Monday, June 29, 2015

A Real Phenomena

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

-Warren Buffet

Welcome to The Golden Sense! Remember the Cabbage Patch Kids, those dolls that became a craze during the 1980s? There was a time when the dolls were in such demand that there was a constant shortage on toy store shelves and people fought in the aisles to get their hands on the limited supply. The 1983 holiday season saw violent outbursts at major retailers. Some stores tried to find clever ways to control crowds, but efforts largely failed, leaving many people empty-handed and frustrated. Eventually more dolls became available and demand dropped. In time, the violence subsided and the stories of baseball bat-wielding parents faded into the distant past - although some remnants of those actions can be seen in Black Friday around the country.

I live in the small, beautiful city of Santa Barbara, California. Recently in Santa Barbara there is a phenomenon occurring in the real estate market equivalent to the Cabbage Patch Kid ordeal. Santa Barbara has recently received the lucky (or unlucky) label of being one of the least affordable cities in California. Which in turn, makes it one of the least affordable cities in the entire United States. According to the recent UCSB economic forecast, less than 14% of the "working" residents have an income that can support purchasing the average price home in Santa Barbara. According to Zillow, in June of 2015 the median home value in Santa Barbara was $1,029,700. Santa Barbara home values have gone up 7.7% over the past year, and the average price of homes are now near the peak of the real estate bubble in 2006. The local market has three powerful factors that are pushing prices into the stratosphere.

In the past year real estate listings have been considerably lower than the historical average. Simply put, no one is selling. The historical listing average for Santa Barbara and the surrounding area of Goleta, Montecito, and Carpinteria has been around five hundred properties. For the past year or two the amount of sellers has dried up considerably and the listing average has dropped, at times, over 20%. The lack of sellers is pushing the price higher for the homes that do come up for sale.

In addition to this limited supply, we all know that the Federal Reserve has held interest rates at extremely low levels for the past seven years. Since interest rates are at historical lows, borrowers are able to borrow larger amounts of money for less cost. The consequence of this is that more and more potential buyers bid up the price of real estate because they have the ability to pay these higher prices with cheap money. 

The third reason is the unique geographic location of the city. The city has the ocean on one side and the mountains sloping up directly on the other. This beautiful location makes for limited space for new development. In addition, the city has a height ordinance which restricts tall buildings from being built. The consequence of this is the amount of homes available remains at a relatively fixed amount. Just like the cabbage patch dolls, this real estate market has a very low supply prompting buyers to be aggressive and pay higher prices.

To some, these contributing factors are music to their ears. To others, it's extremely frustrating. The lack of available housing has pushed rental prices to absurd levels. Current home owners and property companies love the increase in perceived wealth. In the mean time, prices could very well continue upward. However, once more sellers come to the market or interest rates rise, the market price for these homes will come down.

For now, the escalation in price is just another market fluctuation. At one point Cabbage Patch Kids were hard to find. Then things changed. The Santa Barbara real estate market will eventually change too. If you want to see an adjustment in price, you just have to have time on your side.

Over and Out

T. Norman