Real Estate is Cooking

A prospective buyer who has been renting in California since arriving seven years ago told me that anyone who says the real estate market has reached its plateau does not know from whence they speak (he does not actually talk like that). The California median sales price has more than doubled since he arrived.

In order “for prices to drop in a major significant fashion, inventory would need to increase five-fold,” according Leslie Appleton-Young, chief economist for the California Association of Realtors, who spoke in Santa Barbara a couple of weeks ago. She is one of many professionals who are predicting a normal, steady California real estate market both in the median price and the number of sales.

Last year, Young spoke of a “soft landing” for the California real estate market, but by mid-year she recanted that statement seeing that the industry’s correction was perhaps greater than she had predicted. This year, there was no talk of a bursting bubble or a deflating balloon. Instead, the “steam is coming out of the soufflé,” says Appleton-Young. According to my culinary consultant, the release of steam from the soufflé is a natural and desirable occurrence that prevents it from bursting. So, real estate really is cooking.

If we do not encounter an anomaly (e.g., excessive inventory increase, runaway inflation, plummeting consumer confidence, skyrocketing interest rates), the home prices won’t drop. Or, to continue the metaphor, the soufflé won’t burst.

Inventory of single family residences not in escrow from Carpinteria to Goleta was a high of 602 in August 2006. On February 2, 2007 that number dropped to 387. Compare this to the August 2005 number of 353 that had a more gradual change (true it had a shorter distance to fall) to 344 in February 2006. Many people predict spring will sprout additional inventory. While I too expect that to occur, I do not anticipate an excessive increase in inventory on the level which Appleton-Young suggests would cause prices to reduce significantly.

Highlights from Appleton-Young’s presentation:

• Yes, statewide foreclosures are up 140% but from a very low base. Plus, the 1995-1997 job loss totals helped contribute to foreclosures and that situation is not occurring today. A strong commercial market points to a healthy business environment and high employment.

• The difference between the California and the United States median sales price in 1970 was about $400, with the median somewhere below $50,000. In 2005, the United States median was $219,600 while California leaped to $524,000. No wonder my father told me to “go west young man.”

• 2006 saw a 23% drop in the number of sales in California, but a 7% increase in the median price. The prediction for 2007 is a 7% drop in the number of sales and a 2% dip in the median sales price.

Home Inspection Update

When an escrow cancels, a new buyer sometimes pays a reduced fee to the home inspector who did the original home inspection (assuming there was one) for the first buyer. It is wise to pay a fee – as compared to simply reviewing the report for free –because this is the practice preferred by many local home inspectors on the South Coast. Many will then have you sign a contract, re-inspect, print out a new report and add you to their Errors and Omissions Insurance as being a client and party to the transaction. One local inspector likes it to be within two or three months of the original inspection in order to follow this procedure and may charge only 66% of the original fee.

Irrespective of what the policy of an individual home inspector is, the California purchase agreement states that the “buyer shall give seller, at no cost, complete copies of all buyer investigation reports obtained by buyer.” California Civil Code (“Statutory Disclosures”) requires the seller to make specific disclosures to the buyer.

My advice is to “document and disclose,” not “deny and disappear.” If a seller has a report or knowledge of a situation that discloses items which are subsequently repaired by the seller, does the seller need to disclose the report? If the answer is no, then the seller may not go directly to jail but could spend some time in the courthouse. This advice is coming from me, an experienced real estate agent who heard it from an attorney. For legal advice, consult your own attorney.