One in four local home Buyers paid in cash last year

5/2/02
By MARIA ZATE
NEWS-PRESS STAFF WRITER

 

While the median home price reached $649,000 on the South Coast last year and the lack of affordable housing pushed many out of the area, there was no shortage of Buyers laying down cold, hard cash to secure their piece of Santa Barbara real estate.

Roughly one out of four, or 26 percent, of all South Coast homes purchased last year was paid for with all cash, according to data from the California Economic Forecast Project and the Santa Barbara Multiple Listing Service. More than 300 homes out of a total of some 1,300 sold on the South Coast last year were all-cash deals.

Paying cash for pricey homes is a trend that took off in 1999 and hit a decade high in 2001 -- largely reflecting the cycle of the dot-com boom and bust.

From 1991 through 1998, cash purchases comprised less than 10 percent of all home sales on the South Coast. Then in 1999, the number of all-cash sales doubled to 18 percent and has continued to rise in recent years.

A tremendous amount of wealth was generated in the years before the stock market reached its peak in early 2000, and Santa Barbara real estate attracted plenty of local and out-of-area Buyers.

"We had a lot of the dot-com and the Hollywood scene moving into the area," said Mark Schniepp of the California Economic Forecast Project. "From 1999 to 2001 we saw a big run up in the high-end home prices" where most of the cash deals are made, he added.

The median home price in Montecito, for example, increased by more than 30 percent in both 1999 and 2000. In 1998 the median home price in that area was $925,000. By 2000, the median had risen to $1.65 million.

The median price is the point where half the homes on the market sell for more and half sell for less.

When the stock market began a steep decline in 2000 and interest rates also fell rapidly, it left few lucrative options for investors and made Santa Barbara homes even more attractive.

"People cashed out their stocks and started to park a lot of their wealth into Santa Barbara real estate," said Mr. Schniepp.

Although home price appreciation rates have cooled from their previous levels, real estate still provides a safe haven compared to other options.

"In previous years there were a lot of alternatives of where to put your money," said Daniel Encell, of Prudential California Realty in Santa Barbara. "But there's nothing out there that's relatively safe that's offering a great return right now."

The lackluster stock market and weak interest rates on CDs and savings continue to lead people into making an investment in Santa Barbara real estate, he said. Paying cash provides them with a hard asset without the debt.

"People are paying cash when they can because it gives them a secure feeling in that they have no debt on their primary residence," Mr. Encell added.

However, if the stock market starts to rally, it wouldn't make sense to keep that much of one's money in a static investment such as real estate, some sources said.

The last similar bear market was in the early 1970s, when there were three years in a row of negative returns on the stock market, said Larry Rollins, of investment firm A. G. Edwards & Sons in Santa Barbara. History shows that a recovery is in the cards, he added.

Historical data shows that 12 months after the end of a bear market, the stock market has risen about 34 percent, he said.

"Our low point was on Sept. 21," he said. "So there's that risk of missing out on the recovery."

He also points out, though, that from 1972 to 1982 the market stayed mostly flat.

Currently, the market is not far above the level it was at prior to the Sept. 11 terrorist attacks, he said.

"With the direction of the market in the last several years, people are remaining skeptical of the upside potential of stocks," Mr. Rollins said.

As long as the stock market remains sluggish, he said, we can expect to see the all cash deals for homes trend continue.