2012, The Year of the Turnaround

"2012, The Year of the Turnaround" has a nice ring to it.  I used it first last month.  The market continues to signal that we are in transition.  It is wild out there right now.  Not only are local statistics evidencing strength, but we are hearing more and more national evidence showing this to be true.  March data locally is showing the beginning of follow through results signaling that this turnaround is for real.  Looking ahead I can confirm that we will be seeing increases in the median sales price in next two months.  This will be used by many, whether correct or not, to show increases in prices.  This will effect the psychology of the market.  Please read my summary below about how "Perception creates Reality".  It will be interesting to watch and hopefully see this happen.  A major problem now in our local market, especially for the entry-level buyer, is not only finding an attractive home to purchase, but then being able to find a clear path to purchase.  There is a lot of competition and not enough supply.  Do not expect to be the only interested buyer when an attractive listing comes along.  Interest rates have risen a bit, which is actually good for the market because buyers want to complete a purchase while still able to get a good rate and no one wants to miss the long-term golden rates that we are now experiencing.   

This months newsletter will focus on:
 
1. Analysis of Closed and Pending sales for February as well as for March 1-19. 
2.  14 months statistics detailing the makeup of the local Entry Level market. 
3. A now continuing detailed view into the makeup of sales in the Mid-Range market for the last year.
4. A detailed analysis of Pending Sales. 
5. Investment property analysis.
6. Continuing analysis of condo market. 
7. A discussion of "Perception creates Reality"
7. The regular short analysis of each segment of the market. 

NOTE:  All previous newsletters can be found archived on my website.  Please go to 
www.DonElconin.com    to view them.  You may find it interesting to see the trends in a longer view.

As I said last month, what a difference a year makes!  This is the strongest market we have had in five years.  We only had 414 active single family & PUD listings at the end of February.  We had 387 at end of December and 415 in January.  We are working with about 87% of the inventory we had at this time last year and 78% of the inventory we had at this time in 2010.  Meanwhile closed sales are up 39% in February over last year.  We had 83 sales in March 2011, but we already have 74 this month through 3/23, so I expect we will beat that figure this year and will do so with significantly less inventory.  Pending sales are averaging more than 100 every month for last five months through March.  Open Houses are really busy, Buyers are out in force and now are actually buying.  The mid-range is again seeming to strengthen.  We need more inventory!  Soon we will be discussing what it means that closed sales are back to the highest monthly levels reached last year with median prices now increasing.  For now, however, lets take a look at what has been happening in the recent past.

Closed Sales -  We had 68 closed sales of Single Family Homes and PUDs in February compared to 49 last year.  January and February closed sales tend to be lower than the rest of the year.  We already have 74 closed sales through 3/23 for March.  (I was a bit late getting to the numbers this month which is good, because we only had 54 sales close through 3/19.)  These March sales include 27 in the now critical $800K-1.6MM price range.  This is the first step reaching toward renewed strength in this part of the market which is necessary to signal a moving forward of the market turnaround.  One month a market does not make, but I am becoming very hopeful.

The February closed sales came in at a stronger than usual 95.61% of List Price and 89.84% of Original List Price.  Homes again sold more quickly last month, selling on average in 67 days compared to 80 days last month and 100 days previously.  The median sale price dropped again to $699K after being over $800K for the first time in awhile in January.  The mid & higher ranges are improving in March, however, with the median sale price all the way up to $850K for the 74 March sales so far.  Although the Average Sale Price fell in January all the way to $931,617 we can expect it to skyrocket at end of March, given that we already have three sales over $16MM this month! (881 San Ysidro, 2840 Hidden Valley Ln & 1940 Tollis).     
    
Market Share Analysis:  Here is a look into the number of sales and percentages broken into price ranges:     

Closed sales are starting to pick up as they should given the strength of pending sales the last months.  Continued strong pending numbers should translate to strong closed sales looking forward.  Much will depend, absent world events, on whether new product can make it to the market.  The most glaring change in the closed sales starting with March is the transfer of market share to the mid-range of the market.  As mentioned above, 36%(27) of the March sales are in the $800-1.6MM mid-market range.  We saw the beginning of this change with increased pending sales in this range last month.  There are 31 pendings sales in this mid-range already in March so, for now, we are getting continuation.  Keep your fingers crossed! 

