Santa Cruz Real Estate Market
Mid Year Forecast
2009
Over the last few months, most experts have been predicting that the bottom of the Real Estate market will happen late 2009 or early 2010. There are several things that have to happen if a recovery is to occur. First mortgage interest rates have to remain low. The lower end of the real estate market is currently being fueled by low interest rates that are allowing first time homebuyers and investors to pick up properties that are 40% to 50% off their market high prices. As I mentioned in my earlier blog, we are seeing multiple bids for these properties. But we will need on-going low mortgage interest rates to continue to fuel our recovery.
But for a full recovery to happen in our real estate market, we also need to clear out the inventory of bank owned properties that are on the market. These bank owned properties are a result of homeowners losing their homes in a foreclosure action by the banks. We have seen over the last year how property values have continued to fall with the rise of foreclosure sales. The result is a lack of confidence and stability in the market. Thus having a major negative physiological cloud on the market. People are afraid to buy due to the uncertainly of their jobs status. Homeowners are seeing a major decrease in wealth and resulting home equity credits lines. Buyers are uncertain whether to buy now and risk further downturns in the market.
So where are we at today with foreclosure market? The chart below tells us several important messages about our future.
The blue bars represent the number (200) of Bank Owned properties that are not on the market. This is the shadow inventory that the bank is holding on, so as to not flood the market with inventory and drive home prices even lower.
The red bars represent the number (327) of homes that currently scheduled for a foreclosure auction. Keep in mind that the banks will end up owning the majority of these homes. In fact the Banks buy 99% of the homes that are sold at a foreclosure auction.
The yellow bars represent the number (543) of homes that have a Notice of Default. Again the majority of these homes will end up being foreclosed on in the months to come.
Based on this information, we can conclude the following: The banks are holding at least five months of home sales inventory in Santa Cruz County at this time. This is based on the fact we are currently selling about 100 homes a month on the MLS, and the Banks have a shadow inventory of 200 Bank Owned properties not on the market and will be getting another 300 plus homes through the scheduled foreclosure auctions. On top of that, we have 543 homes with a Notice of Default and a good number of these will end up as Bank Owned properties. Keep in mind the Banks will not release their entire shadow inventory on the market at one time. So we will be seeing an ongoing supply of Bank Owned properties on the market for sometime to come. Given the volume of the Bank Owned inventory, we will not see the bottom of the market until at least sometime next year and maybe beyond that.
Steve Johnson
Monterey Bay Properties
(831) 588 0254
Santa Cruz County Inventory
May 12th 2009
These are interesting times in Santa Cruz County with regards to real estate. This is the time of year that Buyers get real active in finding the right property to purchase. Our high season for local real estate happens like the farming season for our fruits and vegetables, from May to September is our busiest time of the year. But this season we have a different pattern as compared to previous seasons.
If you look at the graft below, you will see a snapshot of the housing inventory of Santa Cruz County and there are several market trends that it reveals. This graft shows the number of all active and pending homes in each price range across Santa Cruz County.
First, as you can see at the lower end of the market there are a lot more pending homes verses actives. With lower inventories, if you're a Buyer in this market, you are facing multiple bidders. These properties are for the most part bank owned or short sale properties and most of the potential buyers are first homebuyers or investors. In summary, we have more buyers than available inventory in this market segment.
In the middle and upper segments of the market, you can see we have the opposite situation. We have a lot inventory and fewer buyers. Unless it's a prime beach property that is priced below market, we are not seeing multiple bids. The seasonal demand for beach homes is still a strong driving force and therefore one of the bigger demands in this market segment. In comparison, country homes are being harder hit with much lower demand and higher inventory. Thus Buyers are in a very strong position in this market segment and this pattern will continue through out the year.
