Santa Cruz Real Estate Great Debate
May 17, 2009
Spring has definitely returned to Santa Cruz! We’ve been having some incredible days, and I’ve been enjoying being a new dad here in town, cruising around with wife and baby in the stroller, around the neighborhood, over to Aptos Village Park, down to the Capitola Beach, West Cliff Drive, soaking it all in. It’s been an incredible what, almost six weeks now since Aiden was born?
I must admit, with all the fabulous weather and my beautiful bouncing baby boy to take care of, I’ve taken my eye off the real estate market somewhat. And that’s a good thing – truth be told, I’ve been working, on average, over 80 hours a week for nearly the past two years, and I think that for me, it’s not a sustainable pace. I reckon these days I’m down to something closer to 40-50 hours a week, which does leave some precious time to spend with my wife and amazing little man.
I think that many of us started off the year thinking there would be some Change, right? I think we were promised that, and for good or ill, change has come. Certainly, the real estate market has changed over the past month or two. If you are a subscriber to my newsletter, you may have noticed that last month (April 2009), the median price of housing in Santa Cruz has risen.
Well, I guess that puts the lie to me, right? Here I am saying no no, we’re not at bottom – and now we see rising prices? Scant months after I got up on my high horse and said, “Wait out the storm, ye long-suffering would-be buyers!”
Let’s take a look at these numbers. First, the summary:
So from a median price in March of 2009 of $405,000 we have skyrocketed to a median price of $449,000 – nearly an 11% rise in a single month. Now let’s look at the breakdown of those numbers, divided up into different market areas in Santa Cruz county:
You’re going to have to click on the chart to open it up in a bigger window to actually read the numbers. Taking a closer look, you can see that in every market area except for Rio del Mar (Aptos) and Soquel, the median home price in April was lower than it was in March. Those two areas, however, showed such strong month-over-month gains that they did lift the entire median price up about 10.9% for the county as a whole over the month before.
Except for those two areas, every other market area in Santa Cruz county showed price declines. And let’s not blame it on Watsonville – Watsonville experienced the smallest price drop of all, just 0.7%. Capitola – down 12.3%, Scotts Valley, down 28.4% – and the West county (Bonny Doon, Davenport, Empire Grade, etc.) – down a whopping 28.6%.
Now, hold on a second. Let’s talk about lies, damned lies, and statistics. There is a chorus of voices saying that it looks like we’re hitting bottom – after all, the median price, county-wide, did just increase, right?
Nope, not really. The median price just decreased a whopping 33.5%. The truth is, it is pointless to look at one month compared to the month before, because there is a lot of seasonality in the real estate market. You really need to look at the year before to see how the market performed – and from the statistics, we can see the median home price, county-wide, is actually down 33.5% in April of 2009 compared to a year ago.
And some people are now saying the market is bottoming out?!
One thing that many folks from the “the market is bottoming!” camp like to point out is the number of multiple-offers some listings are receiving. It is true, the market for single-family residences priced under $400,000 is very competitive. Most of those properties in our neck of the woods are to be found in the Watsonville area, and there’s no lack of multiple-offer situations going on down there. There are also a lot of multiple-offer situations going on in San Jose and Salinas – I have a listing in San Jose where I got 34 offers (asking price: $349,900) and another in Salinas where we got a similar number (asking price: $149,900). Surely that means we’re at the bottom, right? Right??
Honestly, I am mystified how people can take a few anecdotes, completely ignore the state of the economy and the housing market as a whole, and now herald, with strident authority, that we are now at the bottom of the market and THIS, TODAY is the time to buy, or you will miss out on the chance of a lifetime.
It’s clear that the bottom is coming – there will be a bottom, someday, and prices will start to rise, eventually. And it’s true, we will only know it by looking in the rear-view mirror – which makes it impossible to say for sure that this is, or is not, the bottom of the market. What’s more, not all market segments will bottom at the same time, so there really is not truly a “bottom” so much as a series of different bottoms for different kinds of properties in different places.
Allow me to tackle the anecdotal evidence head-on. Again, many people point to these multiple-offer situations as evidence we have hit bottom. The thing is, there were many multiple-offer situations going on this time last year. Many. Why do you suppose that is?
