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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Santa Cruz Housing Entry-Level Affordabilty – Up 67%
August 19, 2008
Hey, feeling like maybe now you might possibly be able to consider buying a house in Santa Cruz? You are not alone! According to our good friends at the California Association of Realtors (C.A.R.), housing affordability has increased 50% in the second quarter of 2008 as compared to the second quarter of 2007. Slammin’!
You may not have known this (I sure didn’t!), but C.A.R. has a First Time Buyer Housing Affordability Index (FTB-HAI). The C.A.R. report breaks it down county-by-county, and reports this as the Santa Cruz county:
Q2 2007: 18
Q1 2008: 28
Q2 2008: 30
So since Q2 2007, Santa Cruz county has soared 12 points – that’s 67%! I don’t know why so many Realtors are quittin’ the business with numbers like this. New buyers are, quite literally, streaming into the market. Oh, wait – maybe it has to do with the reduced pay packet. C.A.R. also goes on to report that the median entry-level priced home is going for $531,250 – and that’s a steep drop from what homes used to be going for ($750K+). I guess it’s hard to keep gas in the Mercedes with home prices like that.
In case you’re curious, C.A.R. also figures that a home costing $531,250 is going to cost a buyer $3,380 per month including principal, interest, tax, and insurance (PITI) – assuming a 10% down payment (check under your mattress for that $53,000 you have lying around). They also figure you need to make $101,490 to qualify for such a loan.
Actually, that doesn’t sound too bad – especially when you consider that there’s lots of homes going for a fair sight less than $531,250 in Santa Cruz these days. And the good news is, these prices are still dropping in many areas – it’ll be interesting to see where Santa Cruz county sits in next quarter’s affordability index.
Posted by SantaCruzBroker at 8:34pm
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The Crazy, Mixed Up Market
May 18, 2008
I know that you know it’s a buyer’s market out there, right? I’ve said it a bunch of times. It’s also a declining market – that is, property prices are, broadly and generally speaking, declining. In a market like this, you’d think it’d be pretty easy to buy a house, right?
Think again. While C.A.R. puts out its advertisements saying that the selection of homes is great right now, you have to take that with a grain of salt. First off, the selection really isn’t that great. It terms of “days of inventory” there may be an historically average selection of properties. But the problem here is that most of those properties aren’t really in the market.
They may be on the market – that is, listed for sale and available for purchase, but their asking prices are way too high for the current state of the market. Or, if their asking prices are reasonable, more often than not, it’s a short sale, which means that the contract and price are subject to approval of the one or more lenders which have loans outstanding against the property. Given that these “short sales” often take a very very long time to gain the approval of the lender’s loss mitigation department, it’s difficult to say that these properties are really “in the market.”
So what does that leave? That leaves bank-owned “REO” foreclosure properties (not all of which are actually priced to sell) and those few not-overly-encumbered homes with enlightened sellers who realize where their homes need to be priced in order to actually be in the market and have a decent chance of selling.
So when you look at homes that are actually in the market and priced right, there really is not a good selection of these kinds of homes. For these kinds of homes, though, there is tremendous demand. I put an offer in on a property last week, for example – we didn’t get it, even though our offer was pretty decent. There were ten offers on the property, and someone came in there and hit it out of the park and got the property.
Sigh. It’s like 2004-2005, all over again – because, really, the right-priced properties sell very quickly still, often with multiple offers. If you’re in the market to buy today, the same rules apply for making an offer as applied back in the good ol’ days – weak offers get batted aside and only the strong survive.
Now, here’s a tale of two sellers. I have one seller who got an offer on their place. The buyers had the effrontery to ask that the seller pay for Section 1 termite repairs. The gall, I thought. This is Santa Cruz. We don’t do that here. But in a market like this, if ever there was a time to try and get the seller to pay for Section 1 termite work, this is it. This tactic only works when there are no other offers on the table and demand for a particular property has shown to be only warm instead of piping hot. As it happens, this is the only offer we’re working with right now, so we’re going to take a long hard look at them section 1 repairs.
Now I’ve got another seller. It’s “the bank” – an REO property. Three offers on it in a week. Before one of the buyers was chosen, I went over the terms of the counter offer the bank was thinking about making. “Now, let’s be clear,” I said. “This property is being sold as-is. Under no circumstances will any credits be given or repairs made. Is your client aware of that and accepts this?” The buyer’s agent replied: “Yes, my client knows that, and that’s fine.” And then today, I got the phone call, “Well, the buyers are going to ask for some credits to repair some of the stuff that came up on the home inspection…”
That’s fine. That’s a complete waste of time, but it’s fine. Why is it a waste? Beyond the fact that the seller, a bank, already said it was an as-is sale and no repairs would be made or credits issued for same, there’s another salient point: there were three offers on the table. We got them in a week’s time. What does that tell you, in a market like this? Two things: the price was low, and demand is high for this property at this price. The bank doesn’t need that particular offer. It accepted the offer, with the understanding that the buyer wouldn’t turn around and try to nickel-and-dime them over repair items. But in a multiple-offer situation like this, any one buyer really is holding the weaker hand.
But go ahead and ask for your credits, if you’ve got the time to waste. Otherwise, suck it up and complete the transaction, or move right along. For right-priced properties, another ready willing and able buyer will be along shortly – and you need to know this when you’re negotiating.
Posted by SantaCruzBroker at 8:57pm
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