The Broker's Record

New Year, Old Challenges for Santa Cruz Real Estate

January 07, 2011

The cobwebs have grown thick on The Broker’s Record, my Santa Cruz Real Estate Blog! I’m so sorry – so much work to do, and so little time. As much as I would like to be blogging on SantaCruzHomeBroker.com, there just hasn’t been enough time in the day. As many of you know, my wife and I had a child back in April of ‘09 – Aiden Santiago – and when it comes to choosing between playing with him or blogging for the masses, well…Aiden wins.

For the moment, though, Aiden is happily napping in the other room, and I have some free time and a burning desire to talk about the Santa Cruz Real Estate market.

The latest edition of my newsletter just came out, and this issue is as sobering as most have been over the past year: county-wide, the median home price declined 6.7% from December 2009 to December 2010. The number of homes sold in December was only 132; that’s up from November, but down 10.8% from the number of homes sold in December 2009. To make matters worse, inventory is up for the 7th month in a row – up 22.7% over a year ago.

Here we are at the beginning of 2011, and the question before us is, what will the housing market do this year? If you pay attention to the good folks at the California Association of Realtors (C.A.R.), you may know that back in October 2010 they issued a report. According to what C.A.R. was saying then, the median home price in California was supposed to climb a whopping 11.5% in 2010, and from there climb another 2% in 2011. Sales volume (number of homes sold) is likewise supposed to increase by 2% in 2011, again according to C.A.R.

The big question in my mind is, what are the underlying economic assumptions that people like the economists at C.A.R. are using to base their forecasts on? Leslie Appleton-Young, C.A.R.’s Chief Economist, said:

“A lean supply of available homes for sale will drive prices up at the low end, but larger inventories and limited, less attractive financing will cause continued softness at the high end.”

It’s interesting that she says there is a lean supply of homes. What she doesn’t say is that there is a lean supply of homes because so many people are waiting for the market to turn around before they sell – and many many other people who would like to sell cannot, because they are effectively trapped in their homes which are “underwater” (that is, they owe more on the homes than they are worth). The “less attractive financing” bit is funny, too – actually, jumbo money (loans over $729,500) isn’t so expensive – rates are overall similar to conforming rates. The difference is the size of the down payment that’s required – and of course, the need for borrowers to document their income. It is unlikely that we will soon return to the crazy-easy-money days when they lent out millions to people based just on their good credit and stated income – so what does that mean for the high-end of the market? Continued softness, ad infinitum?

Appleton-Young also went on to say:

“What is certain is that favorable home prices and historically low interest rates will continue to make owning a home in California attractive for those who are in a position to buy.”

So here we find another key component of the 2011 forecast: historically low interest rates. But have you checked interest rates out lately? Back in October when the forecast was made, rates were about 4.25% for a conventional 30-year fixed conforming loan (under $417,000). Today, they are closer to 5.0%. That means your $417,000 mortgage used to cost $2051.38 per month (principal/interest only). Now, you’re looking at $2238.54 per month for that same money – a jump in cost of about 9%.

Given today’s stricter lending practices, many lenders are being very conservative with their debt-to-income ratios. A $187.16 difference in payment might not seem like much to you – but it could mean the difference between the ability to finance a $417,000 house vs. a $382,500 house. In other words, if rates rise by 9%, it means, roughly, that a buyer will qualify for a maximum loan amount that’s about 8% less (in this example) than before the rate increase.

What does that mean? It means that in the face of weak employment and stagnant incomes, when interest rates rise (as they are apparently rising now), the prices people will be able to pay for housing are going to drop – and that’s going to bring house prices right on down too.

I really don’t see – especially given the interest rate trends – that home prices are going to be going up 2% this year. It’s possible, of course – but I think the greater likelihood is that prices will continue their gradual downward trend for the foreseeable future.

Now, I know what you’re saying – didn’t the unemployment rate just drop? Why, yes – HousingWire.com just reported today, for example, that the unemployment rate fell to 9.4%. The funny thing is, though, that just yesterday, HousingWire reported that jobless claims rose 4.6% last week. Now how’s that possible? It’s possible through the dark art of statistics, and while I could take a stab at explaining it, I’d rather not. Suffice it to say that while it may be true as the President says that there is a clear trend of lower unemployment – that trend could be easily reversed and, as the article I linked to notes, the drop in unemployment is largely due to the fact that 206,000 more people have given up looking for work and are no longer counted as unemployed.

