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Dr. Lawrence Yun, Chief Economist for the National Association of Realtors recently said that “Commenting on the National Housing Market is like discussing the National Temperature…like the weather, all real estate is local.” This couldn’t be truer than in Santa Barbara where both our climate and real estate market are different than most parts of the country.
The news media paints a very bleak picture of the housing market with headlines talking about slumping sales, decreasing values, and a rampant escalation of foreclosures. However, it is important to consider the source of these headlines. The majority of television news media is targeted to a national audience and therefore is summarizing countrywide housing trends. Even local newspapers are primarily printing articles from wire services which again tout national statistics. Other media sources focus on California, but don’t generally provide relevance to the Santa Barbara real estate market which is behaving very differently than most other communities across the state. Sometimes you will hear or read reports about Santa Barbara County which can still be misleading because they include statistics that lump together Southern Santa Barbara County (Carpinteria through Goleta) with North County (Lompoc and Santa Maria). Even these two neighboring communities are currently experiencing very different real estate markets.
Here’s my take on the recent headlines as to how they apply to the Southern Santa Barbara County real estate market:
Sub prime Loans
Virtually none of the buyers who purchased homes in our area over the last several years obtained sub prime loans. True sub prime loans were given to buyers in other areas that had no money for a down payment and marginal credit. Because our area is so expensive, very few people could afford the payments on a home without a substantial down payment. While some purchasers may have stretched too far to purchase a home here because they were counting on immediate future appreciation, almost all still have equity in their homes by virtue of their down payment. Sub prime loans were typically taken out for purchases in large new subdivisions where the developers made arrangements for this financing and advertised “why rent when you can own with no money down and payments that same as your current rent?” Buyers literally flocked to these new homes to realize the dream of home ownership and to jump on the bandwagon of unbridled home value appreciation. Later these buyers realized that the catch to their no money down loan was a “teaser rate” that went on to double or triple.
Rampant Foreclosures
Because of the wide spread use of sub prime loans to sell large tracts of new homes, many of these buyers are now in trouble. Not only has their mortgage payment doubled or tripled, because they put no money down, they don’t have the equity to qualify for conventional financing. To make matters worse, softening prices mean that these homeowners now owe more than their home is currently worth. These are the types of homeowners that are losing their homes to foreclosure. While it is sad that these people are losing their homes, since they didn’t make any down payment, it is really the lender that is taking the financial hit. Because South County didn’t experience a rash of sub prime loans, we are not seeing much in the way of foreclosures. According to DataQuick, through November 28, 2007, South County only had 37 properties taken back by lenders through foreclosure the entire year (this represents 1 out of every 1,1141 existing residential properties). In sharp contrast, North County had 420 properties taken back by lenders during the same time period (1 out of every 121 residential properties).
Mortgage Meltdown
Although we have had almost no sub prime lending in our area, the sub prime fallout finally hit Southern Santa Barbara County in August of 2007. Nervousness amongst mortgage backed security investors caused the availability of jumbo loans (those greater than $417,000) to literally dry up overnight. Because of our high home prices, the majority of our loans fall into the jumbo category. With buyers unable to obtain financing, the number of sales in the last quarter of 2007 fell dramatically. In South County the 4th quarter of 2007 saw a 28% drop in the number of sales as compared to the same quarter in 2006. The good news is that many lenders have come back into the jumbo financing market and jumbo financing is now again readily available for qualified buyers.
Plummeting Prices and Sales
A great deal of media attention has been given to the fact that it appears that 2007 will be the first time ever that the national median home price dropped (forecasted to be a 1.7% decrease). The number of existing home sales is also likely to be down by about 12% nationally. What you are likely not hearing is that there are regions of the country that are currently experiencing a real estate boom. Salt Lake City, Utah, for example, experienced a 21.9% in the median price in 2007. In South County, according to the Santa Barbara Multiple Listing Service, the median sales price of a single family home actually rose 4.3%, but the number of sales was off by only 3%.
Areas Hardest Hit
Those communities hardest hit by the market slowdown, including many areas in California, appear to have one common denominator: New Construction. Those areas that saw large numbers of new homes being built during the last 5 years are those that are experiencing the biggest price declines. Communities like Las Vegas and those in more affordable Central California had an explosion of new development where as previously discussed buyers were lined up to purchase with no money down and low teaser rate loans. With declining values, homes with no equity, and skyrocketing loan payments, many owners of these homes are simply walking away and lenders are getting stuck with these homes through foreclosure. As you can imagine, neighborhoods with significant numbers of bank owned homes (that are typically sold at bargain prices) are experiencing dramatic declines in property values. As anyone that lives in Santa Barbara knows, we have very limited new construction in our area, which is one of the main factors contributing to a stable real estate market here.
Upper End Markets
Unlike the last real estate down turn in the 1990’s that was brought on by an economic recession and high unemployment; this down turn is occurring during a relatively healthy economy with low unemployment. As a result, upper end homes are being less impacted by the current real estate cycle than lower priced homes. The exact opposite took place in the 1990’s when the upper end of our market was more severely impacted than our lower end. Because the South Coast in general is one of the most expensive in the state, we are holding up better than other California communities. However, even within our own area, it appears that our entry level homes (lower end tract homes, condominiums, and small starter houses) are experiencing more of a slow down than our higher priced properties. This is likely due to the fact that historically, these lower end homes were attractive to buyers wanting to get their “foot in the door” before escalating home prices went up further. With fewer buyers purchasing homes for quick appreciation, demand for these starter homes has waned. However, the upper end homes that are typically purchased based on a lifestyle decision instead of speculation, appear to be holding value. For example, if you exclude sales in Montecito and Hope Ranch, the median sales price goes from an increase of 4.3% in 2007 to a slight decrease of 0.6%, while the number of sales goes from a 3% decrease to a 7.5% decrease.
In summary, before you make a decision to buy or sell real estate based on what you are learning from the media; be careful to pay close attention to compare what is going on nationally or statewide to what is going on in your community. Contact your local real estate professional for up to date statistics about what is going on in your neighborhood.
Bob Curtis of Village Properties is a 21 year veteran of the real estate industry and can be reached at (805) 683-7333 or bob@villagesite.com. You can visit his website at www.SoldOnSantaBarbara.com.
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