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

Stronger Total Sales Numbers in 2011

September statistics, as well as the first half of October, have confirmed that our local market is slowing down.  We have had to deal with not only seasonal factors, but also the impacts of the lowering of the confirming loan limit, which hits at the heart of our 1st & 2nd time buyer market.  There are two considerations when evaluating the market, prices and strength in number of sales.  We had a great summer when considering number of sales.  Pricing continues to be under pressure.  We continue to find that 50% of our sales of single family homes are under $800,000 and 60-65% are under $1MM.  Please read the "Political Risks" section below to understand my view as to what is critically needed to get us out of this mess. This months newsletter will focus on: 1. Analysis of Closed and Pending sales for September as well as for October 1-19.   2.  Nine months statistics detailing the makeup of the local Starter Home market.   3. A more detailed view into the makeup of sales in the Mid-Range market for last seven months.  4. A continuing analysis of Pending Sales.   5. Investment property analysis.  6. Continuing analysis of condo market which, after picking up in last 3 months is now softening again.  7. An analysis of how each segment of the market is doing.  We have to remember that we do not correctly answer the question of "How is the Market Doing" if we only give generalized overall answers.   Current Statistical Data All segments of the local market are slowing down.  The number of listings of single family homes has not really slowed, going to 557 from 564, 574 & 565 previously.  Last year listing peaked at 678 in July and dropped every month thereafter through December.  This year we have been looking at 84.66% as much inventory starting the summer but, instead of decreasing the number of listings has been stable as you can see.  So we now have 89.12% as much inventory as last year at this time.  Still, we continue to have stronger total sales numbers in 2011 with less inventory.  With condos we now have 137 active listings down from 139, 153 & 170 previously.  We had 156 at this time last year.  We actually began the summer with more listings this year than last last year and we still have not caught up to the total sales as of this time last year.  Houses are stronger in number of sales, condos are the same, but realized prices are under pressure in both markets. Closed Sales -  Closed sales came in at 85 for September, down from 96 and 94 the previous two months.  These closed sales came in at 93.56% of List Price & 87.54% of Original List Price which is essentially equivalent to recent months.  The Median Sales Price jumped back up to $800,000 which is closer to the average median sales price of $815,000 for the first nine months of this year compared to the $734,500 value for last month.  The Average Sold Price was $1,178.497 down from an average of about $1,230,000 the last three months.   How did median price rise and average price fall for the month?  The short answer is that there were fewer lower price sales and fewer high end sales.  Looking into October we have 44 closed sales thru 10/19 so things look to be slowing further.   Market Share Analysis:  Here is a look into the number of sales and percentages broken into price ranges:    Price Range       Oct. 1-19      Sept.       August        July            June            May   Under $800,000   50%(22)    49%(42)    56%(54)    48%(45)     38% (34)     51% (46)  Under $1MM       66%(29)    62%(53)    70%(67)    58%(55)     61% (54)    60% (54)      $1MM-2MM        23%(10)    27%(23)   18%(17)    31%(29)      28% (25)     22% (20) Over $2MM          11%( 5)    11%(  9)    13%(12)    11% (10)     11% (10)     18%(16)      Total Sales            44              85              96               94              89                90           October so far is mirroring September although with lower total numbers.  The $1MM-2MM price range has become stronger relative to the other ranges but not really in itself.  It is more about fewer lower end and high end sales and almost no sales over $5MM.  We have to remember that normal expectation would be for a slowdown moving into the holiday period.     Low End Sales Data (Under $800,000) - Entry level sales are definitely slowing down. Question is whether it is part of overall market slowing that is seasonal or not seasonal or at least partly due to fewer homes selling due to lower FHA loan limits.  The low end is still the strongest part of our market.  It is good news that the Senate has passed a new law again taking the limits up to $729K.  We will have to see if the House will also pass this or, alternatively, that the politics of weakening the current administration is more important than working to improve the economy and housing.  Below you will find an analysis of the last nine months activity which creates an average of 47.56 homes sold per month in this segment of the market. We currently have 142 active listings in this price range down from 148 last month and and average of 147 over last five months.  This creates between 3.1-3.5 months standing inventory.  This part of the market has been looking at these same numbers for at least six months.  Normally so little inventory would create increases in price but in this market the prices have declined this year due to the continual addition to inventory of REO and short sale properties. Sellers and agents know that buyers will act aggressively but only if the pricing is exciting to them.  As I have stated for months now, unless and until the powers that be respond by offering alternatives to underwater owners besides short sales and foreclosure, we will continue to have declining prices.      