Mid May 2009 Market Update

People always ask me, ?how is the market?? I can only answer that in some areas like Santa Cruz, prices have fallen to levels last seen in 2004-2005, but by and large are holding up fairly well. Other areas, like Watsonville, are so decimated by foreclosures that homes are selling for 50 cents or less on the dollar compared to a few years ago, so prices have effectively reversed to levels seen in the early 2000s. Distressed sales have pulled the entire market downward - they have become the most common transaction in the under $500,000 market. As a whole, regional prices are dropping, because the ratio of ?normal? sales and high end property sales has fallen dramatically.

First time buyers are optimistic due to a combination of powerful forces. To stabilize the market, the government has reduced borrowing costs, and prices have dropped to the point where many people can afford to buy for the first time?often at a lower cost after tax than renting. These historically low interest rates won?t be around forever ? there will be pressure to increase interest rates when the economy picks up or there are indications of inflation. Meanwhile, excellent loans are available to people with good credit and verifiable income, especially those purchasing moderately priced homes. The FHA loan for example, only requires 3.5% down payment and frequently permits the seller to pay points and closing costs, reducing the buyers? monthly payment. Simultaneously, the government is offering a first time homebuyer tax credit of up to $8,000? this incentive is set to expire on December 1st of this year. So if you haven?t owned a home in the last 3 years, you?ve got about 200 days left to take advantage of this.

Importantly, there are a lot of all-cash investors in the market, picking up foreclosure properties. For the first time in years, investors can get a positive cash flow on rental real estate. While investing in the depressed stock market might lead to long term gains, investors may realize immediate return on a real estate investment.

This equation of all cash investors, first time buyers, and depressed prices can lead to multiple offers, typically a few of which are over asking price. Some all cash offers have no loan contingency and can close in a couple of weeks; while other buyers are putting way over 20% down. It is this demand which may formulate the ?bottom? of the market. Because our economy is in such upheaval, unemployment remains a risk. No one can offer certainty on the duration of the recession nor the direction of property prices. Yet, if you are considering purchasing for the first time, you can be certain of one thing: the rent you pay now is contributing to someone else?s real estate portfolio instead of your own. Around here, that could easily add up to $20,000 a year or more.

In a nutshell, buyers in some sectors of the housing market may face competition. Foreclosures (bank and corporate owned properties) can offer excellent value, but at the same time, there are minimal disclosures about the property?s condition. Further, each corporation and bank follows their own guidelines and can prove inflexible about repairs during negotiations. Meanwhile, short sales require persistence and ongoing communications with the original lender as well as the buyers? lender. Making strategic decisions and avoiding costly mistakes is critical to getting a good value in this difficult market.

Single Family Home sales data for the last month:
SLV: 17 sales; 11 (65%) of which were distress sales.
Prices ranged from $127,500-$539,000
95.8% sales price / list price
Average discount $13,000; just under 5%
$79,000 largest discount; $28,250 largest premium
5 ?homes? sold for under $200,000: all were foreclosures that needed substantial work prior to being habitable
Only 4 homes sold for over $400,000, 3 of which were not distressed sales.

Santa Cruz: 29 sales; 7 (24%) of which were distress sales
Prices ranged from $365,000 to $2,350,000
94.86% sales price / list price
Average discount: $39,659: just over 5%
$345,000 largest discount (listed at $2.695 million and sold for $2.35 million)
$38,100 largest premium (listed at $399k; sold for $438k)
3 sales over $1,000,000; 4 sales under $475,000