I will grant you – there are more this year than last year – more properties getting multiple offers, and more offers getting submitted. Competition is, certainly, stronger this year. So let’s take a look at those charts again, at another key bit of information: the amount of inventory available.
Despite what you may have heard from certain interest groups (California Association of Realtors, National Association of Realtors, ahem), there is not a great selection of homes to choose from on the market. This time last year, there were 1,042 single-family residences available county-wide. Now, there’s just 787 available – that’s a drop of 24.5%. Simply put, there is a lot less to choose from this year than last year – creating more competition for those homes which are available. Good news for sellers, that’s for sure!
The overwhelming majority of these multiple-offer situations happen in the low end of the market – in Salinas, that would be under $250K, in Watsonville, under $350K, in San Jose, under $450K. What kind of homes are selling in these areas at these prices?
Bank-owned homes, that’s what kind. Only foreclosure real estate can sell at those prices. Well, that’s not true – short sales can also occur at those prices, and some people who have had their homes a long, long time may have enough equity in them to compete with all the REOs and short sales. However, I’d bet my bottom dollar that upwards of 75% of all of these sales are bank-owned “REO” foreclosure properties, probably another 10-15% are short sales, and the rest would likely be probate sales and whatnot.
As it happens, there is a distinct lack of REO inventory on the market right now – and again, at these price points, the vast majority of the market consists of REO properties. This inventory shortage comes just at the time when sales hit their peak – the hot time of our real estate market tends to be March through August, that is when more buyers are out shopping compared to the rest of the year.
So why is there a lack of REO inventory? Has there been some dearth of foreclosures, has the foreclosure crisis abated? Not hardly. Change has come, and during the transition, while all this TARP business and Making Home Affordable initiatives were getting going, the lenders had some self-imposed moratoria on foreclosures. That, and many states (including California) enacted laws to lengthen the time it takes to carry out a foreclosure – and that has served to really tighten up the inventory of these low-end properties.
These multiple-offer situations we are seeing now is simply the combination of a very constricted inventory coupled with the seasonal increase in real estate sales.
The good news for home buyers is that this, too, shall pass. The various moratoria have been lifted and the clock is already winding down on the laws lengthening the time it takes to foreclose on a property. What that means is that Notices of Default (the first step in the foreclosure process) are still near, at, or over record highs.
Here is what I predict – and I’m probably wrong, but I’m going to go out on a limb here. I predict that in 2-3 months, we will begin to see more REO inventory on the market. That puts us in the July-August time-frame. In 3-5 months, we will be seeing a lot more REO inventory coming onto the market – just at the time that the peak buying season is ending. We will see a significant increase in REO listings – and a continuing drop in real estate values, as supply once again exceeds demand.
Another interesting wrinkle is that many of these coming foreclosures are not bottom-rung properties. Many of these upcoming foreclosures are in solid, middle-, upper-middle, and wealthy neighborhoods. I wonder, what’s that going to mean for the market as a whole? Personally, I think it’s going to put increased pressure on the bottom of the market, as many people who were looking at buying a lower-priced “starter” home may now be thinking of stretching to go for one of these “premium” foreclosures which I expect we’ll be seeing.
And that doesn’t even begin to address the elephant in the room – the sad state of the local and national economy. There is a whole lot more to the picture than just the simple supply of foreclosures and demand for affordable housing.
So let the debate rage! We’ll see which way the chips fall, and I look forward to the market data from September, October, and November of this year. As the late Paul Harvey used to say – stand by for news!
Posted by SantaCruzBroker at 1:01pm
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Santa Cruz at Market Bottom? Some Say Yes, I Say No
March 18, 2009
I popped in my office this evening to pick up a commission check, and as I passed by a colleague’s desk, I happened to notice a photocopy of the front page of today’s Santa Cruz sentinel sitting there. I had actually seen the headline news flitter across my screen this morning, thanks to Twitter and Growl (very cool). However, I didn’t have a chance to read the article, and I didn’t see the sub-headline: “We are at Bottom says one Watsonville Realtor.” Or some such eye-bait.