SEPTEMBER 20-OCTOBER19 - Sold Properties under $800,000                    1-15 days     16-30      31-60     61-90     91-180     over 180 days   TOTAL   #of prop:           16               6          11            6           3                -                        42      # short sale          3               1           2             -            -                -                          6     #REO                  5               1           2             2            1               -                        11   # w/price chg      2                2           7            4            3                -                       18     AUGUST 20-SEPTEMBER 19 - Sold Properties under $800,000                    1-15 days     16-30     31-60     61-90     91-180     over 180           TOTAL  #of prop:           15               7            8            3             8                4                      45  # short sale         5                -            3            1             -                 1                      10 #REO                 3                3            2            1            3                 1                      13 # w/price chg     -                 -             4            2            8                 4                      18 JAN 19-AUG 20 - Sold Properties under $800,000                     1-15 days     16-30      31-60     61-90     91-180     over 180 days   TOTAL #of props:        105            42          57           46           59               32                    341  # short sales     19               4          13           11            12               18                      77   # REO              23             13            8           17            14                 2                      77      # w/price chg     1               6          36           39            57                26                   165                          The data shows that: 1. As we now see month after month, bank-owned and short sale properties continue to make up around 45% of the sales in this part of the market.  The 6.25% loss in value thru August this year in this part of market is due to this continuing problem.  2. In last two months more REO properties are closing than short sales.  3.  72% of all listings were into escrow within 60 days in last two months compared to 60% in the first seven months of the year.       Mid Range Sales Data - 35 properties closed in last 30 days in this price range up from 28 and 24 previously and closer to the 44 and 35 in June & July that caused me to start hoping that this critical segment of the market was waking up.  Lets keep our fingers crossed that this segment continues to show strength.  We do continue to see short sales and now REO properties cropping up in this price range.  They are a bit harder to track but at least 6 of the 35 sales last month were either short or REO.  This is starting to become a significant factor for this segment of the market.  There are currently 171 active properties in this price range down from 178 last month and 191 & 198 previously.  If we can stay above 30 monthly sales this segment can come into balance as long as we do not continue to get more short sale and REO properties.    SEPTEMBER 20-OCTOBER 19 - Sold Properties $800,000-$1,600,000                     1-15 days     16-30      31-60     61-90     91-180     over 180 days   TOTAL   #of prop:             8           5                9             3             5                  5                    35      # w/ price chg     -            1                8             1             5                  5                    20       MARCH 20-SEPTEMBER 19 - Sold Properties $800,000-$1,600,000                     1-15 days     16-30      31-60     61-90     91-180     over 180 days   TOTAL   #of prop:           52            14           25            16            44                22                  173        # w/ price chg     -               2           11              8            33                20                    78      Pending Sales -  Pending sales (properties going into escrow) dropped dramatically in September to 79 from 111 in August and 96 & 113 previously.  The Median List Price for the new pending sales also dropped dramatically to $729K and Average List Price to $1,050,312 which was quite a drop from $$1,220,881 previously.   We do have 56 pending sales in October thru 10/19 which does show surprising strength and the median list price for these is up to $807,500 from $749K previously.  This is good news.  Also 23 of these were in the Mid-Range that is critically important to our market. Total pending sales now total 168 compared to 173, 176, 190 & 191 previously.  We continue to have an orderly market with less than 20% of pending sales taking more than two months to close.  We do continue to lose approximately 10% of pending sales to fall through escrows.   Additional pending sales information:     PENDING SALES - Oct. 19       under $800K     $800-1M     $1-2MM     over $2M        Current total pending  (168)            104                   23                27               14      Avg. monthly sales (last 5 mths)     44.2                10.4               22.8           11.4      # months inventory over 5 mths      2.35                2.21              1.18            1.23      # months inventory(Sept. figures)   2.47                2.55              1.17            1.57 PENDING SALES - Sept. 19       under $800K     $800-1M     $1-2MM     over $2M       Current total pending  (173)            100                   22                36               15      Avg. monthly sales (last 5 mths)     41.8                12.0               22.0           12.2      # months inventory over 5 mths      2.39                1.83              1.64            1.21      # months inventory(Aug. figures)   1.85                1.69              2.11            1.25 PENDING SALES - Aug. 19       under $800K     $800-1M     $1-2MM     over $2M       Current total pending  (176)              94                   30                 39               13      Avg. monthly sales (last 5 mths)     40.6                10.4                22.2           12.4      # months inventory over 5 mths      2.32                2.88              1.76             1.05      # months inventory (July figures)    2.10                3.00              1.34             1.3    This information shows that the there is a build up of inventory in the entry level and not much inventory of pendings between $1-2MM.  Given the increase in recent pendings in the $1-2MM range this should come back to balance.   It will be interesting to how the current pending clear in next month as and if the new pendings decrease as we slow down.     SUMMARY (for single family homes) -  Remember that when we look at our market we need to look at strength of sales both in terms of numbers and prices.  Santa Barbara had a good summer sales season in terms of number of sales and, although now weakening, it is still good for this time of year.  We have reasonable levels of fall through escrows.  