October 2008 Newsletter
Greetings, citizens and friends. It is now less than a month until we determine the next president of our fair country. This upcoming election night should push late night TV viewing into new territory. Get plenty of sleep ahead of time. We will have many things to work on together in the coming months and years.
This monthly newsletter (and attachment) will continue the search for the “bottom” of the real estate market, with the understanding that we are passing into winter, when our market would typically slow down anyway. But some good news first: a look at current inventory and sales shows that the problems are not getting worse. We seem to have reached a plateau and while not yet substantially improving, the market seems to be holding its own right now. There are buyers finding great bargains at prices equivalent to 5 years ago, yet with a worsening economy, the inventory will shrink slowly as new listings appear because of personal financial difficulties and foreclosure. Also, we remember that a number of sellers have taken their homes off the market, awaiting a more suitable time to sell (for motivated buyers?). So as we head into fall and winter, we might predict the imbalance of sales to inventory will remain much the same for a number of months, with many banking on next spring and summer bringing more activity, more money and a pent up demand among qualified buyers.
The last month has been pretty scary for everyone with a stake in the financial markets and personal retirement funds to watch over. The irony of the Dow Jones Industrial average going down while the “bailout” bill first failed in Congress, then going down again when it did finally pass, makes market watching and market timing a maddening exercise. Most of the self-proclaimed experts, including this writer, believe that housing inventory must come down and home prices must stabilize before confidence can return to the real estate market. Now that the carnage has grown, this same housing market improvement is the key to regaining a healthy international economy. That old saying about real estate being safe has been severely tested the last few years, but really only for short term investors. A family buying a home to live in is going to be just fine. They just cannot plan to use the home as a personal ATM machine any longer. Funds of all types are proving to be vulnerable to the lack of confidence displayed in headlines and repeated in anecdotal stories. Patience and the long view are called for, however uncomfortable they may feel.
Locally, our fair city and our market both continue to grow slowly, despite a difficult time for retailers, restaurants and workers of all stripes. This is where I insert my strong opinion that Santa Fe is still one of the most attractive places to live in our entire country, and many are still discovering it for the first time. Workforce reductions have hit the widely defined real estate industry, with everyone from surveyors and appraisers to loan processors and title insurance technicians and Realtors finding less work to do. The Santa Fe Association of Realtors predicts and budgets for a substantial reduction in actively licensed Realtors entering 2009. And a number of mortgage brokers (those still in the game) have migrated to institutions rather than remain out in the wilderness. Some conclusions, though very much guesses, force me to say that the cost to the local economy from this housing crisis has been substantial. But the real news is that we did not see that spectacular rise in home prices earlier this decade, allowing us safety today, to not have so far to fall. We didn’t get that wild fluctuation that is well documented elsewhere. That is the clear positive comparison between our market and those extremely troubled areas with huge numbers of foreclosures and hundreds of brand new but vacant houses sitting empty. Earlier calculations had our home prices (appreciation) growing between 7 and 11 percent a year during the first six years of this decade. That has obviously stopped, with almost no increase in value lately, and even actual reductions in home prices the last 2 years. Those experts say homes have decreased in value between 15 and 25% nationwide, with further reductions of 10 to 15% yet to come. But each market is unique, and I cannot find that much decline in values for Santa Fe. Once the price reductions end, that will signal the bottom, in a manner of speaking.
So allow me to speculate on some figures, please. A typical residential real estate transaction might include seven percent of the sales price being paid out to various service providers and professionals involved in helping make the transaction happen. Using that approximate figure, we can assemble the total cost of the current reduced level of sales. First, that figure is made up of sales commissions, title insurance premiums, loan fees, surveys and various other costs. While we were averaging about 2400 home sales in Santa Fe County in 2006, we are now averaging about 1400 sales per year. For 2007, the average sales price was $529,000 – for 2006 it was $482,000 – for 2005 it was $436,000 and for 2004 it was $394,000. Let’s just say the average for that extended period might be about $450,000. If 1000 sales disappeared from our calculations, at that average price, that adds up to $450,000,000 in sales volume that is not happening in 2008. Feel free to double check my math, and please continue. If we assume these numbers are pretty much correct, seven percent of 450 billion is $31,500,000. In a quick and cursory glance, some $31,500,000 has not changed hands locally in the past 12 months. That amount would have changed hands if our home sales market had remained at the level of sales we enjoyed a few years ago. The vast majority of that money would have been paid to Santa Fe residents and area professionals (Realtors, Title Companies, Appraisers, Surveyors, Home Inspectors, Radon Testers, County Clerks and many others) and would have been put into circulation locally. How many bags of groceries, tanks of gas, new winter coats and flat screen TVs does that represent? And how many bathroom remodels and new washer/dryer purchases did not happen because of that slowdown? How many times would those dollars have been spent, and then spent again, with locals enjoying the rewards of transactions? Some say a dollar earned by a local resident will circulate 2.5 times; others say 4 or 5 times. What the total effect is of just this one segment of the housing crisis is staggering. And it continues. No wonder the car dealers are complaining and the malls seem empty of actual shoppers. Also, none of this includes the money home sellers would have realized from their sale, to buy another home or otherwise spend or save in local stores or banks. Nor am I including the amount of money those 1000 buyers might have spent on new furniture, draperies, floor coverings or art to hang on the walls of their new home. This seems a simple but powerful fact about how Santa Fe’s economy has been affected. With this news, I can’t resist recalling a line of verse by a wonderful American poet by the name of Kenneth Patchen: “…evidently those are deathbells keening through the night and there are no horses in the innyard. There is no light in any window, no warmth, no hope… This is indeed a battle worthy of our weapons…” Well, I am truly sorry to be so dramatic, but the local economy is taking a huge hit and we can attribute many spending and lifestyle changes to the reduction in the reduced number of home sales in recent months. And don’t forget to count the reduction in gross receipts taxes paid to the state, then redistributed to local municipalities. Yet there is a resolve in that quote that expects us to rise to the occasion.
