Santa Barbara Economy

Notes from the Santa Barbara Real Estate and Economic Forecast 2006 Mid Year Update

Distributed at the 22nd Semi-Annual Santa Barbara County Real Estate and Economic Outlook Conference held on Sept 21, 2006

1.0 Executive Summary

There is some evidence that speculative buying was relatively high in Santa Barbara County over the last several years.

Already existing home listings in Southern Santa Barbara County are at their highest level in over 10 years.

For Santa Barbara County, investor sales as a percent of total home sales jumped as high as 22 percent in 2004.

Job Growth

The unemployment rate has fallen to 3.8 percent—the lowest rate since 1999 (the construction industry is responsible for most of the new jobs created).

Commercial Real Estate Vacancy

The entire commercial sector remains very active with low vacancy rates and rising lease rates.

Housing Production

The rate of new housing production has dropped another 19% this year.

Apartment Vacancy

Apartment vacancy has fallen sharply this year in the South Coast. The rate has now declined 2.9 percent in Goleta and is less than one percent in Santa Barbara

Recent Evidence for the Santa Barbara County Economy

Job growth ahs weakened and fewer jobs will be created this year than in 2004 and 2005
The unemployment rate continues to fall, to near record lows.
Consumers are still spending in all retail markets of the county. The growth of retail sales is healthy and retail vacancy rates are extremely tight.
Incomes are growing. The final data for calendar 2005 is now complete. Average non-farm salaries for the year jumped 4.6 percent over the 2004 level.
The housing sector has weakened beyond expectations. Sales of new and existing homes have plunged. Price appreciation has fallen sharply but year-over-year selling values have remained remarkably stable.
The apartment market in the South continues to tighten and the appreciation rate of rents now exceeds appreciation in home values.

New Development

In the south, housing production has been so weak for so many years, there is not much further decline possible. Consequently, the current ugliness in new residential development will not impact the South Coast economy much.

The Slow Growth Environment

Population growth has turned negative in Santa Barbara, Goleta, and Carpinteria. The mantra: “those that work here don’t live here…those that live here don’t work here” best describes the dynamics at work in Southern Santa Barbara County.
Santa Barbara County has observed all Fortune 500 companies previously headquartered here depart; along with the commonplace company downsizings and defections.
Community participation and youth sports participation are in decline. Charitable giving has stagnated as well.

Existing Home Market

Year to date through July, sales of existing homes in Santa Barbara County are off 28 percent compared to year ago levels, the largest year over year decline since 1995. Furthermore, the rate of sales over the last 4 months has been brutally low.
Single family detached home sales in the South Coast market are off 20 percent from year ago levels. Condominium sales are off 35 percent.
Selling prices of homes in the North County have not declined much, if at all. The year over year rate of appreciation is still positive at 0.2 percent. There has been some retreat I the monthly median selling value between February and July of this year, but broader evidence of declining home values is still unclear.I
In the South, the median selling value for all exiting home sales has dropped 4 percent. For the more expensive submarkets, the median selling value is up 6 percent in Hope Ranch and 9 percent in Montecito.
The rapid and steep decline in home sales validates our premise that the real estate correction in Santa Barbara County will impact transaction volume rather than transaction prices in a meaningful way. As long as sellers of existing homes don’t have to sell, they won’t.

The Stalemate and the 6 Month Outlook

Encouraged by the freefall decline in home sales this year, along with sharply rising unsold new and existing housing, buyers are waiting on the sidelines for a significant downshift in home values. They perceive that price declines are inevitable as inventories pile up.
However buyers have not considered all the facts: that prices for homes are sticky downward. There is a long legacy in California that shows that nominal housing values don’t fall much, even during weak economic periods.
The softness in the real estate sector is due to the expectation that home prices will fall, and buyers are reluctant to buy into what they perceive as a price declining market. The lack of distress in the general economy is not motivating sellers to reduce listed home prices to accommodate the expectations of would-be buyers. A stalemate between buyers and sellers therefore exists.
Over the next 6 months, interest rates will probably show much less volatility (compared to the last 6 months) and they will represent one less item that home buyers can blame for postponing a purchase.
The rate of home buying is not likely to accelerate. The current pace of new and existing home sales will continue into early 2007. However, as buyers delay purchasing, some pent-up demand will be pushed into 2007. Consequently, next year should be slightly better for volume, especially if both buyers and sellers accept the notion that nominal prices don’t fall much and adjust to level pricing.

