First Quarter Reflections: 2011 Off to a Fast Start but Challenges Remain

filed under: Market updates posted on April 18th, 2011

Since the first Monday morning after New Year’s Day, the Sonoma County real estate market has been incredibly active with some of the highest rates of pending sales in the last several years. Most realtors I know have been very encouraged by all the activity, particularly after activity in late 2010 ground to a near halt for most agents.

But many challenges and obstacles remain, and MANY opportunities exist in this market as well. We will continue to delve into these in more detail over the coming months but for now, here are some of the high points.

The median sales price in the county has declined over the last several months. What this generally means is not necessarily that values of individual properties have declined so much, although I think there has been some softening. What it means is that the action this last winter was in the low end of the market–that is homes under $350,000.

Our market is currently dominated by first time buyers, investors and, to a lesser degree, second-home/retirement buyers.

First time buyers are often FHA buyers with as little as 3.5% down. FHA allows these buyers to receive down payment assistance–either gifts from family members or government-sponsored down payment assistance programs such as CHAFA. (News Flash: CHAFA in California is currently on hold due to a funding shortfall.)

Real Estate Investors are out in force both in Sonoma County and nationwide. Bargain-basement pricing, interest rates in the fives and a strong rental market are attracting investors in record numbers. Previously high prices kept investors out of our markets for years.

Many investors are buying homes to hold and rent. With 25% down, you can buy a rental and pay interest in the low 5’s. Homes that cost $200,000 to $300,000 can cash flow today. Someday we will have appreciation again and you can add that to the tax benefits and cash flow of the current rental market. (Talk to your tax advisor about how a rental property can benefit you, and talk to me if you would like me to run some numbers for you.)

Other investors are buying to renovate and flip. I have seem some great flip jobs and some bad ones, but for the most part I think these investors are doing a service in renovating some of the really troubled real estate inventory out there. Some of these investors are buying foreclosed properties off the courthouse steps (not recommended for the amateur), others are looking for good opportunities on the open market. A listing of mine just sold–it was a HAFA short sale by Wells Fargo. It was purchased by a cash buyer who is going to do some renovations to the property and put it back on the market in 3 or 4 months. I am seeing a lot of new home builders who are spending the recession taking this approach to business.

The other segment that is seeing signs of life is the upper-end market. In the wine country of Sonoma County and beyond, there are MANY MANY more sales of properties priced at $1,000,000 or above. The luxury market is gaining strength and cash buyers are out in force to take advantage of bargain prices. There seems to be a consensus that prices have dropped to a more accurate level as sellers have become more realistic about today’s market valuations.

But there is a gaping hole in the move-up market. If people owe more than their home is worth then they have no equity to take and put in something bigger or different. Sales of homes from $500,000 to a million are pretty sluggish. There are some great opportunities to buy properties at a great discount in this price range.

Who will be taking advantage of these bargains?

I work with many out of town buyers new to the wine country, typically coming from urban areas looking for a wine country lifestyle. They might be selling their home in the San Francisco Bay Area, Los Angeles or NYC. This would be a sideways move or maybe a downsize. Maybe the kids are off in college or retirement is in sight.

I also see many second home buyers who are taking advantage of our bargain pricing to own a home that they can use as a weekend place or rental now. Generally there is a plan to move in fulltime someday. Often these are folks who love gardening, food and wine or have horses and want to keep them at home.

As the headline said, challenges remain. Lending standards are tight and often shifting. (I am glad to see standards tighter, don’t get me wrong, but it pays to be aware that they are constantly changing.) The cost of home-buying for FHA buyers went up this week. Rates have inched up slightly. The jumbo loan limits will increase this fall. Many people are concerned about their jobs or have lost them or been cut back. The move-up market is nearly non-existent.

But that said, there are opportunities in challenging times. You just need to know where to look!

posted by Pam Buda // Comments Off on First Quarter Reflections: 2011 Off to a Fast Start but Challenges Remain