Sometimes it seems that the real estate market reflects the weather.
In the spring and summer, the market heats up here in Santa Barbara; then as temperatures cool down, traditionally the market does, too. Not that we have extreme changes in weather here — by any means. We love our 70-degree, mostly sunny consistency, but the locals like to point out the subtle changes in seasons as the year progresses. We’ve noted a subtle change in home sales this past month, too, in Santa Barbara South County.
The frenzy of the summer has slowed a bit, and the more even tempo of fall has set in. Our winter months (which I’m calling November through January) don’t always follow this traditional pattern; however, it’s looking like this year it will. In this article, we’ll explore October and the year-to-date sales numbers — and where we might expect real estate temperatures to be in the next few months based on recent trends.
The median price for the 90 houses that closed escrow in October is $941,499, up about 2 percent from the month prior. The median price of the 30 condos that sold in October is $512,000, down about 6 percent from September’s median of $544,000.
Because so few homes sell each month, it’s more useful to compare year-to-date figures. October’s year-to-date median selling price for houses is $937,500, exactly the same as it was last month. But that figure is up almost 18 percent from the beginning of the year’s median of $795,000. And if an 18 percent increase sounds alarming, check out condo prices: The median condominium price is up a staggering 27 percent since Jan. 1. Our year-to-date median is $508,500, and condos ended last year at $399,900.
If you held out to sell and took advantage of the summer months, you might not have netted $100,000 more this year than last (because our median price reflects both the composition of homes sold and price appreciation), but it’s a steady bet that you sold your house for much more in 2013 than you would have in 2012.
Tables 2 and 3 show the South Coast median prices for houses and condos (January through October) since the year 2000, and it sure is looking like 2012 was the bottom of the market. So far this year, we are showing a steep incline. Will that continue?
Pending sales of houses in October are down from earlier this year. This past spring, sales were brisk as prices leaped. In April, nearly 200 houses and condos had an accepted offer that month and went into escrow (pending sales), and the month of May showed 190 closed sales.
Each summer month posted more than 150 pending and closed sales. Then in September, sales slowed a bit; we had 129 pending and 141 closed houses and condo sales. And this October, buyers paused and took another deep breath: We posted 114 pending sales (see Table 1), down a significant 32 percent from the average pace of 167/month for the summer. Indeed, real estate activity has cooled down for the fall.
I looked at the number of pending sales by month for the last two years to gain perspective, and each year showed 20 percent to 30 percent fewer sales in the winter months.
Of course, we can’t say what the future will bring, but we can say: Don’t be too alarmed by the drop in the volume of sales — it’s very likely a seasonal trend.
That doesn’t mean the steep increases in median price will continue, however. For one thing, if we post double-digit gains next year, that will make Santa Barbara’s median over $1 million again (our year-to-date median price hasn’t been over $1 million since 2008). Secondly, most pundits predict a modest rise in interest rates, and the chief economist for the California Association of Realtors predicts rates will hover around 5.3 percent next year. This will affect how much home buyers can afford to borrow.
For example, a median priced condo buyer with 20 percent down will have a mortgage of about $407,000. At 4.375 percent interest for a 30-year loan, his payment would be about $2,032/month. With rates 1 percent higher, at 5.375 percent, that mortgage would be about $2,279/month, or $247/month more. A buyer who purchases a house at today’s median of $937,500 with 20 percent down would have a mortgage payment about $456 more per month if interest rates rise as predicted. When you couple this with the fact that interest rates have already increased about 1 percent since their low point of 3.35 percent in November and December of 2012 (according to Freddie Mac’s published monthly average commitment rates), this is significant. At 5.375 percent interest, $456 extra in mortgage expense translates to about $81,000 in purchase price.
Don’t make the jump, however, that this means prices will drop by that much. Prices have been very affordable in the last two years by Santa Barbara standards, and our affordability rate has been much, much lower than it is now, which could mean there is room for our affordability to decrease. Affordability is calculated using total cost of home ownership and the median income for the region. Click here for information on housing affordability trends in California.
Besides our history as a luxury community, there are other indicators that will put some upward pressure on prices and potentially balance out the influence higher interest rates will have on prices. In California, foreclosure sales are down 66 percent year-to-year as of September, and statewide short sales are down 62 percent (see Table 4). At the time of this writing, there are only eight homes for sale in the entire Santa Barbara market area that are either bank-owned/foreclosures or short sales. That is just 1.3 percent of all homes for sale in our area, down from around 30 percent a few years ago.
Fewer and fewer homeowners are underwater on their mortgages, now have equity in their homes and could potentially earn some profit if they chose to sell (equity sale). These “regular” sales are up 35 percent statewide since last year, which means fewer distress sale bargains. It also means that these folks can potentially buy another home — even to downsize into something more affordable for them if needed. I do believe we had a pent up supply of buyers who were waiting for prices to hit bottom. When that was evident (ironically, it became evident only when prices started rising), those buyers came out in droves.
Many of those folks have purchased a home by now, so the buyer supply is now more normal. Our supply of homes for sale, however, is still in seller’s market territory in all price ranges up to about $2 million. Our “months of inventory” is a low 3.8 months (see Table 1). This means that at the current rate of sales, it would take less than four months for all available homes to be purchased. A balanced market is more toward 6 months, and higher inventory numbers mean it’s a buyer’s market.
If you’re looking to buy, I recommend looking now — this winter. Spring and summer are traditionally when the market — like the weather — heats up. Also, ask your lender about the upcoming changes in mortgage qualifying guidelines that could affect how much you qualify for. If you’re looking to sell, there’s an argument there, too, to list now to catch buyers before interest rates potentially rise and changes in mortgage qualifying hit in January. Educate yourself and time it as best you can, but whether you’re buying or selling, it’s most important to look at your personal reasons for your move.
A home is an investment, yes, but it’s much more than that. It’s a place to weather the storm, and enjoy the passing seasons.
— Kalia Rork is a Realtor with Berkshire Hathaway HomeServices California Properties in Santa Barbara and a member of the Santa Barbara Association of Realtors Statistical Review Committee. She may be reached at email@example.com, and by clicking here. The opinions expressed are her own.