I’ve sipped the last of my Earl Grey and I’m looking down at what’s left in my cup, and I’m trying to make sense of what I see there. I’m having difficulty, I think, because I really have no idea how to read tea leaves. But I can do a fair job at reading headlines written in English – I read them pretty much every day. Actually, I usually read a bit down further below the headline, just to see if there’s anything more to the story that might be gleaned by reading in some detail.

As far as I can tell, there’s nothing but great uncertainty when it comes to the national housing market – and the same goes for the Santa Cruz market as well. It could be that the “recovery” starts getting some teeth, that people start finding work and those who do have jobs start seeing some extra money in their pay checks. That’s definitely a possibility – I think even the most ferocious bears will tell you that it could happen.

For many, though, the downside risks are too great and too real to ignore. Absent any signs of a genuine, down-deep recovery in jobs and wage growth – especially in the face of rising interest rates – it is really easy to surmise that the market still has some ways to fall yet, and that only fools will rush in to buy today.

Well color me a fool, then, with that big old broad brush of yours! I for one am delighted to say that after waiting and searching for a considerable while, I’m in escrow to buy a house, back in my beloved Aptos. I sold my house in Seacliff (Aptos) back in 2007 (good timing, eh?) and have been sitting on the sidelines ever since, waiting for just the right replacement home to come up.

And now it has – escrow should be closing in a couple of weeks (knock on wood). I know what you’re thinking – do I have rocks in my head? Don’t I know that prices will probably be going down more still? Am I CRAZY?

That’s perfectly debatable, of course. But here’s the scoop: we found a house we love. It’s in a location which we are also very happy with. The house itself is beautiful and in great shape. We’re putting 20% down, and our after-tax payment will be around $2,000 a month. Our pre-tax payment will be considerably higher than that, of course – so I for one really hope they don’t pull the plug on the mortgage interest tax deduction – which could, of course, have a really deleterious effect on home prices depending on how it is implemented.

That $2,000 a month is an after-tax payment I can live with – for years to come. I waited and searched for so long because I wanted to buy a house I knew I could be happy with – at a price I could afford – for ten years or more. So who cares if the value drops another 5-10% over the next year or two? Not me, because I don’t plan on going anywhere anytime soon.

Of course, my plans could change – anything can happen, and I might end up with the short end of the stick, as so many folks who bought in recent years have painfully discovered. But we ought not make too many of life’s choices based on fear of what might happen if things go wrong, as they very well might. For me, I’d rather make choices based on what I can reasonably expect to make work through my own planning, work, and diligence.

Hat’s off to nut-jobs like me who plan to buy this year. And a big high-five-right-on to those of you who continue to sit on the sidelines and plan to wait it out for calmer seas and blue skies. Whatever your choice, whatever 2011 should bring for you, me, and all the rest of us on this spinning blue marble – I wish you all the best in the coming year.

And if you do decide to buy or sell a house – please don’t hesitate to call. I’ll be there, in Aptos, standing by.

Posted by SantaCruzBroker at 5:35pm
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The CalSTRS Program in Santa Cruz County

April 02, 2010

Hey, what’s a year between friends? It’s been just about that long since my last blog entry. It’s been a crazy year. Did you catch that article in the Santa Cruz Sentinel a couple of weeks ago? If you read the fine print you’ll see what’s kept me busy.

But that’s not what I’m back (finally) to talk about today. I want to let you know that we’re cranking up a SantaCruzHomeBroker YouTube Channel. OK so the video we’re cranking out isn’t up to national network broadcast quality, but that’s some of the appeal. But it is cool what you can do with a Canon Vixia HF11 and iMovie 09.

So the most recent video we shot was with Peter Boutell of Santa Cruz Home Finance. Peter stopped by at an Open House I was holding, and wanted to talk up the CalSTRS Loan Program. It’s a great program for teachers, whereby teachers need only a 3% down payment and can get a 17% “silent second” mortgage with no payments on this loan for 5 years. It sounds like a great option for teachers in Santa Cruz county who are looking to get a little help on their path to home ownership.

So check out the video and let me know what you think!

