Question-Marsha, I’ve made several offers on houses in Santa Barbara in the last year. Each time it was multiple offers and I didn’t get into contract. Are we in or approaching another housing bubble in Santa Barbara?
Answer-I’m glad your question was about Santa Barbara and not the national housing market. While there are national and state trends, all real estate is local. I am not an economist and everything I say is just my own opinion and observations.
Santa Barbara experienced tragic events this year which have impacted our local market. The debris flow of January 9 rendered approximately 400 houses uninhabitable or unsafe. Local citizens with the means to do so went out and purchased temporary housing, many for all cash. Condos which had held steady at certain prices now had multiple offers and overbids. The Hope Ranch luxury market was seen as a desirable alternative to living with Montecito’s debris flow worries. Sales and prices went up in The Ranch. This speaks about risk. There is known and assessable risk, such as a lowering of credit and mortgage standards creating too much money in the market. Then there is the unknown or black swan risk. Our January 9th debris flow event was an unpredictable and random risk to our local housing market.
Housing bubbles are created when too many dollars are seeking too few houses to purchase. There can be many underlying causes for the supply of dollars going up or the housing supply going down. The housing market is cyclical. Our collective memory seems to fall short of the cycle lengths. Just as we become assured that values will endless climb, we hit a blip in the road and there’s a pull-back in the market. Who saw that coming?
The housing bubble of 2003-2007 was in large part created by mortgage-backed securities. Mortgages were bundled and sold to investors. This became an extremely popular investment. To meet the demand for the mortgage-backed securities credit and mortgage standards were lowered and then lowered again. Money flowed abundantly. The bubble burst when the sub-prime mortgages went into default. The housing market was too closely tied to the financial markets and the crash was deeply felt.
Are we currently in a bubble? I spoke with a local CPA who felt Santa Barbara is not currently in a bubble. The CPA noted that Santa Barbara’s housing market is open and clearing quickly. If a well-priced house comes on the market it will sell quickly and perhaps with multiple offers. However, the market is sensitive to value and even slightly overpriced homes won’t receive an offer until there is a price reduction. He did express concern that mortgage standards may be reduced. In that case money will start to flow again and too many dollars will be seeking too few homes.
The housing market is like a river, you are never looking at the same river or housing market twice. It’s constantly flowing and changing. A bubble is created when the market is mismatched with too few choices. The river is flowing at a steady pace right now.