Home prices may fall again

2/23/07
By MARIA ZATE
NEWS-PRESS STAFF WRITER

Rising interest rates

Home prices on the South Coast will fall slightly again this year, following a drop in 2006 that marked the first time in a decade that the median turned downward.

The median price is expected to decline by another 1 percent in the year ahead -- to about $1.185 million -- but it will take another three years for it to surpass the recent peak of $1.25 million, according to the California Economic Forecast.

Housing experts presented their projections for 2007 at a gathering Thursday hosted by the Santa Barbara Association of Realtors. More than 350 people attended the event at Fess Parker's Doubletree Resort.

From 1995-2005, South Coast homeowners enjoyed steep increases in the value of their properties, with the rise in prices resembling the incline of an advanced ski slope.

The median hit a record $1.25 million in 2005. In 2006, it finally fell for the first time, but it shed only 4 percent of its value -- a mere bunny slope of a slide compared to the huge jumps of prior years.

Median price is the point where half the homes on the market sell for more and half sell for less. It represents the mix of all homes sold during a specific time period and not appreciation rates on individual properties.

Price declines should hit bottom this year, said Mark Schniepp, director of the California Economic Forecast and main speaker at the event.

Those who purchased homes in the last two years, however, will likely not see much in the way of gains until 2010, the California Economic Forecast predicted.

Between 2005 and 2007, the median is expected to decline more than 5 percent, the economic group said. Adjusted for inflation, the drop could be as much as 12 percent.

"There has been no major price collapse," Mr. Schniepp said, "but we had a much larger correction than we all predicted."

While total home sales fell significantly over the past two years, transactions are expected to bounce back this year, he added. Sales are expected to keep increasing through 2011.

Single-family homes and condo sales on the South Coast combined took a dive in 2006, hitting the lowest level in more than two decades, Mr. Schniepp said.

But compared to the rest of California and the nation, the South Coast sales slump appears mild, said David Lereah, chief economist of the National Association of Realtors, who also spoke at the conference.

"Santa Barbara's road is less bumpy than Los Angeles and a lot less than San Diego," he told the audience. "You're in pretty good shape."

Mr. Lereah said that the nation's home buyers "strayed from the fundamentals," and that has led to a "recession in real estate right now."

Exuberant investors flocked to places like Las Vegas, Phoenix, Fort Lauderdale and Miami, scooping up as much property as they could get their hands on, he added.

"These were flippers and speculators. In 2005, 40 percent of all home sales were to investors and second-home buyers," he explained. "Everyone got carried away."

On the South Coast, investment purchases have already been curtailed by one-third of what they were a year ago, the California Economic Forecast reported.

"We needed to learn our limit. And today we are faced with the remnants of our limits," Mr. Lereah said about speculative buying.

Despite the rough patch, he expressed optimism for the home market in the years ahead.

Baby boomers are in their peak earning years and will still buy homes, as will the boomers' kids. And immigrants coming to the United States in record numbers, along with retirees living longer, also will add to demand for homes, Mr. Lereah said.

Demand for property in the wealthy Montecito area remains strong, even though the rest of the South Coast has gone into a pause, according to Dan Encell of Prudential Fine Homes.

Montecito was the only area on the South Coast that had positive price gains last year, and the market for homes priced at $5 million and up is expected to stay hot, said Mr. Encell, who also spoke at the conference.

The brisk sales of multimillion-dollar homes in Montecito, as well as its counterpart, Hope Ranch, have served to buoy overall property values on the South Coast, said Mr. Schniepp.

When Montecito and Hope Ranch sales are taken out of the total, he said, the median price on the South Coast is just around $1.04 million, instead of close to $1.2 million.