Posted by SantaCruzBroker at 10:04am
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Caveat Emptor for Watsonville Investors

May 24, 2009

I’ve got some clients, and they’ve got some money to invest in Real Estate. They are not looking to speculate on real estate – that’s how so many people ended up getting foreclosed on in Watsonville, and in California, and in many other places throughout our glorious but fading homeland. Rather than simply speculate, my clients want to make smart, long-term investments.

A Speculator is someone who is placing a bet – they put some money down, and their bet is that the value of whatever they buy will go up. They may have reasons to speculate that the price will rise, but it’s more of an anticipation, an educated guess. This is what so many people did wrong – they bought real estate they could not afford to hold on to, speculating that it would always be worth more than they paid for it, so they could get out, easy, and make a handsome profit for their trouble.

These clients of mine are probably not what you would call professional real estate investors – but they want to buy real estate as if they were – and after they do buy a few properties, and if they keep with it, hey, before you know it – they will be professional investors, after all, every professional has to start somewhere.

One of the primary things an investor wants is a good “cash on cash” return on investment . That is, they want to put up some cash, and have that cash investment return them money, put money back in their pocket, each and every year. So let’s say you put $100,000 down into a property, and you want to get a 10% return on your investment – that means, that after all expenses and costs, you get back $10,000 pear year on your $100,000 invested.

And that is where a lot of investors go astray, I think. They don’t have realistic numbers as to the income the property will generate and the costs that owning, financing, maintaining, and renting the property will incur. As it happens, my clients went on to my web site and found my handy Excel spreadsheet for income property analysis. It’s a really great tool (to be used for estimating purposes only, of course! Contact your legal, tax, and accounting professionals before making any investment decision!) to help you figure out what kind of a return you can expect on any given property.

There are some key numbers you need to know. The first, is the interest rate on the loan you will be getting. This is tricky – many times, your loan broker will quote you a figure, and then your actual interest rate turns out to be 1/4 or 1/2 or even a full percent higher than that. Make sure you ask for your Good Faith Estimate from the lender so you will know what your actual interest rate is going to be, and if you have to pay any points to get it.

You will also find out how much of a down payment is required. At first, my clients were figuring they’d only need 20% down for a non-owner-occupied real estate loan. Their lender informed them, when asking about their actual rate, it would be 25% down.

Another key bit of information you’ll need to know is, how much can you actually rent the property out for? The rental market in Watsonville has been extremely tight of late, and rental prices have been very high – or have they? I had recommended my clients look on Craigslist and also on Zilpy.com to see what the rental prices were looking like. The problem with that, though, is that these are asking prices for rent. It does not mean that they are the actual prices people are paying.

When you’re an investor, every month a unit sits vacant kills you. If you are asking too much for rent, you are not going to attract the kind of quality tenants you are looking for. You need to price the unit well for quick rental to attract quality, long-term tenants.

I talked to a property manager down in Watsonville about the rental situation. She said that the rental market had softened considerably, especially since the Housing Authority of Santa Cruz County had put a freeze on new housing vouchers. Ouch. According to the lady I spoke with, actual rents in Watsonville are now down about 20-25% from a year ago. D’oh.

What this means for my clients is that the amount of money they can afford to pay for a property, given their higher interest rate and lower rental rates means that they can offer less for a property than they had first thought – in order to make that 10% (or near 10%, anyway) cash-on-cash return on their investment. And there’s another important factor to consider for you number crunchers out there – closing costs and fix-up costs. It could be you need 25% down for your loan, and then another $10K for closing costs and another $15K on top of that to rehab the property so that its condition will make it desirable to rent quickly and for the highest rent possible. The $100K you thought you were investing could easily look like $125K before the first tenant moves in, and if you want to get 10% back, you’ll need to see $12,500 per year free-and-clear.

While we are on the subject, let me ask this: why are rental prices in Watsonville down 20-25% from a year ago? I don’t know for sure, but here’s what I think: it used to be there were a lot more owner-occupants in Watsonville than there are today. A year ago, there were less rental units available. All the people getting kicked out of their houses by foreclosure were competing for the scarce rental stock. Now, a lot of those formerly owner-occupied houses have turned into rental houses, thereby increasing supply. At the same time, not as many people are getting foreclosed on at the moment because of the various foreclosure moratoria which have been in place. And, of course, the unemployment rate in Watsonville is reported to be at 25% – that’s huge, and I think it means a lot of people are going to be sharing housing, families living with families, rather than each family having their own individual place as I’m sure they’d prefer in many cases but owing to the weak economy cannot afford to do so at the moment.

