The Santa Barbara County Real Estate and Economic Outlook Conference took place here in Santa Barbara on September 21st, and it was presented by Dr. Mark Schniepp. Dr. Schniepp is the director of California Economic Forecast, and you can view his website at www.californiaforecast.com. I find the information from the Economic Outlook to be valuable, especially in the middle of a changing market, and I hope it is informative to you as well. Following is a summary of the key points…

National Economy
On a national level, the labor market is essentially full. Recent inflation reports are tame, average worker compensation is up, oil prices are down (now under $64/bbl), consumer spending is up, commercial production is up, the Dow Jones Industrial Average is near an all-time high, and 2 nd quarter GDP growth was revised upward to 2.9%. The current concerns are that inflation is still troubling the Fed, crude oil prices are volatile, and the housing market has cooled.

Local Economy
In Santa Barbara County, employment growth has slowed, but the unemployment rate keeps falling. Right now it is at 3.8%--the lowest rate since 1999. Local spending is strong, and the commercial, industrial, and retail real estate markets are very active and very tight. Local incomes are rising, and the jobs being created in Santa Barbara are broad-based. Generally speaking we have a relatively vibrant economy.

Interest Rates
We have seen declining interest rates since July of this year. The 30-year fixed rate had fallen for 10 straight weeks, as of the end of September. The Federal Funds Rate rose 17 consecutive times over two years (since June 30, 2004), but now it is holding steady, with the Fed watching inflation closely. The UCLA Anderson Forecast predicts rates may continue to go down, but that they will remain somewhat level at around 6 or 7 percent through 2010 or for the foreseeable future. As long as future inflation reports remain benign and/or U.S. economic growth convincingly slows, future rate increases are less probable. The rate hikes will produce a "drag" on the U.S. economy that will become more convincing during the next 12 months.

"The downturn in the housing market so far appears to be orderly…We recognize the risk (of the real estate correction on the U.S. economy) and we are watching it very closely."
--Ben Bernake, Chairman, Federal Reserve Board

Housing Market
California has seen a pronounced decline of existing home sales, although prices have not really been falling. California home prices have essentially been at a plateau over the last 10-12 months. Compared to last year, the number of sales in Ventura County is down 27% for homes. Santa Barbara North County's home sales have dropped 34% (mainly due to a weakness in Lompoc), and Santa Barbara South County has seen a 20.3% decrease in existing home sales in the first 8 months of the year, comparing 2005 to 2006. This number is remarkably uniform across all areas of Santa Barbara (Caprinteria, Montecito, Summerland, East of State, West of State, Goleta North, and Goleta South).

Where are buyers coming from, and where are sellers going?

The origin of Santa Barbara South County buyers is still largely local at about 70.6%.

48.8% of sellers for 2006 are staying local, 11.6% are deceased, 17.4% are going elsewhere in California, and the remaining are mainly headed to other western states or out of the country. There is no mass exodus…these numbers are mainly the same as we have seen in recent years.

Summary – Are we in for a soft or a crash landing? And how long of an adjustment period are we expecting?

Yes, sales have slowed, but so far we have navigated a soft landing. Buyers are reluctant to buy in what they perceive to be a declining market and are waiting for prices to fall, and sellers are pricing their properties on "comparable sales" in the area. Unless there is distress, sellers will not cut prices to sell. This leaves us with fewer buyers and stubborn sellers…and this is why prices have remained largely level while the number of sales has gone down about 20% for Santa Barbara South County.

There is weakness in the residential real estate market, but not much weakness elsewhere in the economy. Empirical evidence shows that selling prices tend to be sticky downward, and nominal prices (prices not adjusted for inflation…the prices we see on price tags) don't really ever decline. Dr. Mark Schniepp stated that no major collapse is likely, sales may pick up (due to some pent-up demand from buyers who have delayed purchasing, causing sales volume to be potentially better in 2007), and prices will most likely remain level (nominally speaking) for the foreseeable future. He discussed that he believes values in many markets will remain resilient, especially in coastal markets of California where housing is scarce and speculative buying was not excessive (this includes Santa Barbara County).

I believe that we are in a much more balanced market than the market we have seen over the last few years. For buyers, this could be viewed as an opportunity to buy at reasonable prices while interest rates are still low, especially if your plans are long-term. For sellers, it is good to know that eighty percent of the business that was going on last year has still happened this year, but bad headlines help to sell newspapers. Homes are still selling, but it does take more planning and patience to sell a home. In the market we just experienced, you might get top dollar while selling a home, but then you'd be paying top dollar for the home you were buying next. In this market, you may not be able to sell at top dollar, but you can make up for that on your next purchase. No matter where you are at, it is always good to plan ahead and to think long-term. As the saying goes, "It's not about timing the market…it's about time in the market."

Please contact Emily McBride at Emily@EmilyMcBride.com or at (805) 252-2773 with questions.