One thing that’s interesting is that the median price the Santa Cruz Sentinel used, $380,000, is quite a bit lower than my own figure of $429,000. $380K is pretty low for these parts, but an almost $50K discrepancy between my numbers and those of Gary Gangnes (an oft-quoted source of local market data) is notable. But I won’t quibble with Gary, I think he’s been tallying the numbers since I was learning to ride a tricycle.
The exact median price for sales in February ‘09 doesn’t interest me so much – the fact that it’s a lot lower than February ‘08 or even January of ‘09 is very interesting – the fact that we’re heading, still, in a downward direction seems inescapable.
However, one Realtor at least (and one who should know – the president of the Watsonville Association of Realtors) is ready to escape this, by proclaiming that in the south county, at least, “We’ve hit our bottom … in single family.”
She brings up a few vague anecdotes, like she has more buyers than properties right now. And that’s the criteria for knowing when we are at the bottom, when one Realtor has more buyers than properties? That’s not real hard thinking. She also cites how we’re seeing multiple offers. Fact is, we have been seeing multiple offers for well over a year now on these bargain-basement properties in Watsonville – and pretty much anywhere in California where bank-owned foreclosures are sold several percent cheaper than competing properties – these properties attract multiple offers and sell quickly. It’s not a new phenomenon, it’s been going on at least 18 months I’d say.
The fact is, I’ve got a number of listings in Watsonville myself. Do I have multiple offers on all of them? Hardly. Certainly, sometimes there’s a crazy feeding frenzy of 10+ offers on these properties. I listed a new home last night in San Jose, and I’ve had 20 phone calls on it today at least, I’m sure there will be multiple offers on that one. Does that mean the market has stabilized, that we have hit bottom?
No, it means that this is the cheapest home to sell in that neighborhood in that condition in many years, and there are buyers for it, lots of them. But when this home sells, the next one to come on the market will come on at a lower price, or at least, it’ll almost surely sell at a lower price. That’s because we’re in a declining market.
Here’s an anecdote that tells me we we are not at bottom. I have a listing at 90 Arista Lane in Watsonville, it’s 14 years old, 3 bedrooms, 1.5 bathrooms, on a quiet dead-end street in the center of town, close to everything. All the homes on Arista Lane and Arista Court are pretty much identical. My own listing is not in bad shape at all, except it does have some unusual choices for interior paint color.
The house across the street from this, 87 Arista Lane, is what you’d call a “model match.” Pretty much – I didn’t go into 87 Arista when it was on the market, but from what I can tell on the MLS from the pictures, the choice of paint colors and level of amenities in this home was about on par with my listing. 87 Arista was listed in October of 2008 for $299,900, and in November of ‘08 it went down to $279,900 before closing escrow on January 2 of ‘09 for $260,000. There was no mention made of the seller having paid the buyer any closing cost credits – but not all Realtors mention the closing cost credits in the private comments when marking the property sold (though they should).
And then, a scant two months later, my own listing comes on with an asking price of $250,000 – that’s 3.8% less than the sale price of a very very comparable property which closed just two months earlier…and I’m on the market eight days, and I’m standing in a field of chirping crickets. Not an offer, and only a handful of phone calls. Where are all these buyers, loan approval letters in hand, waiting to buy my listing that could possibly be had for maybe 6-7% less than this comp which closed just a tad over two months ago?
Let’s say though that 90 Arista Lane does get a full price offer (very unlikely if there’s only one buyer making an offer), and it sells for $250,000. By the time it closes escrow, it’d be about 3 months past the sale of the last comp, meaning the market will have dropped about 1.26% per month (for this particular type of home). That’s an annual rate of 30% drop. And, strangely enough – the year-over-year price decline (February 2008 to February 2009) in Watsonville was…30%. But mind you, we are now looking ahead to March, so what we’re seeing is…the market is still headed down, at about the same rate as it’s been going down for the last year.
And another thing! Before I close out this little missive, I’d like to take exception to another thing in the Sentinel article, that homes are being sold “at discounts of 30 to 50 percent.” Nothing could be farther from the truth. The truth is, these homes are being sold at a loss of 30 to 60 (yes – sixty) percent from their all-time peak values. In fact, these homes which receive multiple offers typically end up selling for more than asking price – so does that mean that anyone who pays more than list price is paying more than the property is worth?
