The Shape Of Things To Come

Montecito real estate has held up better than virtually all other areas over the past twelve to twenty-four months. One might surmise it has done so because of its desirability and inherent value (climate, semi-rural ambience, good schools, etc.) and certainly there is some truth to that. But the main reason, I believe, it has held its value while others have faltered is because Montecito prices did not rise as fast or as furiously as prices in other areas have, and those areas lack the cache or atmosphere of Montecito.

My previous observations have been that prices in Carpinteria, Goleta, and elsewhere had outpaced Montecito’s more modest rise, on a percentage basis. Consequently, when the inevitable downturn occurred, those areas would be harder hit; that is more or less what has happened. So, if you bought in Montecito – and were careful not to pay too much – you are probably just fine. Montecito real estate will indeed continue to hold its value, but there are some caveats. There are, however, some things to worry about, and all revolve around the future state and direction of the California economy. Along those lines then, the following are scenarios that may play out and affect home values negatively.

1) U.S. and California authorities actually get serious about policing the international border. If that happens – and it looks like it is actually beginning to – the flow of traffic north and south, especially north and particularly among those at the lower end of the economic scale, is likely to diminish, putting a lid on California’s population explosion. This event, if it occurs, will also squelch, or at least ease, the high demand for low-cost housing in areas around San Diego, the “Inland Empire,” and other desert locales. Prices for those units will likely fall, or at least weaken substantially.

2) California’s budget deficit grows – substantially – over the next half-dozen years, mainly because of lower or even simply stable real estate prices. Prop 13, as much as politicians and others enjoy complaining that it has stunted the state’s ability to pay for its varied needs, the ugly truth is that Prop 13 has been a virtual bonanza as home prices have escalated. Property tax revenue has been pouring into all California county tax collectors. Now that prices – and those tax revenues – are about to stabilize, property-tax revenue increases will be limited to 2% per year, rather than the 5% to 10% county and state government have come to depend upon, hardly enough to sustain California’s insatiable hunger for new and more spending money.

3) Because of the burgeoning deficit, there will be a demand from politicians to raise taxes, and the “realistic” Governor Schwarzenegger will go along. The most likely new tax will either be a “surcharge” on the wealthiest residents, or an outright 1% boost in the state’s already high income tax.

4) In an environment of upward tax rates and downward property values, many home-buying decisions will be altered. Instead of, for example, purchasing a second home in Montecito or Lake Tahoe, some will look at lower-tax states like Nevada, Idaho, Wyoming, Montana, even Washington, for refuge.

While not predicting Armageddon, California does seem to be in for an extended bumpy ride; there is absolutely no political will to reduce spending and a propensity among the state’s Democrats and the Republican governor to “tax the rich.” The outline of the problem may begin to take shape as early as the release of the next few months’ economic statistics. As revenues to the state’s coffers begin to falter due to falling real-estate prices, watch and listen carefully to proposed “solutions” to bridge the gap. If “higher taxes,” rather than restrained spending, becomes the mantra of the day, some version of the aforementioned scenario is likely to play out.

There were 59 Montecito sales recorded in the second quarter ‘07, as opposed to 46 during the same quarter in ‘06; the median moved from $2.76-million to $3.2-million, mostly reflecting the strength at the higher end. Montecito is not currently over-valued and I believe prices here will continue to bump upwards at a moderate (3% to 7%) rate. If tax-hikers really get going – and they could – that estimate would likely be revised downward. As things stand, homeowners with a $1.5-million property in a less-than-top-tier location today (the top tier being most of Montecito, the upper east side of Santa Barbara, much of the Riviera, Hope Ranch, etcetera) may find themselves with a $1.3-million property three years hence; in almost all cases, however, the Santa Barbara area is likely to do better than the rest of the state.