The problem is that realized prices are not at all exciting.  My analysis in August showed that all segments are either flat or falling in realized prices through the first eight months of the year.  Buyers still rule but agents and sellers have responding generally by listing the majority of properties, especially in lower price ranges, aggressively.  Investment Properties -  We only have 42 active properties down from 46 last month and 44 previously.  This market continues to be active with many more buyers than sellers.  There are 17 pending properties with 12 of them going into escrow since 9/20/11.  We have had four new escrows close in last 30 days.  The combination of strengthening rents and great interest rates make any reasonably priced property pencil out.  The low end of this market continues to be mostly short-sale & REO properties.  We need more inventory.   Condo market -  There were 39 closed sales and 32 pending sales in September which continues about three months of good news after a miserable first half of the year.  So far in October there seems to be a slow down with only 14 closed sales and 14 pending sales through 10/19.  In the last 30 days through 10/19 we find 37 closed sales but only 20 pending sales.  The median price for September sales was $445,000 and is $435,000 for those that closed in last 30 days.  The average median price for the year now stands at $425,000 which is 2.75% below 2010 & 8.99% below 2009.  It feels like this market is trying to make a bottom price-wise.  It also looks like this market is also slowing considerably as we move towards the holidays.  We will know by next month.  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 142 active listings which is close to the average of 147 for last five months.  Sales are steady through September but slowing now.  There is 3.5 months inventory at this time at most.  Currently this portion of the market accounts for over 50% of all sales.  Pricing has fallen 6.25% through first eight months of the year but feels even weaker.  This is still the most vibrant part of our local market in terms of number of sales.  Mid Level Properties  ($800,000 to $1,600,000) -  This part of the market had weakened the last two months but is showing more strength in last 30 days.  We are again below the monthly numbers needed to bring this market into balance.  There are currently 171 active listings, down from 178 & 191 previously.  There is about 5-6 months standing inventory.  We actually have stable realized prices in this range but increasing short and REO sales which will not bode will if it continues because it will drive pricing down.  High End Properties ($1,600,000 to $3,000,000) -  We had 7 sales in September down from 9, 12 and 10 previously and ONLY 3 so far in October.  There are currently 125 active listings compared to 126, 118 and 125 previously. We have 12 pending sales currently.  This market still has way too much inventory and sales continue to decrease.  Realized prices are somewhat stable.  Luxury Market  (over $3,000,000) -  There were 6 sales in September compared to 6, 6 & 3 previously and 4 sales so far in October.  There are 137 current listings compared to 144, 148, 148 & 145 previously.  There is a total of 8 current pending properties.  Average Sales Prices have fallen over 19% this year but this is due to fewer higher priced properties selling and there have been a few large transactions that did not make the MLS.  The numbers are not good fore either sales or prices.  POLITICAL RISKS - We have to fix housing!  Hopefully Congress will a correct the mistake of lowering the conforming loan limit to $625,500 which began October 1.  This change actually began having its effect as of around the middle of August because buyers had to make offers based on what loan limits would be at time of closing.  The Senate has passed a bill on Oct. 20 that takes the limit back up to $729,750 but, as of this writing, the House has not followed.  I cannot for the life of me understand the thinking that led to lowering this limit.  The higher limit is important in stretching the purchase price range for buyers with 3.5-10% down payment.  In other words homes priced from $648,186 to $810,833 become unattainable for anyone who does not have the "normal" 20% down payment when the limit is lowered.  Also adding to the problem is that jumbo loans (now over $625,250 instead of $729,750) require even stiffer qualifying standards on top of a minimum 20% down payment.  Rates are higher as well because the jumbo loans are not guaranteed to be purchased and uncertainty creates higher risk which creates higher rates and more rigorous underwriting.  Simply said, it becomes more difficult to find a qualified buyer and to get an approved loan which has a negative impact on this part of the market which, in Santa Barbara, is within the heart of the 1st time and 2nd time buyer's market. In my view at least equally important is the need to fix the mess with underwater home owners.  Unless and until the government and Fannie & Freddie finally realize that housing will not turn the corner until this problem is solved we will be looking at weakening prices and more owners becoming renters after losing their homes.  I have heard more discussion focused on this problem lately but only time will tell if any progress will be made.  Distressed homeowners need to have their loans reduced to amounts in line with current market values and they need to be offered this option without having to qualify as long as they are current in their payments. The biggest risk remains to continue to do nothing other than to cut costs which, like I mentioned last month, is akin to bleeding a patient in order to cure them as was prescribed in the middle ages.  We all now know that bleeding the patient only weakens him and only worsens his situation.  One can say many things about the "Occupy Wall Street" group but, unless we the people rise up, we will continue to be run by the small percentage who now rule us all on the basis of their own self-interest and profit.  We can hope that the election of 2012 will be about this but that will mean at least another 15 months of real pain before any real change can be enacted and, only then, if the people are not again misguided by the power of advertising in the hands of the corporations.   Housing values in Santa Barbara and all of the country will not improve until the problems mentioned above are corrected.  By: Don Elconin