I moved to Santa Barbara from La Jolla about seven years ago, and one of the first things I heard when looking at real estate was that it’s different here in Santa Barbara. When other markets experience price declines, I was told, Santa Barbara just keeps right on going. So, with the recent real estate debacle and accompanying price declines and resultant global recession, I thought it would be interesting to take a look at the local economy and real estate market to see if I could determine if it is truly different here.
First, I looked at the median home price for Santa Barbara, and compared it to the California median home price, and that of the nation as a whole. What I found was that the median home price in the city of Santa Barbara actually increased by 12.7 percent in 2008, while in the U.S. the median home price fell 9.3 percent, and for California, the median price fell by a shocking 41.5 percent during 2008. At least on the surface, these results seem to support the idea that it really is different here.
However, there are some problems with making this simple comparison. First, Santa Barbara is a smaller city, and as such, we just don’t have the number of monthly home sales as other larger cities, states, or the country as a whole. So evaluating our local economy or real estate market based strictly on a snapshot of median home price isn’t going to be reliable. This smaller number of sales can act to skew the median home price up or down from one month to the next, so we must examine the median home price over time, to identify any trends that might be developing.
Second, we need to consider seasonality, as real estate sales are not consistent throughout the year, but instead are lumpy, with a larger percentage selling during the spring and summer as compared with winter, for example. Finally the 12.7 percent increase was at least partially the result of the median home price falling by such a larger amount from October of 2007 through December of 2007, from $1,275,000 to $845,000, a 33.7 percent decline in only two months. This meant that the starting median price for 2008 of $845,000 was very low, and therefore it was easier to have the unusually large increase for 2008. The big drop in the last two months of 2007 highlights the tendency for the median home price to jump around month to month due to the lack of a large number of sales. Still, we did end 2008 with a median home price of $952,500, and while that price was twenty-five percent below the peak price of October 2007, it is still one of the highest in the nation for any city.
A little closer to home, the median home price for Santa Barbara County, which includes the city of Santa Barbara, fell 31.9 percent during 2008. While there were more sales included in the calculation of the county’s median price, this is a striking contrast to the 12.7 percent gain we experienced in the city itself. Based on the county information, and that of the state of California, I would have to conclude that, at least up until this point, Santa Barbara is certainly experiencing a much less significant impact from real estate price declines as compared with the county, state, or other areas where real estate prices skyrocketed, like Phoenix, Las Vegas, Florida, etc.
The real question is: Where do we go from here? Another way to try and find an answer to this question is to look at inventories of unsold homes. For Santa Barbara County, inventories fell from about 8 months supply to 5.5 months supply over the course of 2008. What these number mean is that it takes, on average that amount of months to sell every house in inventory at the current rate of sales. The rate of sales can increase or decrease, so this number is a bit esoteric, but basically what we can take away from it is that a lower number means that the supply is diminishing and / or demand is increasing relative to supply.
We had an even more dramatic reduction in inventories for the state of California in 2008, with inventories falling from a 13.4 months supply to a 5.6 months supply. With steep price declines in Santa Barbara County and the state, the reduction in supply makes complete sense: if you lower prices, sales should increase, and therefore inventories will be reduced.
On the commercial real estate side of things, I spoke with Steve Cushman, the Executive Director of the Santa Barbara Chamber of Commerce, who keeps a close eye on commercial vacancies in town. He stated that vacancies during the depth of the 1991 recession, the last time we had a major real estate contraction, were as high as 44 out of the 410 retail store fronts on State Street. Today, he says there are 37, so in comparing the two periods, it appears on the surface that this real estate recession is not quite as bad as the last.
But, Cushman cautions, he sees some businesses subletting space to reduce overhead costs, making the number of vacancies less reliable, as it understates the true magnitude of the recession. One optimistic way of looking at the subletting issue is that businesses are likely subletting instead of giving up the space entirely because they expect the slowdown to be temporary, and therefore want to maintain control of the space so they can expand once things get better.
Unemployment is another major factor in determining the impact of the recession and real estate contraction. If unemployment continues to climb, we could very likely see continuing and more intense pressure on the real estate market and economy. As incomes are lost, homes will follow. This is another area where we may be able to say that it is truly different in Santa Barbara, again, at least so far. In the county, we have an unemployment rate, according to the California Employment Development Department, of 7.2 percent, about in line with the country as a whole, while California’s rate is at 10 percent, and about to go a lot higher as the legislature failed to pass the budget this week, forcing Schwarzenegger to lay-off 20,000 more state workers, and counting.
The state has lost the largest number of jobs in the construction industry, which makes sense as new home construction has all but gone extinct. With the recent Tea Fire, as devastating as it has been for so many local families, we may benefit as a community through maintaining construction jobs that may have otherwise been lost, somewhat insulating us from the same unemployment rates as those of the state or the nation. Some estimates show our local unemployment rate jumping to 10 or 11 percent. While I expect the national rate to climb as high as 8 to 9 percent, I am still hopeful that we will not experience the severe economic impact of an unemployment rate in the double digits.
We will need to watch the trends in median home prices, commercial real estate vacancies, and unemployment to get our answer, but based on what we have seen so far, I think there is reason for optimism that it is truly different here in Santa Barbara.