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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Speculating on Santa Cruz Real Estate
April 02, 2009
I got a phone call the other day from a lady who was interested in one of my listings in Capitola. Unfortunately, the property had just closed escrow the previous day, and I let her know…being the good Realtor I am, I quickly brought up the MLS and tried to find some good “switch” properties for her.
I found one, and during our conversation, it turned out she was an investor, looking to buy a property for investment purposes. This came up because the “switch” I had found for her had higher HOA dues than the property she was originally calling on, but I explained that the “switch” would rent for considerably more than the property which originally interested her, and would in fact provide much better cash flow.
These days, though, the people who are investing for cash flow are not buying in the mid-county area (Capitola, Aptos, Soquel, etc.) – because the properties there do not cash flow without a huge down payment- and even then, if you were to put a huge cash down payment, you would have a poor cash-on-cash return of your investment. I suggested to her that she take a look in Watsonville, because there’s a place where you can get good ROI (return on investment) with a relatively low down payment.
She wasn’t interested in buying in Watsonville, though. Her feeling was that Watsonville would not be appreciating in the future, and that she felt that Capitola, Aptos, and Soquel would have much better appreciation in the future.
Ahhh. Here is an important distinction to make: this lady is not truly an investor. Real investors are in fact snapping up properties in Watsonville in droves. This lady is a speculator – she speculates that the values in Capitola and such will be going up farther and faster than they will in Watsonville.
We then spoke for a few minutes about future price appreciation. I indicated that it will be some time before prices start rising in the mid-county area, and that before they do, prices will continue dropping for some time to come – whereas Watsonville has fallen farther, faster, and is closer to the bottom. However, to an investor, it does not matter so much that the prices in Watsonville will continue to fall for some time to come. When a property is truly providing positive cash flow, it does not matter much that the value has dropped, if it costs you nothing to own it and instead reliably kicks off money every month that ends up in your pocket.
I don’t see the sense in buying something in, say, Santa Cruz that requires a large down payment, which does not provide much in the way of cash flow (and probably has a negative real cash flow, considering vacancy factor, maintenance, etc.), and will be heading steadily down in resale value for some months (or years?) to come, before someday eventually climbing back up to the price you paid for it, and then jumping high enough up over that price to justify the money you have spent on taxes, insurance, maintenance, and of course, the cost of the eventual sale (let’s not forget that 6% commission!).
On the other hand, it is patently sensible to me to buy a $250,000 3-bedroom house in Watsonville, put down 20% ($50,000), rent it out for $2000 a month, make $500/month after principal, interest, tax, and insurance – and assuming a 10% vacancy factor, you’re making a 10.8% return on your money every month. Now that is what I call investing! Who cares if the property drops in value the next 1-2-3 years? You’re making a 10.8% return on your $50K, where else are you going to get that? OK, I didn’t factor in maintenance and whatnot, but even so, you’d still be looking at a return that’s much better than you’re going to get in today’s stock market.
Having said that, there are investors who do work in the mid-county area and do well – however, these are people who invest in properties that are, typically, not in a condition that can be financed. They pay cash for the properties, do the repairs necessary to put them into a livable, easily-financed condition, and turn around and flip them in a short period of time. Typically, they are contractors, or investors paired with contractors. There are very few investment-grade properties in Santa Cruz county outside of Watsonville where you can buy, hold at a profit, and sell down the road for a net profit – without speculating on an eventual price increase to make it all worth the considerable risk.
Posted by SantaCruzBroker at 12:01pm
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It’s Nigh Time to Buy in Santa Cruz
March 14, 2009
A few days ago, after about a month’s silence, I wrote something of a “doom and gloom” blog entry about Santa Cruz real estate – in fact, I’m proud to say, the entry was even picked up on the HousingDoom.com blog, which I read now and again to stay in touch with my darker side. You see, I felt the need to vent about what I see as a lot of hype by various individuals and organizations saying what a great time it is to buy some real estate.
As I’ve said before, it may in fact be a good time for you to buy some real estate here in Santa Cruz. In any market, it really depends on your situation. All I’m saying is, don’t buy into the hype – positive or negative – about the current real estate market. Do your own research, make up your own mind. Make an informed decision, and be prepared to live with the consequences.
