LOCAL MARKET INFORMATION 

~ Santa Barbara Real Estate ~ 2011 Year in Review ~

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 and what does that mean for 2012?  

This decline was a surprise to those of us working in the field. 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). There were also homes listed in other Santa Barbara, Goleta, and Carpinteria neighborhoods, mostly short sales, in the $450,000 range.  These are livable homes with working roofs, good foundations, fenced yards, and in a decent residential neighborhood.  

All of a sudden, the cost of home ownership was neck and neck with the cost of renting, maybe even less expensive after tax benefits.  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!  

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, especiallly for houses.

The number of pending sales (new transactions that opened escrow) in December 2011 totaled 102. 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 type of brisk activity is not typical in the Fall and Winter months. Competition for these homes is steep for buyers. Most of the well-priced homes had multiple offers (two, three, or sometimes more buyers bidding on the same home). 

Sometimes misguided sellers price their underwater property way below market value, as was the case for a two-bedroom condo in the Highlands 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.  The time span from negotiating a purchase contract to closing escrow can be 30 to 90 days (or longer for short sales), so the increase in December closings reflects the pending sales from October and November. 

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). 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.

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 the next few months.  The most sales were in the $500,000 to $600,000 price range 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 house 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 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.  

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 (REO's), 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, and with 1,257 residential properties hanging 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%. 

What does all of this foretell for 2012?  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.