A Buyers' market?
South Coast facing larger reserve of homes, fewer takers
11/4/01
By MARIA ZATE
NEWS-PRESS STAFF WRITER
South Coast residential real estate was in a frenzy last year, flooded with "as-is" properties for sale that often received multiple offers in which some winning Buyers bid more than $50,000 over the asking price to seal the deal.
Those days are suddenly a distant memory, said several local real estate agents who have felt the tide change.
"There's no question that the strong Sellers' market is over," said Daniel Encell, director of the estates division for Prudential in Montecito.
A strong Sellers' market is usually characterized by very little inventory, numerous willing Buyers, and high consumer confidence levels, he said.
In contrast, the South Coast real estate market is now facing a larger inventory of homes, fewer Buyers rushing to pay top dollar and eroding consumer confidence as the economy weakens.
"The euphoria we had in the last two years is gone," said Harry Kolb, an agent of Sotheby's International in Montecito.
Long before the terrorist attacks on Sept. 11, South Coast housing sales were already declining. Several agents said they started to notice the downward trends in sales and prices in late July and August, and collected data now support that observation.
The most recent statistics from the California Association of Realtors show that the South Coast's median home price dropped to $582,720 in September, down 2.2 percent from the August median price of $595,590. The August median price also dropped from July's $634,090.
Median price is the point at which half the homes on the market sell for more and half sell for less. It's considered the best indicator of price changes because the median does not fluctuate widely if a few extremely high-priced or extremely low-priced homes are sold.
The South Coast median home price hit its highest level of the year at $674,110 in March, according to the state realtors association.
Escrow closings in March would reflect sales made in February or earlier, and it's no coincidence that the median price hit a peak in March. This was the same time the stock market plunged to its lowest level of the year -- until the Sept. 11 fallout -- essentially erasing hundreds of thousands of dollars in personal wealth.
It's important to note that while the median price has gone down, it does not mean that home values are declining, said economist Mark Schniepp of the California Economic Forecast Project. Rather, the median is an indicator of the type of homes that are being sold, he said. A higher median indicates more homes sold in the upper price range, and a lower median reflects more homes sold in the lower price range.
"For properties over $1 million, the overall decline in wealth seemed to outweigh the positive aspects of lower interest rates," Mr. Encell observed. "In that higher price range, interest cuts just aren't as significant as the current price of Cisco stock."
It's no surprise, then, that the price segment seeing the most softening ranges from about $800,000 to $5 million, based on agents' observations and the most recent data.
Home sales in Hope Ranch and Montecito have seen the most dramatic drop, based on data from the California Economic Forecast Project for January through August of this year vs. the same period last year.
Mr. Kolb at Sotheby's said he has seen the most decline in the $800,000 to $2 million range, "but above that, it seems to be business as usual," he added.
From Mr. Encell's view at Prudential, the $2 million to $5 million segment of the residential market appears to be suffering the most.
"In the last few years, the $2 million to $5 million segment, or mid-high range, was very strong," he said. "A significant portion of these Buyers were people who were building and remodeling major estates in this price range because it made more sense than renting them. I know that sounds unbelievable. But this was a very strong segment of the market.
"The mid-high range is really suffering from the build-up of inventory and the economic conditions," he said. "But above the $8 million range, prices have dropped quite a bit before they sold, and that segment is doing fine."
As an example, there have been three sales in the past few weeks for homes priced at $12 million, he added.
It's now becoming much more common for Sellers to lower their list prices and to do so more quickly to hasten a sale, agents said.
Further, Mr. Encell acknowledged that Sellers had become "so spoiled" by high expectations of what their homes would fetch that they routinely became "aggressive" in their asking prices because they could find Buyers who were willing to pay.
The most aggressively priced area in the South Coast is Montecito. The difference between the average list price and the average sale price in Montecito was about $526,000 from January to August, based on the California Economic Forecast report, which uses data from Chicago Title and the Santa Barbara Multiple Listing Service.
Montecito property Sellers were getting about 75 percent of their asking price, which averaged about $2.1 million in the first eight months of this year. The average sale price during that time was about $1.6 million.
The Hope Ranch area has seen the biggest inventory buildup and slowdown in sales this year compared to last year, with sales off by 52 percent and inventory more than doubling. The median price in Hope Ranch fell to $1.8 million vs. $2 million the prior year.
In other neighborhoods across the South Coast, the number of sales fell while inventories rose considerably this year. Yet prices continued to rise, though more slowly than in the past two years.
While the buoyant Sellers' market may be long gone, the South Coast is still a long way from a true Buyers' market, Mr. Encell said.
A true Buyers' market requires a large inventory of homes for sale, and while inventory on the South Coast has grown compared to previous years, there still isn't an abundance of available homes.
Furthermore, the segment where demand is greatest -- homes priced below $600,000 -- still suffers from a lack of new inventory coming onto the market.
"There are very few new homes being built," said Mr. Schniepp, adding that the situation isn't going to change any time soon, even with a few approved projects coming on line.
Meanwhile, homes listed near or below the median price continue to sell well, especially with the boost from low mortgage rates.
"Prices are stabilizing, but this price range is still strong," said Karen Spechler, an agent with Coldwell Banker in Santa Barbara, who specializes in homes priced near or below $600,000.
"But Sellers just can't tack on $10,000 or $20,000 to the price anymore," she said. "These days you have to be where the comps (comparable sales) are."
Ms. Spechler added that Sellers were getting "carried away in the past few years" with overpricing their properties.
As prices have escalated, sales have fallen in all home categories and neighborhoods for the first eight months of this year -- with one exception. Condominium sales continued to increase this year and demand kept inventory 18 percent lower than it was last year.
"The condo market is still very hot and very popular," Ms. Spechler said, adding that it's still quite common for well-priced condominiums to be bid up with multiple offers.
After a slow summer of sales and with September sales down as well, October is turning out to be a surprisingly active month, said several agents.
"Lower prices helped," said Mr. Encell. "We were busier in October than in August."
Several agents and economists expect South Coast real estate to stay strong despite the economic slowdown for the region and the likely recession for the nation.
Could the South Coast suffer a plunge in real estate values similar to the one that plagued the area during the recession of 1991?
"There's always a probability that could happen, but the likelihood of it actually happening is very low," said Mr. Schniepp.
Unlike the 1991-92 recession, the South Coast is not experiencing a fallout from one main industry, such as when aerospace shed thousands of jobs.
"Our economy today is much more diverse. Plus, we have a housing crisis that we didn't have back then," Mr. Schniepp said.
"Those holding equity in their homes don't have to worry about their home value falling," he added. "But it may take longer to sell your home, and don't expect to see double-digit increases."
South Coast real estate in 2001 vs. 2000, based on activity from January through August of each year.
-- Hope Ranch