It may be that you decide that it makes sense for you to buy some real estate right now in Santa Cruz. Over a hundred people bought property in the county in February – and did all of these 100 people make a horrible mistake? Indubitably, some of them did. Just as indubitably, some of them made very shrewd investment decisions which will yield rich rewards down the road. After all, let’s not forget the golden rule of real estate: you make money when you buy, you reap the cash when you sell.
If you were to ask any my buyer clients about what I’ve been telling them in person as we’re out looking a property, I bet they’ll all tell you I said this: “Be patient, time is on your side.” I have some clients with whom we’ve been looking, on and off, for many months. With each passing month, the properties that are in their price ranges just keep getting better, and better still. The problem right now isn’t so much the price of the homes – it’s the idea that a better home for the same price is waiting just around the corner.
The truth is, while the median price in Santa Cruz county is now down to a “wow I can afford that” $429,000 – there are not many of these homes for sale in the central parts of the county (e.g. Santa Cruz, Soquel, Capitola, Aptos); the sales are for the most part happening in areas where the sellers are more motivated – and that means, the areas with a high percentage of foreclosures, or distressed homeowners who need to (try to) sell quickly to avoid foreclosure.
However, the sharp rise in unemployment, rising foreclosure rates among Alt-A and Prime borrowers, coupled with pent-up seller demand (sellers who really want to sell, but have been waiting for the market to go back up) means that every day, prices of real estate even in prime locations continues to drop down to where it is within reach of the average Jane who has a good credit score, low debt, and a good enough, fully-documentable income. Jane, your time is coming.
I ended my previous blog entry saying:
It’s quite a bit more challenging to buy real estate today that you won’t regret having paid so much for a year from now.
Buyer’s remorse is, of course, a terrible thing. I think you can have buyer’s remorse in a market even that is appreciating strongly, because remorse can come from a variety of factors. Feeling that you have overpaid, or regretting that you didn’t wait to buy as you watch prices in the neighborhood into which you have bought keep tumbling lower can be, to be sure, nauseating.
For that reason, I caution my buyers: be patient. Wait, until you find the house that you love, at a price you can comfortably afford. This is not the market, or the economic cycle, in which you want to be stretching. If the house you want to buy is a stretch – don’t buy it now, this isn’t the time. If you wait just a bit, a very similar house will come on the market in another six months which won’t be such a stretch.
Even then, “six months from now,” I wouldn’t be surprised if prices keep right on dropping. Might you still be a happy homeowner, even so, having not bought at the rock bottom of the cycle? If you are patient, and you buy the right house, in the right location, that fits your lifestyle, your plans, and your budget comfortably, then I expect that you’ll continue being happy in your new home, even should it drop in value over the next year or two. And, down the road, you may be pleasantly surprised to find that the house you bought because you loved it and it was affordable at the time turned out to have been a great investment. Imagine that.
Posted by Administrator at 2:47pm
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Santa Cruz Median Home Price: $475,000 in Sept. ‘08
October 12, 2008
My Santa Cruz sales numbers for September 2008 are in, and they are nothing less than shocking. The median home price in Santa Cruz county in September 2008 was $475,000. This is compared to $702,500 in September ‘07. That is a drop of some 32%. You can get the complete scoop in my monthly newsletter.
Of course, a big reason for this is the amount of bank-owned real estate being blown out in Watsonville, and to a much lesser extent, the San Lorenzo valley and the rest of the county. There were 37 sales of houses in Watsonville in September, and just 29 sales in the city of Santa Cruz. The median home price in the city of Santa Cruz was $675,000 – that’s down just 8.7% from last year, and down only 5.5% from August, the month before.
Still, though – if you have a house in Santa Cruz, you’re looking at it being worth about $58,725 less than it was this time last year, if your house is something like the median house. That, combined with recent and staggering losses in the Stock Market, adds up to greatly diminished (paper) wealth. Of course, don’t we all buy houses with some kind of paper? Exactly.
In looking at these numbers, you might be thinking one (or perhaps both!) of two things: now that prices are this low, is this a good time to buy – and – will prices drop much further?