And, one other thing: what do you think these lower rental rates are going to do to home values? Will they have no effect? Bah, humbug. I dare say they will continue to drag down property values in Watsonville, and that we have not yet hit bottom. A lot of the buyers in Watsonville today are investors – and a real investor will only be able to pay so much for a property to get the return they need to justify the considerable risk. Also, as rental rates decrease, it blunts the incentive to for someone to buy – as the chasm between monthly rent and a full PITI payment widens, more fence-sitters are likely to stay there on that fence, and continue to wait out the market.

To all ye would-be investors, in Watsonville and everywhere else in our Golden State, I say: rock on, but play it safe, and always use your green eyeshades when analyzing any real estate investment. I’d hate to see you end up like thousands of well-intentioned but mis-guided “investors” before, with your investment dollars flushed down the drain and a bitter taste in your mouth.

Posted by SantaCruzBroker at 1:00pm
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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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Billions, Trillions and a House in Santa Cruz

September 30, 2008

These sure are interesting times. Washington Mutual (my bank) – gone. Wachovia (which just bought up World Savings a while go) is now part of Citibank. The much-touted $700 billion bailout plan gets shot down in the house of representatives, and Wall Street falls 777 points to erase $1.2 trillion dollars in market value. Glad I sold all my stocks 2-3 weeks ago.

I know, I’m part of the problem. I should have just sat there and watched as my hard-earned dollars evaporated, sucked it up, been a man, and lost all that cash, the price to pay for participating in our capitalist system.

Except that I, like many of you, can’t help but feel that the system is, perhaps, a bit rigged in favor of the big guys. Like Washington Mutual, for example – my understanding is, the Feds took it over, wiped out the shares of everyone who owned it, and sold it to JP Morgan Chase for a couple of billion dollars. And the WAMU shareholders got nothing.

So what does all this have to do with Santa Cruz Real Estate? Pffft. Wish I could tell you. One thing that’s very interesting to me is this claim that the credit markets are “frozen” and that’s why we need this $700 billion bailout. From where I sit, the credit markets do not appear frozen. At worst, they appear congealed.

I’ve actually been selling a lot of real estate this year, and almost everyone who is buying is getting a loan. It is true that in order to get a loan these days, you must meet a much stricter standard. Last I checked, though – that’s a good thing. Easy credit, liar loans, all that – isn’t that how we got in this mess to begin with?

So let me assure you – if you want to buy a house in Santa Cruz, and you have decent credit (at least a 580 FICO Score to qualify for an FHA loan, I believe) and you have the debt-to-income ratios required by the guidelines. But if you have that, a pulse, and a paltry 3.5% down payment – you’re in.

Let’s say you want to buy a starter house or condo for $500,000. Mind you, the median price these days in the county is $585,000 (as of August), so it’s getting to the point where you can actually buy a habitable structure in a somewhat central location for that kind of bread. You’re looking at a down payment of $17,500. That would leave you with a whopping loan of $482,500 and payments (all-in, including principal, interest, property tax, and insurance) of about $3,500 a month (roughly, approximately – and that’s before your considerable mortgage interest tax deduction).

What’s that, you say? $3,500 is a lot to pay every month? Yeah, it is. So perhaps you would want to – gasp – have a bigger down payment, like 10 or 20%. Or buy a smaller house, or live somewhere less central. Or, wait another six months or a year before buying. Because prices are going down further. Except in Watsonville and north Monterey county, I think they can’t possibly go down much further there.

Let’s say, though, that you have $20K for a down payment, and you’re fine with a $3,500 monthly payment. You might be wondering about your closing costs – those can be considerable, especially if you are in fact going with FHA financing.

No worries, mate! Put a shrimp on the barbie and let the seller pay your closing costs. Most sellers, if you write them a high-enough offer, will be happy to pay your closing costs. Even in a short sale, and especially if you’re buying a bank-owned REO property. You might even be able to lower your rate by paying a point or two, which is not a bad idea if you’re planning to stay in the home longer than 3-4 years.

It hardly needs to be said, of course – but if you’re planning to buy a house, you’d better plan on being there at least 3-4 years. At least. Real estate is a long-term investment. Not like that crazy silly stock market.

Posted by SantaCruzBroker at 8:29am
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