2.0 Results of the fifth consecutive buyer’s survey:

Who’s Buying Santa Barbara Homes?

The principal origin of the buyer is still from the South coast. In the first half of 2006, the percent of local buyers increased from 62 percent in 2005 to 68 percent. This implies that 32 percent of buyers come from outside the South Coast.
About 14 percent of buyers originated from out of the state with 8 percent from the eastern states, 5 percent from western states and 1 percent from foreign countries.

Is the buyer downsizing?

Just over 80 percent of buyers answered “no” to that question meaning they are purchasing homes that are of equal or greater value than their previous homes. Only 12 percent of buyers are downsizing.

Primary or Second Home Purchase?

Investment purchases declined sharply to 8.0 percent of all sales in the 2006 survey, from 15.4 percent in 2005. Secondary home buyers increased to 15.9 percent, from 9.9 percent in 2005. These percentages imply that more buyers are purchasing homes to live in as their primary residence.

What about first time home buyers?

First time home buyers purchased nearly 18 percent of homes in the 2006 survey.
In the first half of 2006, 80 percent of first time home buyers were already living along the South Coast in rented homes or apartments.
In the first half of 2006, 40 percent of first time home purchases were condos or mobile homes compared to 13 percent for repeat buyers. In addition to favoring condos, first time buyers also purchased less expensive homes and condos. For condos, first time buyers paid a median price of $575,000, while repeat buyers paid a median price of $689, 500, a difference of 20 percent. The difference in single family estate homes was more pronounced as first time buyers paid a median price of $930,000, compared to $1,835,000 for repeat buyers.

Are sellers downsizing?

The survey indicates that 55 percent of sellers are downsizing.

Summary

Primary home purchases are on the rise, while the combination of investment and second home purchases is declining. Homes for investment purposes have particularly declined this year.
Other areas of Santa Barbara County are not a significant source of buyers or a destination of sellers. The principal destination of sellers continues to be the greater Los Angeles area.
Just less than 50 percent of sellers relocate within the local market, and the percentage has been relatively constant over time.
Sellers continue to cash out by downsizing. In 2006, the percentage of downsizers jumped to a record high

Southern Santa Barbara County

Year-to-date, the number of sales in both the condo and estate housing markets are projected to resister the lowest combined total since 1982.
Condominium selling values remain virtually unchanged from the last year’s selling values. In the prior eight years, condo price appreciation was at least 10 percent per year.
The median selling value of a home in the South Coast excluding Hope Ranch and Montecito has declined 4.5 percent during the first 8 months of 2006. In the combined Hope Ranch/Montecito area, the median selling value has increased 7.1 percent.

3.0 Santa Barbra MLS Statistical Review

Southern Santa Barbara County Single Family Estates

On the basis of just 35 sales this year, the Summerland/Carpinteria market has recorded the highest rate of price appreciation among the sub-markets, at 24 percent. It should be noted that the removal or addition of a single sale on such a small sample could change the median price by $100,000.
New listings have risen 25 percent through the first eight months of 2006 compared to the first eight months of 2005.
With an increase in the new listings and a decline in sales, the sell-through rate has tumbled in 2006 to 46 percent. The sell-through rate has not been under 50 percent since 1992.
The average number of days on market for the first 8 months of 2006 was 107l. Goleta South recorded the fastest sell time with an average of 89 days. The highest average sell time occurred in Hope Ranch (203 days), followed by Summerland/Carpinteria (139).

Southern Santa Barbara County Condominiums

New listings have jumped 33 percent in 2006.
As listings rise and sales fall, the percent of new listings sold has dropped sharply. In the first eight months of 2005, the sell-through rate was 71 percent, but in the first eight months of 2006, the rate was 35 percent.
The average number of days has increased to 102 days, the longest average sell time since 1997.

If you would like a copy of the entire Real Estate and Economic Forecast (110 pages), please give us a call at or email us at the contact page and we’ll email you it to you in PDF format. The complete report has some helpful charts and graphs, as well as some sections not covered in this highlight sheet.