”) foreclosures. In some areas, like Watsonville, it is as high as 75% of all home sales. In other areas, it represents a small but growing fraction. If you are thinking about buying property in Santa Cruz County in 2009, there’s a very good chance that you’ll be considering buying one of these homes.

There’s a great deal of confusion around buying bank-owned homes. I do have some information on my web site that should be of interest to folks interested in doing so, specifically my Santa Cruz Foreclosure Report (delivered via e-mail), as well as the Santa Cruz Foreclosure Opportunities video which I had taped last year at the Santa Cruz County Housing Expo.

In many ways, however, buying a bank-owned REO foreclosure property is much like buying a house from a private individual. There are some differences, though. Here are a few things to know about making an offer on these properties:

1) You need a pre-approval letter, and proof of down-payment funds. Unless there is some defect (e.g. a red tag) with the property, you do not need to pay cash. Sometimes, you will need a pre-approval from a specific lender (e.g. Countrywide, Prospect Mortgage, Downey Savings, etc.). Many times, no specific pre-approval letter is required, except that you have a pre-approval from a direct lender – that is, a bank, not a mortgage broker.

2) They are priced to sell – at the asking price. When a financial institution goes to sell one of its assets, it typically makes a pretty thorough investigation as to how much the property will sell for. They do not price these homes for $100,000 more than they think they will get for them – they price them to sell for close to asking price, in the present condition. Normally, the homes are priced quite low anyway, usually at the very bottom of the market, and often 3-5% below that. Of course, sometimes they get it wrong and price the home too high; in that case, they will gradually reduce the price until the property does sell. You are welcome to make a low-ball offer, and so long as it is at least credible, they will usually counter – they don’t get offended. However, do not be surprised when they counter back close to asking price.

3) They are generous with closing cost credits. Do you only have the 3.5% down payment required for an FHA loan, and not much besides? No problem, the banks will give you closing cost credits of 2, 3, 4% – just ask. They usually look at their net cash after sale when considering your offer. Many times, buyers will offer 2% over full price, and then ask for 2-3% back in closing cost credits. For buyers who are low on cash, this is a great way conserve cash when buying.

4) The properties are sold as-is. The price the bank puts on the properties is an “as-is” price. They do not like to pay for termite repairs, fumigation, or small repairs which may be discovered in a home inspection. Some banks will absolutely, never ever give termite repair credits – but some will. You’ll never know until you ask – but don’t be surprised if the bank refuses to grant any credits. One big exception to this rule are repairs for “health and safety” or lender required repairs (such as for an FHA loan).

5) Cash Is not King. Some cash-laden buyers are under the impression that waving a lot of cash under the nose an REO seller will get them some kind of big discount. In my experience, this is not the case. These are, after all, banks you are dealing with. They like loans. In fact, that’s their business, not real estate sales. They know if a property is lendable or not, if t is, why not sell it for maximum value from someone who can get a loan?

6) Banks want no hassles. Some banks don’t want buyers with FHA loans, because this may result in a long list of lender required repairs. If a bank has two offers on a property, one with a conventional loan and the other with an FHA loan, the buyer with the conventional loan usually wins out, even if it’s for a bit less money. An all-cash offer will, of course, trump an offer from a buyer needing a loan, assuming it’s close to the same price – a cash buyer will not have any loan or financing contingency, and that’s one less thing for the seller to worry about, and one less way a deal could fall apart.

7) Limited disclosures will be made. The banks have no knowledge of the homes they are selling. Per California law, they are required to make some basic disclosures, such as about natural hazards, lead-based paint, water heaters, and smoke detectors. The listing broker will also have to make a visual inspection and disclose that to you. However, the onus is really on the buyer to be extra-thorough during the investigation period. One good idea is to talk to the neighbors – they often will know something about the history of the house which you may not discover any other way.

Banks are reasonable. This is perhaps the most important point of all. There’s a lot of innuendo out there that perhaps the banking industry is run by buffoons, crooks, flunkies, and con artists. That may be true, but the people charged with selling these foreclosure assets are not the same people who made the original lending decisions. In my experience, the people working to sell these assets are reasonable, pragmatic, and practical. They want these homes sold – they need these homes sold. If the buyer is also reasonable, pragmatic, and practical, most issues which come up in the course of a purchase can be worked through to the satisfaction of both buyer and seller.

I hope you find this information useful. If you have any specific questions about a particular bank-owned REO property you see listed for sale, give me a call or shoot me an e-mail. I’m happy to give you my advice on any real estate-related matter, foreclosure or otherwise.

Posted by SantaCruzBroker at 1:00pm
1 Comment »