No, it doesn’t mean that at all. It means that the list price was below market value, and the market recognized that and enough offers were generated to bump the price back up to market value – or perhaps a bit above market value, or perhaps a good bit below. But not too far below – if in fact you were able to buy a home for 10% below true market value, you could not do a thing to the property, then turn around and sell that property to someone else the next day for 10% more than you paid for it. I can name few examples where that has happened here after purchasing the home “retail” on the MLS in recent memory.
Since Paul Harvey is no longer with us to say it, I’ll have to: “So now you know…the REST of the story!”
Posted by SantaCruzBroker at 8:29pm
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Is 2009 The Year to Buy Santa Cruz Real Estate?
January 17, 2009
This is a question that I get asked, and find myself asking, quite a bit these past couple of weeks. I am working with a number of buyers who are skittish and waiting for prices to hit just the right point. After all, what’s the sense in buying a depreciating asset? Who wants to buy something that they know is going to lose them money – maybe a lot of money – within a few months after buying it?
One of my clients sent me a link to a great web site – Housing Crash Continues, Bubble Pops. It lists 14 great reasons why this is a terrible time to buy real estate. It’s pretty strong stuff, with lots of inflammatory statements like, “Realtors just lie outright about…”. Well, I always say, never attribute to malice what can be explained by stupidity. I don’t think that Realtors are habitual liars, but it’s true that many of us are not as perhaps informed as we might be.
I won’t address all 14 points that the The Housing Crash guy brings up, but I would like to make a few comments. The Housing Crash guy says:
A landlords’ rule of thumb is that a house price should be a maximum of 15 times the annual rent for that place, yet in coastal areas, houses are still selling for 30 times annual rent
I think he’s got a good point there – which goes to underscore my belief that prices in Watsonville are actually very reasonable at the moment. Looking at Craig’s List rentals for Watsonville, I see you can rent a 3-bedroom condo in Apple HIll for $1,875 a month. Those condos are now selling for around $190,000. So at $1,875 a month, that’s $22,500 a year, or $337,500 over 15 years. Hmm…so does that mean according to the Crash Guy, we should all be moving to Watsonville?
Put another way, how much does it cost to own that same condo which rents for $1,875 a month? Let’s say you put down the minimum 3.5% as required for an FHA loan, and that you are paying 5.75% interest per month, which includes the allowance for the FHA insurance. You’d need a down payment, then, of just $6,650, and you’d have a loan of $183,350. Your fully-ammortized 30-year loan payment would be about $1,070 per month. Then you’d have property tax of about $175/month, and then of course your HOA fee for that unit of about $290/month. That comes to $1,535 per month. Hmm. It costs less to buy in Watsonville than to rent.
I know, I know – you don’t want to live in Watsonville. You’d rather pay a premium and live near the beach, or closer to your job in Silicon Valley, or closer to your friends who all live near downtown, or maybe you don’t want to live in Watsonville because you’re spooked by los pandilleros, or you want your kids in a better-performing school district. Whatever your reason, I can accept that you might be interested in buying somewhere other than Watsonville (even though I think real estate there is a an exceptionally good value at the moment).
We all know that prices in Santa Cruz are a lot higher than in Watsonville, but let’s see some examples. Let’s start by looking at Craig’s List rentals in Santa Cruz. Wow, they’re a lot higher than in Watsonville! Thank Goodness for UC Santa Cruz, drivin’ that rental market right through the roof, eh landlords? Looking over the ads on Craig’s List, it’s safe to say that a 3 bedroom, 2 bathroom house would rent for about $2,400 a month in Santa Cruz, assuming it was in a not-so-great location. That’s a pretty conservative assessment, having looked at what’s available.
At $2,400 a month, that’s $28,800 a year – times 15, that’s $432,000, which is the maximum that The Crash Guy says you should pay for a house if it rents for $2,400 a month. Are there any 3/2 houses in Santa Cruz for $432,000? No, of course not! Don’t be silly. But there are presently six 3-bedroom, 2-bathroom houses in the city of Santa Cruz under $500,000.
