Santa Barbara Real Estate

SANTA BARBARA ASSOCIATION OF REALTORS
2011 Real Estate Year in Review

Something happened last fall here in Santa Barbara. Real estate prices for houses took another dip. Not huge, mind you, but significant. The median price for houses in Santa Barbara’s South Coast dropped from $815,000 at the end of the third quarter 2011 to $790,000 at year end 2011. That’s a 3% decline in three months. That wasn’t indicative of the rest of the year, as the median house price dropped just 4.1% for the prior nine months. What happened this last quarter? What does it mean for 2012? To many of us working in the field, this decline appeared out of place. All of a sudden there were three or four tract houses listed in Goleta for $399,000. (Turns out all three had significant foundation issues, but still.) Then there were homes listed in other Santa Barbara, Goleta, and Carpinteria neighborhoods, mostly short sales, in the $450,000 range. And these were livable! Can you imagine being able to buy a two‐ or three‐bedroom house in the Santa Barbara area for under a half million? A house with a working roof, good foundation, fenced yard, and in a residential neighborhood. We’re not talking about the little fixer perched under the electrical wires or adjacent to the cement factory; we’re talking decent houses in decent neighborhoods. All of a sudden, the cost of home ownership was neck‐and‐neck with the cost of renting, maybe even less expensive with the tax considerations. Interest rates for 30‐year fixed mortgages were hovering around 4.0%, and lenders had loan programs with as little as 3.5%, 5%, and 10% down (and still do).

Sellers who owed more on their mortgage than the property was worth were aggressively pricing their homes to submit a short‐sale offer to their lender (a much better option for many sellers than foreclosure). Other sellers in the neighborhood needed to adjust prices to compete with these short‐sale homes. Bank‐owned homes were also priced aggressively in this under‐$500,000 market. This remarkable perfect‐storm for buyers hasn’t been seen in Santa Barbara for nearly two decades. Can you imagine what happened next?

The buyers came out in force, especially for houses. The number of pending sales (new transactions that opened escrow) in December 2011 totaled 102, as seen in Table 1. This is a 62% increase over the number of pending sales in December of the prior year. November had 102 pending sales, and October had 104 homes that entered escrow that month. This is what we’re accustomed to in our best selling seasons, spring and summer, not in the fall and winter months. It’s not all rosy for buyers, however. The competition for these homes is steep. Most of the well‐priced homes had multiple offers (two, three, or sometimes more buyers bidding on the same home). Short‐sale sellers on Del Monaco dropped their price to $449,900 in late October, which immediately generated three offers. A cute two‐bedroom house on the Westside on Clearview listed recently for $630,000 – a normal sale ‐‐ and had ten offers within the first five days (and sold for over asking price). That left nine buyers out in the cold, hunting for another good value. Sometimes misguided sellers price their underwater property way below market value, as was the case for a two‐bedroom Highlands condo recently. The $299,000 list price generated a flurry of offers, but once reviewed, the short‐sale lender countered with a price $50,000 higher (substantiated by their appraisal) and rejected the offers. Although buyers occasionally get lucky and a low‐ball bid gets accepted by the bank‐seller, more often than not, the banks do know the value of the property and counter at or just below market value. Table 2 shows the combined number of pending sales for both houses and condos. (Remember most of the new activity has been for houses; pending condo sales actually decreased in December after taking a jump in November.) The time span from negotiating a purchase contract to closing escrow can be 30 to 90 days (or longer for short sales), so the bump up in closed sales in December reflects this jump in pending sales (contracts signed) in October and November.

Like other industries, we call the available number of homes for sale “inventory.” At the end of December, we had just 3.9 months of inventory in our whole south coast market (3.8 months for houses and 4.1 months for condos), see Table 1. Economists tell us that an inventory of about six months is balanced between buyers and sellers. An inventory of less than six months eventually puts upward pressure on prices (and is a seller’s market); an inventory of over six months puts downward pressure on prices (and is considered a buyer’s market). Our inventories have been low this entire last quarter of 2011 in all areas except Montecito and Hope Ranch. Look again at Table 1 at the Months of Inventory column. Both Goleta and Santa Barbara houses have inventories of around 2.5 months! It makes sense that with all the buyers out there, prices at the lower end will start to rise, and favor sellers. We are not seeing this yet, but we are seeing more price stability (especially in condos right now), and plenty of frustrated potential home buyers. Stay tuned to this column to see if the current buying frenzy at the lower end of our market translates into higher prices in next few months. Table 3 reflects these figures, showing which price ranges logged the most sales: $500,000 to $600,000 for houses, and $300,000 to $400,000 for condos.

