LOW END COOL; HIGH END HOT

When asked to write about the local housing market, my immediate response was “Which one?” After almost a decade of strength in all areas and all price ranges, the market seems to be rapidly cooling in some segments, while remaining red hot in others. Inventory levels are building for lower-priced properties as estate properties continue to enjoy tremendous activity.

The strong real estate market that lasted almost a decade was fueled in large part by historically low interest rates. The largest beneficiary of low interest rates was the entry-level market. As interest rates hovered at historical lows, buyers stretched to get into home ownership. Many people who were right on the edge between renting and buying were able to get into the market because of those low interest rates combined with aggressive lending policies. Appreciation rates for mobile homes, condominiums, and lower-priced houses greatly exceeded all other segments of the market. Over the past decade, prices of these entry-level properties went up over 400% in many areas.

However, as mortgage interest rates have risen approximately 50% in the past few years, activity for most price ranges has slowed considerably. Inventory levels for properties under $1 million (which are the most interest-rate sensitive) are increasing rapidly as fewer properties are selling, and those that do are taking longer to sell. Since there are few high-paying jobs being created along the South Coast, I anticipate this segment of the market will remain flat for the foreseeable future, although I do not anticipate a significant drop in prices. Unlike the early 1990s, when thousands of high-paying defense industry jobs were eliminated, there have been no large-scale job losses. Inventory levels are increasing, but there has not been a noticeable change in the number of properties coming on the market; they are just taking longer to sell.

This is where the story becomes like the fabled race between the tortoise and the hare. While the entry-level market enjoyed a meteoric rise in prices and a subsequent flattening, appreciation in the estate market has been slow and steady by comparison. Unlike the general market, the outlook for estate properties along the South Coast looks strong for both the short term and the long term. The fundamental supply-demand forces driving the market bode well for continued appreciation.

Our housing inventory is small enough that even a slight increase in demand has an important impact on prices. The current demand for local estate properties significantly exceeds supply. Buyers, young and old, are drawn here by quality-of-life considerations. Families with young children are attracted to the excellent Montecito schools, the strong community environment, the unsurpassed natural beauty, and the reputation of great weather.

Estate Market Likely To Remain Strong

In addition to families with young children, we are also seeing large numbers of retirees and second-home buyers with lots of money to spend on housing. Despite higher interest rates, recent gains in the stock market have resulted in a tremendous creation of wealth. Also, baby boomers, which are in their peak income earning years, are beginning to plan their retirements and are the beneficiaries of hundreds of billions of dollars of inherited wealth. This generation loves to buy real estate. A recent study by the National Association of Realtors shows one in four Baby Boomers (the largest generation in history) own more than one property.

Another contributing factor to my prediction of a strong high-end estate market is the expectation that inventory levels will remain low. With high construction costs and significant bureaucratic hurdles for builders, there are very few large-scale speculative projects currently in the pipeline. Also, for many estate owners, unfavorable tax consequences make discretionary decisions to sell unattractive. And unlike other communities which have experienced strong gains in property values, we have seen very few estate owners opt to take their profit and relocate to less expensive communities. For most homebuyers the choice to relocate to the South Coast has been the right one; they love it and they are not leaving.

Overall, with the exception of estate properties, I anticipate a shift away from the strong sellers market that we have experienced for the past ten years. Instead, I expect inventory levels to continue to rise, allowing greater selection and more choices for buyers. I do not anticipate a significant drop in values, but would be surprised if we do not see both a decline in the number of sales and an increase in the time it takes properties to sell (both of which contribute to increased inventory levels).

For Montecito estate properties, especially those with views, premium locations, and quality architecture and construction, I expect the future to be extremely positive. This trend seems to be mirrored in other communities. A recent article in the Wall Street Journal states “homes on the ultra high end of the price scale…have been selling in increasing numbers.” In Los Angeles County, overall home sales are down more than 10% during the first quarter of 2006, but the number of homes sold above $3 million is up over 90% for the same period. So far this year, between Montecito and Padaro Lane, there have been five closed sales above $10 million and at least five more pending transactions, scheduled to close soon.

Regardless of whether home values rise, fall, or remain stable, we are all fortunate to live in such a special community.