    

Low End Sales Data (Under $800,000) -   Sales are steady in this price range.  We had 42 in February and have averaged 46.15 monthly for last 14 months.  More of the sales are now in the higher end of this range than before.  There are now only 82 homes available in this price range, down from 89 last month.  This is less than two month's inventory.  There are only 29 homes currently available under $600K.  We had 24 sales under $600K in February & 20 so far in March.  This is barely one month's inventory. Only 8 of the 29 homes are regular sales, the rest are short sale or REO.   That leaves 53 homes between $600-800K available with 24 sold in last 30 days.  The bank strategy of only letting a few of the homes held in inventory out each month might finally be working because the news soon might become that the concept of scarcity and increasing pricing overtakes the concern of overhanging shadow inventory.   The question is: "What will bring out increased inventory?" A few entry level sellers, with significant equity, are putting their property on the market in order to take advantage of pricing at the next level up.  But, other than these sellers, I believe that only increases in pricing will bring out significant inventory other than REO & short sale homes.   

The data shows that:

1.  Bank-owned (REO) and short sale properties accounted for 46% of total entry-level sales last month & 45% for last 14 months.   

2.  45% of properties listed in this price range sold within 30 days in 2011.  42% last month. 

3.  We had 291 properties in this price range that were either REO or short  sale properties in the last 14 months.  That is a lot of Santa Barbara people who lost their homes!!  

4. As a side note, seven of the 40 sales in last 60 days that were listed for less than 30 days sold for more than list price.  A high percentage of short sale and REO listings now come out very low and create bidding wars. Three of these in last month sold for at least $25,000 more than their list price. 

   

Mid Range Sales Data ($800K-1.6MM )-  Only 20 properties sold in this price range in February but we had 24 sales from 2/20-3/19 and 27 so far in March.  There were 11 closed sales in the four days from March 19-23!  We also have had 30 pending sales in this price range so far in March.  I am still seeing many published Notices of Trustee Sales in this price range but so far not many are ending up as foreclosures or short sales.  We will keep watching.  This market segment seems to be moving towards balance.  We now have 127 active listings in this price range, essentially equal to 133, 131 & 128 three months previously.  We actually need more good listings in this range also.  Side note: 501 Samarkand listed at $1,395K, had around 7 offers, and sold quickly for $1,600K! 

Pending Sales -  There were 102 Pending Sales in February, with 107, 102 & 102 the previous three months.  Strong numbers!  The median List Price for February Pending Sales was $777,000.  We already have 85 more Pending Sales in March through 3/23 and the median List Price for those is up to $816,750. The Average List Price was up to $1,451,304 in February.  The prices range of March Pending Sales is up from previously with only 48%(41) of the pendings being below $800K, 18%(13) of pendings being between $800K-$1MM and 27%(23) being between $1-2MM.  31 properties went pending between $800-1.6MM in March already.  Again, as I keep saying, we need 30 properties per month sales in this price range to get confirmation of the next step to recovery.  Hopefully these escrows will close and the numbers will continue strong

Total pending sales were 198 as of March 19 but back up to 211 as of 3/23.  Total pending sales have not been this high since we started building pending sales into last spring/summer. We continue to maintain pending inventory below $800K although active inventory continues to decline.  We had pending inventory of 54 in the $800-1.6MM mid-range and this increased to 60 as of 3/23.  This adds hope to continuation of strong sales in this price range.  Pending sales in the $1-2MM range stayed at 40 but increased to 47 as of 3/23.  We continue to put homes in escrow over $2MM but not enough of them.  Total failed escrows numbered 25 through the end of February for the year.   

PENDING SALES                <$800K     $800-1M     $1-2MM    >$2M    TOTAL

      Total pending  MAR. 19        117             26               40             16           198  

      Total pending  FEB. 19          124             24               44             14           206 

      Total pending  JAN. 19          110             22               30               9           171  

      Total pending  DEC. 19:        119             28               36               9           191
      Total pending  NOV. 19:        120             20               41             15           196
      Total pending  OCT. 19:         104            23               27              14           168
      Total pending  SEPT: 19        100             22               36              15           173    

 

SUMMARY (for single family homes) -  "Perception creates Reality".  The Santa Barbara real estate market continues to change, with more pending sales and closed sales in higher part of entry-level and mid-range of our market.  We are also seeing stronger luxury end sales.  All of this will translate to higher median sales values in the next two months.  Many analysts equate changes to median sales values to changes in pricing even though this may not be so because the increase or decrease can actually be only due to which price level of sales is most active at the time.   Whether actually true or , instead, misunderstood statistics, just the talk of increases in pricing as measured by median sales prices will produce changes in psychology which will create the same result whether or not actual prices are increasing.  And the result of this perception will be that prices might actually start to go up.   I continue to believe that it will probably take longer than past market turns to make a base, (it already has!) but I am starting to see how the turn could be stronger than most now think it will be.  Everyone continues to believe that Buyers have learned to be cautious because of the previously burst bubble, but we are already seeing a shift in Buyer attitudes given the many recent over-list price bidding wars in lieu of the previous unwillingness of Buyers to overreach.  Again, by the time the media has the news, the cat will be out of the bag. 