The upper end of our market, defined in our charts by Montecito and Hope Ranch, has more inventory, 12.3 months and 8.5 months, respectively. This is nearly identical to December 2010. Median price for a Montecito home dropped year over year from $2,400,000 to $2,100,000, a 12.5% decline. Hope Ranch median price for 2011 is $1,950,000, down from $2,212,500, an 11.6% decline. Remember, though, that only part of the median price calculation is due to declining values. The other variable is the mix of home prices. More homes sold at the lower end and fewer at the upper end brings down the median price.

Condo prices are holding steady with just a 1.6% decline in the fourth quarter 2011 (from $425,000 to $418,000 after hovering near $425,000 for several months), and a 3.7% drop year over year.

This analysis would not be complete for 2011 if we didn’t also look at distressed sales, that is, the number of closed escrows that are short sales or bank‐owned properties (foreclosures). The number of short sales that closed in 2011 totaled 200. In 2010, this number was 137 (and in 2009, it was 92). More and more sellers are becoming aware of the benefits of a short sale, and are choosing that option. As for bank‐owned properties (REOs), Santa Barbara saw 184 close escrow in 2011, as compared to 154 in 2010 and 165 in 2009. The total number of all sales, regular and distressed, in our south coast is consistent year‐over year, with 1,257 residential properties changing hands in 2011 (2.5% more than last year’s 1,227). Therefore, the percentage of homes sold that are distressed has increased to 30.5% from 2010’s 23.7%.

My recommendation for sellers who have a “normal” property to sell: since many of the distressed homes are in poor condition or unkempt, make your house stand out by staging it and giving it a thorough cleaning – make it shine. Be flexible on your closing date and other timelines, and be willing to make repairs. Not all buyers are willing or able to work with the peculiar timelines and demands of purchasing a distressed property and might pay a premium to buy a home from a “real” seller. If a buyer needs to move in by a certain date, or needs a house in move‐in condition, that buyer would be best served by purchasing a “normal” sale; cater to that buyer.

What does all this foretell for 2012? Philosophers are quick to prophesy about the year 2012 based on ancient history. Our recent history would be a better guide. With an increase in distressed sales lowering property values across the board and a flurry of buyers who realize now is the time to buy, I predict a steady pace of sales in 2012. The number of sales will be limited by the low inventory, and buyers will continue to compete for the best deals, but be reluctant to overpay. Sellers will have to compete with others who are underwater and trying to beat the foreclosure clock with a low listing price, and with bank‐owned properties. Prices will rise slightly at the lower end, and stabilize in the middle and high‐end markets.

As we enter this much‐prophesied year of 2012, I’d like to propose a new idea. Psychology has long recognized the power of self‐fulfilling prophecy (a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself, due to positive feedback between belief and behavior [Wikipedia].) For example, if you think the real estate market is going to tank, then you won’t purchase a home (and if you’re an expressive type, tell others why they shouldn’t either) – which, if enough people feel the same way, will slow home sales and contribute to that original prediction. If you think that we’re at the bottom in prices and interest rates, and now is the best time to buy because both are going to go up, then you will figure out a way to purchase, as well as talk to others about the great opportunities in real estate, which, you guessed it, contributes to the number of sales and raises prices (thus helping to fulfill the original expectation). Economists measure something called the “consumer confidence index” (CCI), which is the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. Businesses make decisions to expand or contract, offer products or not, and economists make their predictions based partly on this index — that is, on our expectations of what the economy (or the real estate market) will do.

What if, in 2012, we all predicted – expected — a stable, even sustainable, real estate market? What if we predicted that the unsustainable highs and lows of the last decade are coming to a close, and a new era is beginning? Real estate has not always been a commodity, and perhaps if we collectively begin to look at it as a long‐term investment, and a place to call home (or provide others with a home), we will begin to act in such a way to make that prophecy come to light in 2012.

-Kalia J. Rork Prudential California Realty