Our City Council just passed an Ordinance setting up a public vote on a new tax on home sales in excess of $750,000. This would result in a tax payable by the purchaser equal to one percent of the price above that amount. The special election is to be held March 10, 2009. I urge each of you to find out what you can about this upcoming vote and the resulting tax and make your own determination about how you want to vote. Special elections are typically very low in voter turnout, so 50 to 100 votes could go a long way toward influencing this initiative. This writer is against the new tax for a number of reasons, although I am not against the concept of workforce housing or helping to get people into affordable homes. I was happy to serve on former Mayor Louis Montano’s task force for affordable housing in the 1980’s. My problem with the new tax, if approved by voters, is that it will change many times over the years, to the point that the tax will not only increase in size but also have lowered thresholds. When future City Councils decide they need more money coming into City Hall, we will be asked to vote again to increase the percentage above one percent, and/or lower the sales price threshold below $750,000. Also, the way the City has styled it, the tax is for “services” related to a sale, since state law apparently does not allow a tax on the actual sale itself. Who is providing services? Well, for one, the Realtor. The City advisors, in their projections, have Realtors getting six percent on a sale. The truth is more like five percent, on average across the board. With this new tax, that number will shrink further. It is not only a Robin Hood style of taking from the wealthy to help the less well off, it also takes from the Realtors as if they are to blame for the price of housing in Santa Fe. Rumor has it that only somewhere around 200 of the 1200 Realtors in Santa Fe have had more than ONE closing this year. Let’s see… average price $450,000. Average commission at 5% = $22,500 divided by two (two Realtors, usually) equals $11,250 each. And that is the gross commission, which almost all Realtors have to split with their brokerage. So how about 1000 Realtors in 2008 earning somewhere around $10,000 or less so far this year? Do you think some of those 1200 Realtors might vote against this new excise tax? Nobody knows how many live inside city limits, but I repeat that 50 to 100 votes will make a huge difference in this special election next March.
Back to the larger picture, Santa Fe did not create this economic crisis, nor did any other city. We are all affected in our own way and we are all experiencing necessary change in the way we do business and also the way we live our lives. Testimony to the strength of our area is that occupancy rates at motels and hotels have remained steady. The Opera carries on and still sells out, so too the apple crop from Dixon’s Orchard near Cochiti. Our local farmers and growers have a permanent home for the Farmer’s Market now, thanks to many of you. And I suspect many will become gardeners themselves by next spring, as grocery prices climb. Various officials predict the largest vote totals ever this November 4th, with record numbers obtaining absentee ballots and early voting expected to be very strong. We can’t spend as much money these days, so we might as well vote. Another quote I have seen seems relevant: A citizen of America will cross the ocean to fight for democracy, but won’t cross the street to vote in a national election. Bill Vaughan No, I don’t know anything about Vaughan, but he may be proven wrong this election cycle. Are we all in favor of a larger voter turnout?
There are many more stories about our real estate market that I could go into. We shall see what the “bailout” bill will actually accomplish. So far, just it becoming law has not had any positive influence on our troubled stock market. Maybe our expectations have been too high. Time has to pass no matter what. I know I have already tested your patience, so I will close by thanking you for reading at least this much. Please note: If you wish to be removed from my mailing list, just reply and inform me. And if you forward this on to an associate, feel free to let me know that person’s email address so I may add them. There is no charge for this newsletter (maybe reflecting its true value?) and I do not mind if you pass it on.