So what are the market trends we are seeing:
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Most people would be surprised at the percent breakdown between Foreclosure Sales, Short Sales, REO, and regular Grand Deeds in Santa Cruz County. The graph below does a good job in showing what is really happening in our local real estate market. As you can see the majority of homes that closed last month are a result of the normal sale between a homeowner and a buyer via a Grant Deed. We also have a smaller number of Banked Owned Properties (REOs) in which the Bank had previously foreclosed on the property and is now selling the property on the MLS. There are also an even smaller number of Short Sales where the homeowner is selling his property with the permission of the bank for a price less than the total amount of the mortgages. All of these sales have occurred through the MLS (Multiple Listing Service).
However the eight hundred pound guerrilla in the room are the Bank Foreclosed property sales. These Bank Foreclosed properties are bought back by the bank on the court house steps and usually at a price of what the mortgage debt is on the property. In almost 99% of Foreclosure Sales, the banks buy back the property, and this is due to the fact that Bank Foreclosed properties are usually over priced, have higher risks without title insurance in the sales process, and Buyers needs to come in with all cash.
Unlike normal MLS property transactions where the buyer is planning to keep the property for years, the banks are buying back Bank Foreclosed properties with the plan to sell them as an REO on the MLS at a later date. The implications of the Bank Foreclosed properties on the real estate market are huge. These properties represent a large shadow inventory that regular sellers will have to compete with when they put their home on the market. To make matter worse for the normal seller, banks often price REO properties below market to get multiple bids. Thus driving property prices even lower.
So as you would expect, there is direct correlation to the on-going trend of lower median house prices and the number of Bank Foreclosed and REO properties. It is hard to believe that we had 77 Bank Foreclosure Sales and 105 regular MLS Grant Deed sales last month. The bottom line is that, until we see drastic reduction in the number of Bank Foreclosed properties and work through the cooresponding shadow inventory, we will not see a bottom to the woes of the real estate market.
Santa Cruz County Notice of Defaults
It is a well-known fact that Watsonville and South Santa Cruz County have been the hardest hit areas with regards to Foreclosures and Short Sales. Thus it is not a big surprise that Watsonville has the most NODs in the county. But what is really surprising is that Santa Cruz is number two and Watsonville has only a little over one third of the NODs in the County. Since the beginning of this year there have been around 220 NODs in Santa Cruz County. NODs are a leading indicator for both Short Sales and Foreclosure Sales, which both have a major impact on property values. This is major contributing factor to the lower median prices in the Santa Cruz and the surrounding areas since April of last year. But more importantly if a good majority these NODs result in Foreclosure Sales or Short Sales, we will see an ongoing negative impact on home values not just in Watsonville, but also in the other areas of the county.
Steve Johnson
MontereyBay Properties
(831) 588 0254
Santa Cruz Median Home Price Surprise?
Pick up the newspaper or watch the news on TV and you can't help but see how bad the news in the real estate market. However there are some areas in the country where property values have not been hit as hard as the central valley area of California. Certainly the Watsonville area of south Santa Cruz County has seen a major decline in home values comparable to central valley property values. However in comparison, many home owners in the prime areas of Santa Cruz areas like Aptos, Rio Del Mar, Capitola and Santa Cruz feel they have not taken the same decline in their property values. These prime areas have in the past have held their property values in even the toughest market downturns.
However based on median home values, over the last ten months the mid county areas of Santa Cruz County have seen their property values go down at the same rate as the Watsonville area. Certainly most people would never believe that homes in Aptos, Rio Del Mar and Santa Cruz were declining in value at the same pace as Watsonville. But they have. There is a historical seasonal pattern with Median Home Prices and usually we see a decline in the median price in the winter months and a high in the summer months.
Given this once in a lifetime bear real estate market, there are still many questions. Have we hit bottom? Will we see the usual seasonal higher median prices this spring and summer or will the median price just continue on a downward spiral? My guess is that we will see the usual seasonal pattern of higher median prices this summer in the mid county areas and this is due to the sale of higher priced beach properties during the spring and summer months. With regards to hitting the bottom of the market, when we have reversed the number of distressed properties on the market, we will have hit the bottom.
Steve Johnson
Monterey Bay Properties
(831) 588 0254
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