Investment Properties -   There are only 28 active listings currently.  We had 31 last month and 28 the month before.  Only 9 of these are priced under $1MM and, unlike previous months, none are short sales.  We have 10 new listings in last 30 days.  List prices are somewhat rich but it is the only way to get a Seller to list.  Very few short sale listings come to market now.  All the short sale investment listings get bid up over list price and are gone quickly.  There are now a total of 18 pending sales and 13 of them were priced under $1MM.  Only 5 of those 13 are straight sales.  11 of the pending properties went into escrow in last 30 days and 5 of them were short or REO.  Investors need to focus on what the cap rate and/or after tax cash flow is and compare this to other possible uses for the cash.  The big question is how important owning Santa Barbara investment property is.  There is also a huge difference in analysis between properties of four or less units and those with 5 or more units.  

Condo market -  The condo market is waking up with 43 pending sales in February and another 41 through March 23.  These strong pending numbers will translate into closed sales in next two months far above the 17 closed sales in February and 12 in January.  The February closed sales did sell at 97.09% of their current list price.  The median sale price was $369K for February but February pending sales had a median list price of $429K.  The median list price for March pendings as just below $400K.  There are currently 115 active listings down from 118 last month.    

How Is The Market Doing?

HOW IS THE MARKET DOING?  -  I am asked this question all the time.  We actually have many markets.  Here is a quick synopsis of the various markets as I see them.    

Entry Level Properties: (under $800,000) - There are currently only 82 active listings, below the 89 last month and 103 in December and way below the average of 123 for the last eight months.  We continue to average 40-45 sales per month, and we have 117 pending sales in this price range.  We have 2 month's inventory!  We need more listings!   

Mid Level Properties  ($800,000 to $1,600,000) -  We currently have 127 active listings and have averaged 130 over the last four months.   We were averaging over 170 during the summer.  We are again approaching 30 sales per month which is what we need to balance this market.  There is still enough product to create sales but we would benefit from additional new listings.    

High End Properties ($1,600,000 to $3,000,000) -  We currently have 108 active listings compared to 97.5 average over four previous months.  We had 4 sales in February, 8 sales in January and a monthly average of 7.25 for the last eight months.  We now have a total of 19 pending sales, down from 22 last month.  A "balanced market" of 6 months inventory would be somewhere between 15-20 monthly sales.  We are showing signs of life. 

Luxury Market  (over $3,000,000) -  We had 2 sales in February but already 6 so far this month with 3 over $16MM!  The eight month average is 4.21.  We have 11 current pendings up from 8 last month.  We currently have 136 active listings, compared to the seven-month average of 138.5.  This market has been slow.  We do get some sales that do not go through the MLS.   We need a significant increase in sales in order to turn this part of the market around.  We currently have 18 properties listed over $15MM, 30 over $10MM, 60 over $6MM and 84 over $5MM. 

POLITICAL RISKS -  As mentioned last month, lender underwriting is becoming a bit less rigorous.  This should help our market.  This is well known.  No one, however, is discussing the fact that, this being an election year, we should expect the best possible news regarding the economy.  It is true that Congress is dysfunctional and that election year effects could well be diminished by this, but we should still expect that the news on the economy will be more upbeat as we head to November.  As such, unless we get some world event similar to what happened to Jimmy Carter with Iran , we can expect that macro economic events will favor the positive for the economy, interest rates & therefore, at least to some degree, our local real estate market.  It will also probably favor the Democrats.  If Democrats can get control of Congress we should have a better chance of getting a resolution with Fannie & Freddie that is similar to the current Harp 2  that we have with FHA, assuming that we are not able to get that template in place before the election.  This will provide an answer for up to 10 million underwater homeowners.  As I have said for over a year, resolution of this shadow inventory problem will be necessary in order to get to a strong real estate recovery.  Speaking of a possible recovery, I am reading and hearing more and more media and talking heads discussion that speaks to an improving national real estate market.  As I said earlier, the effects and impact on the market of a change in Buyer psychology that creates a new view that the turnaround is at hand and that prices are moving up cannot be overestimated.      

-Written by Don Elconin