Does that mean that housing prices are still too high in Santa Cruz? According to the Crash Guy – yes. According to me – yes. I do think that prices in Santa Cruz (and Capitola, and Soquel, and Aptos, etc.) are higher than they will be towards the end of the year. Does that mean you shouldn’t buy a house in Santa Cruz in 2009?
Good question. Let’s look at the payment for a $500,000 house – but let’s assume you’re putting down a reasonable 10% instead of the FHA minimum of 3.5% – so you’d have a $450,000 loan, again at about 5.75% because with only 10% down, you’d still need to pay mortgage insurance. A 30 year fixed loan at 5.75% would run you $2,626 a month – plus $458/month in property tax, plus about $75/month for insurance, leaving you with a monthly payment of about $3,159.
However, you mustn’t forget about your mortgage interest tax deduction – of that $2,626 per month, about $2,100 is interest (gulp) – plus the $458 in property tax (which is also deductible), means you have a monthly tax deduction of $2,558. Let’s say you’re in a tax bracket of 25%, and you can figure you’d save about $640/month in federal and state taxes, bringing your effective monthly after-tax payment to about $2,519 per month, or just about $120 more than renting.
Is $120/month too high a price to pay for the benefits of ownership vs. renting? You tell me.
Here’s what I will tell you: it seems clear to me that there are many properties in Santa Cruz county which now make economic sense to buy, and that number is increasing, and will continue to increase throughout the year. There is no shortage of blogs to read (try here, and here, for example) suggesting prices will continue dropping beyond 2009. I admit – quite possibly, this is true.
However, I would argue that if you want to live in Santa Cruz, and you have the option of either renting or buying, that for many people, the numbers will soon pencil out to where buying may, in fact, be the right choice for you in 2009. There. I’ve said it. But I won’t be offended if you want to take that with some salt on the side.
Posted by SantaCruzBroker at 11:47am
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Median Santa Cruz home price drops to $599,000
February 16, 2008
Finally, the real state of the Santa Cruz county housing market is starting to show up in median home prices:
[From Santa Cruz Sentinel - Median home price drops to $599,000]
By JONDI GUMZ The median price for a single-family home in Santa Cruz County dropped to $599,000 in January, down 18 percent since December and a level not seen since 2004. … Only 63 sales closed escrow, a new low, the previous was 107 in 2006. A third of the January 2008 sales were for homes less than $500,000, more than double from previous months, and the subset of sales over $1 million, which had been as high as 25 percent, was 14 percent, the lowest in months.
For too long, the median home price has defied the reality out there on the streets, giving many buyers and especially sellers a false sense of what’s happening. Sometimes, we would see the median price inch up month over month, but for a long time it held steady at over $700,000.
But now, there’s been a significant drop in the median price, down to $599,000. Of course, it is worth noting that this is the figure for the county as a whole, and that some areas continue to hold up their values very well. That would be the usual suspects – Santa Cruz, Capitola, and pretty much anything near the beach.
And don’t go blaming Watsonville on being a drag on prices – hardly anything is selling down in Watsonville, although it had a much better month in January than it did in December, which was pretty much a train-wreck for sales. No, these lower-prices are county-wide, and even in Santa Cruz and Capitola, there are more bargains to be had than in recent years past.
The article is a good read, and it mentions that inventory is relatively low in many parts of the county, that many people who might want to sell are keeping their homes off the market, because now is not a good time to sell. That’s true, but what’s left unsaid is, what would happen if these same people found themselves in a situation where they had to sell?
Might we start seeing rising foreclosures in the rest of the county? Up until now, Watsonville (and to a lesser extent, Boulder Creek and the rest of the San Lorenzo Valley) has grabbed the lion’s share of the foreclosure activity. That’s because people tried to sell their houses, and found there were few buyers for them at the prices they were asking…and when you can’t make your house payment, and nobody wants to buy your house…you know the rest of the story.
Is this what lies in store for more of Santa Cruz county? I sure hope not, because what’s going on in Watsonville is pretty heartbreaking.
Posted by SantaCruzBroker at 9:46am
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