Those are some good questions! I’ve been telling folks for a while that Watsonville has already dropped really far really fast, I don’t see it dropping much more. For the past several months now, the median price has been rumbling along around $350,000 – give or take $10-$20K. So let’s assume that Watsonville has found its footing, and that this is the bottom, the trough if you will.
So I think it will be interesting to look and see where Watsonville and the rest of the county were at in the Summer of ‘99 (them were the good ol’ days, eh folks?), and compare it to where we are today. This is a completely unscientific study, of course, because I just used the MLS (most, but not all, sales go through the MLS). I looked at Sold Single Family Residences:
Median Price of Sold Houses in June & July of 1999
Watsonville: $247,000 (1.0)
East side Santa Cruz: $390,500 (1.58097)
West side Cruz: $395,000 3/2 1486 (1.59919)
Capitola: $360,000 (1.457489)
Soquel: $379,000 (1.5344)
Felton: $310,000 (1.2551)
What this says is that back in the summer of ‘99, the median-priced house in Capitola cost about 1.457 more than the median-priced home in Watsonville.
Now, let’s look at sales data from September 2008:
Watsonville: $352,000 (1)
East Side Santa Cruz: 615,500 (1.74857)
West side Santa Cruz: 702,500 (2.0468)
Capitola: $711,000 (2.01988)
Soquel: $610,000 (1.73295)
Felton: $486,500 (1.3821) (* August 2008)
You’ll notice that compared to the 1999 ratio, the sampled areas in the county appear considerably higher relative to Watsonville than they have been historically. If we use the same ratio from the summer of ‘99, here’s what prices in the rest of the county should look like today:
Watsonville: $352,000
East Side Santa Cruz: $556,501
West side Santa Cruz: $562,914
Capitola: $513,004
Soquel: $540,108
Felton: $441,795
What does all this mean? Probably nothing, because I’m not a statistician or an economist. But from my armchair analysis, it looks to me like either a) Watsonville is cheaper than it should be, or b) the areas I sampled are still too expensive, or c) both A and B to some extent.
It does make me feel better about something I’ve been saying for months, though: buy in Watsonville. Prices there are low, and even if you don’t want to live there, with a reasonable down-payment, the properties will break even on a before-tax basis.
These sure are interesting times we are living in!
Posted by SantaCruzBroker at 9:15am
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Capitola Begonia Festival 2008
September 01, 2008
It’s Labor Day weekend, so it must be time once again for the Capitola Begonia Festival. Despite having lived in Santa Cruz, Capitola, and Aptos for many years now, I must confess, I had not previously ben to the Begonia Festival. This year, however, I made it a point to go. It’s a three-day affair, with the highlight of the fist day being the Sand Castle Competition.
Naturally, the sand castle that first caught my eye was the one with the “Foreclosure” signs placed all around it. Nice. It should be noted that this particular castle didn’t win any prizes – and that can be said of most foreclosure properties as well.
There were, however, a few really cool sand castles there. I even discovered that my friend Rico Suave (aka Richard Robinson, also of Thunderbird Real Estate) was down there working on a pretty cool sand castle – which, unfortunately, didn’t win any prizes either but I thought was surely one of the better ones there.
The 2nd day of the Capitola Begonia Festival is the nautical parade. This is what makes the festival famous – famous in these parts, anyway. Folks create these boats that are covered in begonias – like floats in any parade, except these floats actually float. The floats are constructed there Soquel Creek (alongside Riverview Avenue). There’s a little pathway that starts at the Stockton Bridge, and you can follow it and watch the people building their floats.
As fate would have it, that’s about as much of the nautical parade as I got to see this year. I didn’t know what time the parade started – I had thought it began earlier in the day, and a client asked me to go see some property at 2 PM, so I pretty much had to leave before the floats weighed anchor and went wherever it is they go.
There’s lots more to the Capitola Begonia Festival than just the sand castle competition and the nautical parade, though. They also have a few concerts, an outdoor Movie Night at Esplanade Park, the horseshoe tournament, a fishing derby, and more.
Next weekend, it’s the Capitola Art & Wine Festival. I’ve never been to that, either – but I’m planning on spending a few hours this year as well, if all goes according to plan. I’ll let you know how it goes!
Posted by SantaCruzBroker at 8:53am
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