The Broker's Record

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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Interest Rates Plunge for Homes in Santa Cruz

September 08, 2008

In case you haven’t heard, over the weekend the free-marketeers over at the Treasury Department have taken over Fannie Mae and Freddie Mac. I’m all for it, of course. The hypocrisy kind of makes me sick – they’re all for government intervention to help out the banks and whatnot, but when it comes to helping out the middle and lower classes with, I don’t know, a tax cut or a single-payer health care system – forget it.

But I digress – I’m totally for the bailout. We just can’t afford a collapse of the whole mortgage lending system. That would just be catastrophic, and would end up hurting many more people than simple inaction and the possible collapse of Fannie and Freddie.

The good news out there for you, Mr. Middle Class Home Buyer, is that interest rates have plunged. Apparently, a confirming 30 year fixed loan is down to about 5.75%. That’s pretty good. Rates had been about 6.5% on Friday, so this is a huge drop.

Now, for those of you who are using FHA Financing (typically first-time and low-income buyers) – you’re out of luck. It seems that FHA rates will remain about 6.5% for the time being.

Of course, as you can imagine, an event of this magnitude is likely to cause quite a bit of perturbation. Rates could be this low only for a short time – they could go right up again before we know it. Or, of course, they could drop even further. Who knows?

Interest rates vary all the time, and they vary from borrower to borrower and lender to lender. But let’s assume that on Friday, your rate would have been 6.5%, and today, it’s 6% – in other words, a 1/2% drop. Let’s also assume you’re buying a median house in Santa Cruz, and you’re putting down, say, 15%. The median price these days is around $610,000 – so your loan would be $518,500 (yes, I’m assuming you have $91,500 handy for a down payment!).

At 6.5%, your principal and interest payment, for a 30 year fixed loan, would be $3,277.27.

At 6%, your principal and interest payment for a 30 year fixed loan, would be $3,108.66. That’s a difference of $168.61 a month.

Hey, calm down! Don’t get so excited! It may not seem like much – but it is a bit more than a 5% savings in monthly payments. Until you figure in tax and insurance, of course. Your tax would stay the same – about $559 per month, and insurance would be, oh, $75 a month. So your true payment with a 6.5% rate would be around $3,911.27 a month, which puts your actual savings of $168.61 at somewhere around 4.3% per month.

Still, $168.61 ought to pay for at least a few refills of the ol’ Prius, eh?

Posted by SantaCruzBroker at 2:54pm
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