When people say we live in uncertain times (in terms of the economy) they aren't kidding. In the last week I noticed Time Magazine's cover with one arrow going up and one going down. The point? That none of the brilliant minds in business can agree if we are headed for a double dip recession or if the worst is over. Last Sunday's LA Times had a feature story from a number of experts essentially agreeing that no one can predict what will happen with the stock market and the economy even though corporate profits are way up and many of the usual indicators are overwhelmingly positive. Which brings us to my favorite topic - the Santa Clarita Real Estate Market. As you can imagine, the question I am asked most often is, "Have we hit bottom?" Often my clients will TELL ME why we have or haven't. If I were to line up the 20 top agents in our valley (whom I happen to network with every Tuesday), 10 would tell you why they are sure that the worst is over; the other 10 would argue just as convincingly why we have one more drop before bottom. No one knows of course, but if we aren't there yet, I would suggest we are pretty close. In fact, I can show dozens of recent sales in the under $400,000 price range that suggest APPRECIATION of at least 10% in the last 2 years. It is at the mid-point of the year where I typically report what we have seen and what the second half of the year may be like. In short, we have less activity and fewer buyers out there than 3 months ago. Inventory has gone up and new sales down in the last 45 days. Many suggest that the federal tax credit that ended in April took away a lot of the buyers that may have bought in May or June. Looking back, that seems true. Still, this is ALWAYS the time of year that things start to slow. So here are FIVE things that are definitely happening right now that there is no disputing - FOUR reasons why you should have some confidence and ONE big reason why we won’t have any real appreciation anytime soon.
1. Buyer confidence is much stronger than last year and infinitely stronger than 2 years ago. Everyone knows that “confidence” is that hard-to-measure critical component of Real Estate. In 2008, for every 20 buyers that I spoke to, 15 would tell me that they would not even consider buying until the market stopped declining. I get that maybe 2 out of 20 times now. In fact in the last 2 years, it is far more common that I hear frustration from buyers that cannot find a home and that they have been looking for months. Which leads to....
2. The second foreclosure wave never hit and virtually every insider agrees that it won't. Don't be mistaken, there are plenty of foreclosures that will come to market in the next 3-4 years. They are coming very slowly and steadily. Just ask the 100's of Asset managers that have been laid off in the last 2 years. This is critical because it was the wave in 2007-2008 that took values down no less than 20% in 12 months. Without hundreds of foreclosures driving prices down each month, stability can occur. Need more proof? In 2007, foreclosures consistently represented 25% of the active inventory and active inventory was much higher than today. Currently they represent 9% of our inventory and we have 30% less homes for sale than in 2007.
3. Buyers are willing to pay "retail" again. We currently are in a market split between "regular sellers" that have equity and want market value and distressed properties that are often in inferior condition and sell for less than market value. In 2008, over 70% of the inventory AND THE HOMES THAT SOLD were either foreclosures or short sales. 2009 was about the same. Today over 45% of the homes for sale are "regular sellers," the highest it has been in 4 years. Often they are priced beyond what they will likely get but every week a buyer steps up (often because they are tired of waiting months and months for offers that they made on short sales or being out bid on a foreclosure), and pays "market value". The more this happens, and the trend is increasing, the closer we will get to having enough sales to show the appraisers that there is a market for nice homes and they can bring appraisals in. This is an absolutely critical part of creating stability in the market. A little history here may help. From 1990-1997 Santa Clarita was in a slow price decline with foreclosures and short sales taking values down. In 1997 and 1998 the trend of buyers buying more "retail" properties occurred and by 1999 we had our first quantifiable price increases across the board. The negative equity problem of the mid 90's went away and we had virtually NO SHORT SALES from 2000-2006. Should this happen again, we might expect some appreciation in 2-3 years, especially in higher demand areas.
4. Somewhat linked to the above is an obvious sign that buyers are not only paying more "retail" for regular homes that are easy to purchase, but a clear willingness to pay more for quality homes again. I have often shared that the problem with the Zillows of the world is that they cannot quantify the very things that buyers will pay more for. Exceptional locations, views, privacy, upgrades, cleanliness, rare floor plans - all of these are features that buyers may, especially if they cannot find what they are looking for, pay a premium for. I have successfully sold these types of homes for significantly more than "average" homes in the same tract for 20 years. The last 3 years have been very difficult to get premiums; either because the buyer was scared to pay it (#1 above) or the appraiser wouldn't bring the value in. Here are 3 examples:
- 29329 Hulsey, Plum Canyon. This newer section of Saugus has been dominated by distress sales. When I put this home on the market, every pending sale and closing, with one exception, was a short sale or foreclosure. Comparable square footage homes were selling in the mid 400's, yet we sold this property for 510,000 to a move up buyer (another good sign) that needed to buy now.
- 23379 Camford, Northbridge-Valencia. Northbridge hasn't had the amount of distress sales that other parts of town have but this property closed yesterday at 725,000 and was only the second closing in the area over $700,000. The first was another home I sold around the corner for 715,000. Realistically, the appraisal doesn't come in on Camford if I don't get the one on Beaumont closed. Both "regular" sales and both help show that quality (both homes are beautiful) still sells when comparable sized distress properties are $60,000-$80,000 lower.
- 26810 Stonegate, Westridge-Valencia. I could probably use dozens of examples in Westridge alone to demonstrate the huge spread between quality and distressed homes because this area was primarily built at the height of the market and many homes have been walked away from. It is, however, arguably the most desirable part of our valley, and certainly has the most expensive homes with the "Customs." This property is in escrow at 1,200,000 and it is worth every penny. Comparable square footage in the area has recently sold in the 800,000's! The buyer (a fine local realtor) and I both knew that the appraisal would not come in and it was excluded from the contract. When it closes, it will help many refinance their homes and clearly show other prospective buyers that quality still commands a premium and give them confidence to do the same. Crucially, I had the home on the market a year ago and didn't get nearly the interest then, at the same price.
5. I hinted at the beginning that I would finish this post by suggesting that we will likely not have any obvious appreciation for a few years. I have already touched on a few of the reasons why, but the overwhelming reason is agents pricing short sales below market without any knowledge or care for what they might get and then hounding the bank to accept the offer. Make no mistake, all agents price short sales aggressively. Still when obvious fraud or self-interest is the reason (and this wont stop anytime soon with 30% of the homes in our valley having no equity), there has to be some kind of checks and balances. Consider my last 2 homes as example of what I mean.