New Year, Old Challenges for Santa Cruz Real Estate

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The cobwebs have grown thick on The Broker’s Record, my Santa Cruz Real Estate Blog! I’m so sorry – so much work to do, and so little time. As much as I would like to be blogging on SantaCruzHomeBroker.com, there just hasn’t been enough time in the day. As many of you know, my wife and I had a child back in April of ’09 – Aiden Santiago – and when it comes to choosing between playing with him or blogging for the masses, well…Aiden wins. 🙂

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For the moment, though, Aiden is happily napping in the other room, and I have some free time and a burning desire to talk about the Santa Cruz Real Estate market.

The latest edition of my newsletter just came out, and this issue is as sobering as most have been over the past year: county-wide, the median home price declined 6.7% from December 2009 to December 2010. The number of homes sold in December was only 132; that’s up from November, but down 10.8% from the number of homes sold in December 2009. To make matters worse, inventory is up for the 7th month in a row – up 22.7% over a year ago.

Here we are at the beginning of 2011, and the question before us is, what will the housing market do this year? If you pay attention to the good folks at the California Association of Realtors (C.A.R.), you may know that back in October 2010 they issued a report. According to what C.A.R. was saying then, the median home price in California was supposed to climb a whopping 11.5% in 2010, and from there climb another 2% in 2011. Sales volume (number of homes sold) is likewise supposed to increase by 2% in 2011, again according to C.A.R.

The big question in my mind is, what are the underlying economic assumptions that people like the economists at C.A.R. are using to base their forecasts on? Leslie Appleton-Young, C.A.R.’s Chief Economist, said:

“A lean supply of available homes for sale will drive prices up at the low end, but larger inventories and limited, less attractive financing will cause continued softness at the high end.”

It’s interesting that she says there is a lean supply of homes. What she doesn’t say is that there is a lean supply of homes because so many people are waiting for the market to turn around before they sell – and many many other people who would like to sell cannot, because they are effectively trapped in their homes which are “underwater” (that is, they owe more on the homes than they are worth). The “less attractive financing” bit is funny, too – actually, jumbo money (loans over $729,500) isn’t so expensive – rates are overall similar to conforming rates. The difference is the size of the down payment that’s required – and of course, the need for borrowers to document their income. It is unlikely that we will soon return to the crazy-easy-money days when they lent out millions to people based just on their good credit and stated income – so what does that mean for the high-end of the market? Continued softness, ad infinitum?

Appleton-Young also went on to say:

“What is certain is that favorable home prices and historically low interest rates will continue to make owning a home in California attractive for those who are in a position to buy.”

So here we find another key component of the 2011 forecast: historically low interest rates. But have you checked interest rates out lately? Back in October when the forecast was made, rates were about 4.25% for a conventional 30-year fixed conforming loan (under $417,000). Today, they are closer to 5.0%. That means your $417,000 mortgage used to cost $2051.38 per month (principal/interest only). Now, you’re looking at $2238.54 per month for that same money – a jump in cost of about 9%.

Given today’s stricter lending practices, many lenders are being very conservative with their debt-to-income ratios. A $187.16 difference in payment might not seem like much to you – but it could mean the difference between the ability to finance a $417,000 house vs. a $382,500 house. In other words, if rates rise by 9%, it means, roughly, that a buyer will qualify for a maximum loan amount that’s about 8% less (in this example) than before the rate increase.

What does that mean? It means that in the face of weak employment and stagnant incomes, when interest rates rise (as they are apparently rising now), the prices people will be able to pay for housing are going to drop – and that’s going to bring house prices right on down too.

I really don’t see – especially given the interest rate trends – that home prices are going to be going up 2% this year. It’s possible, of course – but I think the greater likelihood is that prices will continue their gradual downward trend for the foreseeable future.

Now, I know what you’re saying – didn’t the unemployment rate just drop? Why, yes – HousingWire.com just reported today, for example, that the unemployment rate fell to 9.4%. The funny thing is, though, that just yesterday, HousingWire reported that jobless claims rose 4.6% last week. Now how’s that possible? It’s possible through the dark art of statistics, and while I could take a stab at explaining it, I’d rather not. Suffice it to say that while it may be true as the President says that there is a clear trend of lower unemployment – that trend could be easily reversed and, as the article I linked to notes, the drop in unemployment is largely due to the fact that 206,000 more people have given up looking for work and are no longer counted as unemployed.

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I’ve sipped the last of my Earl Grey and I’m looking down at what’s left in my cup, and I’m trying to make sense of what I see there. I’m having difficulty, I think, because I really have no idea how to read tea leaves. But I can do a fair job at reading headlines written in English – I read them pretty much every day. Actually, I usually read a bit down further below the headline, just to see if there’s anything more to the story that might be gleaned by reading in some detail.

As far as I can tell, there’s nothing but great uncertainty when it comes to the national housing market – and the same goes for the Santa Cruz market as well. It could be that the “recovery” starts getting some teeth, that people start finding work and those who do have jobs start seeing some extra money in their pay checks. That’s definitely a possibility – I think even the most ferocious bears will tell you that it could happen.

For many, though, the downside risks are too great and too real to ignore. Absent any signs of a genuine, down-deep recovery in jobs and wage growth – especially in the face of rising interest rates – it is really easy to surmise that the market still has some ways to fall yet, and that only fools will rush in to buy today.

Well color me a fool, then, with that big old broad brush of yours! I for one am delighted to say that after waiting and searching for a considerable while, I’m in escrow to buy a house, back in my beloved Aptos. I sold my house in Seacliff (Aptos) back in 2007 (good timing, eh?) and have been sitting on the sidelines ever since, waiting for just the right replacement home to come up.

And now it has – escrow should be closing in a couple of weeks (knock on wood). I know what you’re thinking – do I have rocks in my head? Don’t I know that prices will probably be going down more still? Am I CRAZY?

That’s perfectly debatable, of course. But here’s the scoop: we found a house we love. It’s in a location which we are also very happy with. The house itself is beautiful and in great shape. We’re putting 20% down, and our after-tax payment will be around $2,000 a month. Our pre-tax payment will be considerably higher than that, of course – so I for one really hope they don’t pull the plug on the mortgage interest tax deduction – which could, of course, have a really deleterious effect on home prices depending on how it is implemented.

That $2,000 a month is an after-tax payment I can live with – for years to come. I waited and searched for so long because I wanted to buy a house I knew I could be happy with – at a price I could afford – for ten years or more. So who cares if the value drops another 5-10% over the next year or two? Not me, because I don’t plan on going anywhere anytime soon.

Of course, my plans could change – anything can happen, and I might end up with the short end of the stick, as so many folks who bought in recent years have painfully discovered. But we ought not make too many of life’s choices based on fear of what might happen if things go wrong, as they very well might. For me, I’d rather make choices based on what I can reasonably expect to make work through my own planning, work, and diligence.

Hat’s off to nut-jobs like me who plan to buy this year. And a big high-five-right-on to those of you who continue to sit on the sidelines and plan to wait it out for calmer seas and blue skies. Whatever your choice, whatever 2011 should bring for you, me, and all the rest of us on this spinning blue marble – I wish you all the best in the coming year.

And if you do decide to buy or sell a house – please don’t hesitate to call. I’ll be there, in Aptos, standing by. 🙂

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