I wanted to follow-up on my most recent blog post, “An Inventory Shortage is Here”, and drill down on the highly sought after “Golden Rectangle” neighborhood of Carmel-by-the-Sea. This encompasses the area between Ocean Avenue to Santa Lucia and Scenic up to San Carlos. My observation is that our market has bottomed and we are just now seeing the beginning signs of a recovery. In the past it’s been all about “getting a deal.” We’ve had a high number of transactions at lower price points. But now, literally in the last 30-60 days, the $1M or less market has evaporated. Today, the least expensive listing in this neighborhood is $1,095,000 for a 1 bedroom, 1 bathroom home.

Just Listed! San Carlos 3 NE of 11th, $1,149,000, www.CarmelBeachRetreat.com

Demand is high for this walk to town and walk to the beach location and because inventory is low it will inevitably push prices higher. We don’t, however, have real evidence to prove that prices are increasing, with only 2 closed sales so far this year in the Golden Rectangle.  From a historical standpoint, it’s pretty easy to see that we’ve hit the bottom. I wouldn’t expect a significant rise in sales prices this year, but something fairly modest. There is still too much uncertainly in the macroeconomic environment. Our market is a second home market, affected by discretionary income. You can see from the first graph below that our inventory is certainly limited. Buyers who can purchase in the $2-$4M have the most power simply because they can always take their money elsewhere. It’s the sellers in the under $2M market that now have the stronger negotiating leverage purely from a supply and demand standpoint. January was a slow month, but February did pop with 4 sales, the $1-$2M price point being most active. Some stale inventory finally went into escrow. I expect a healthy year as compared to last. But we’re not likely to hit the numbers from 2005, the height, any time soon, if ever again. Certainly I’m comfortable in saying that the market a year from now will be stronger and prices will be higher than they are today. And I’m sure that uptick will remain true for a handfull of years. The multi-offer, over asking environment of the Silicon Valley predicts that demand will continue to increase. But from the roller coaster that it’s been since 2009, its nearly impossible to put a specific projection on where this market is headed. 

What a difference a month makes! January was our typically slow winter month, as I reported in my recent blog post, “Where is 2013 Headed?”. February has painted quite a different picture. Suddenly, there appear to be more buyers competing over limited inventory and a feeling as if this is really the last chance to “get in” before our market heats up. The San Francisco Bay Area is practically overheating with in some cases 30 offers, over asking, etc. We typically lag behind that market and I would not characterize any of our neighborhoods as overactive. With that said, there is a sense of urgency that is beginning to brew among buyers.

Take a look at the chart below, showing the number of active properties per city and price point.

This chart illustrates the segments in which buyers can still lead the negiotations, but also shows where sellers are taking the driver’s seat. The toughest area for buyers right now is under $1M in any location. Properties in this category are in highest demand and a seller that asked for $750K last year, may very well be in a position to increase his/her asking price simply due to the limited inventory in this segment. The other challenging place for buyers is Carmel-by-the-Sea. Carmel gets a high percentage of vacation home buyers who primarily want to walk to Carmel Beach and to the shops and dining in town. Within that limited geographic area, there are only 10 homes on the market between $1-$2M. But if buyers look outside of this area, the options increase substainally, as seen in the chart above.

It is also important to note that 43% of the 230 active properties have been on the market for 6 months or longer. The majority of our inventory is stale. The new inventory is exciting and sought after by weary buyers tired of hitting the open house weekend circuit.

Recent Sale in Carmel Woods

What this also means, is that we’ll see an increase in off-market sales, or homes that were never even listed on the Multiple Listing Service. You can even visit the Carmel Realty website for homes that are “discreetly available”. As a buyer, it is more important now than ever, to align yourself with a realtor that has this inside knowledge. I can tell you about properties for sale that you won’t find online in Pebble Beach, Carmel Valley’s Sleepy Hollow community and Carmel’s Hatton Fields, Carmel Hills and Golden Rectangle neighborhoods. And as a seller, welcome to the turnaround!

I often find buyers get scared when they see “as-is” in a contract or a seller is upset when they receive a “Request for Repairs” when they thought it was an “as-is” sale.  Does “as-is” mean “buyer beware”?  The term “as-is” is commonly misunderstood and a typical source of contention during the escrow period.

First, it is important to note that all sales contracts start as an “as-is” sale.  After acceptance, the contingency period (most commonly 17 days) is the period of time which the buyer performs his/her due diligence and reviews the seller disclosures.  The purpose of the contingency period is to give the buyer time to confirm that the present condition of the property is acceptable.

When the buyer’s due diligence is complete, the buyer has to decide if he/she is satisfied with the present condition of the home, is willing to remove contingencies and go ahead with the sale.  If during the contingency period the buyer uncovers a significant repair item or a health and safety concern, the buyer has the right to request that item, or items, be repaired or ask for a credit.  Even if the buyers’ original intention was an “as-is” sale, and even if an “as-is” addendum was incorporated into the offer, the buyers always have a right to request repairs before removing contingencies.  The seller may not agree and the buyer can still walk away from the deal.

Let me reiterate, the seller would most likely not repair or provide a credit for something that was “obvious” at the time of the offer. For example, the seller isn’t going to be agreeable if the buyer asked that the carpet be replaced but he/she clearly saw the condition of the carpet at the time the offer was made.  But the fact that the roof leaks would be a different matter.

Often, as we all know, inspections reveal facts that are not only new to the buyer, but to the seller as well.  And, of course, that new knowledge then becomes a disclosure requirement of the seller should the escrow fall out and the home returns to market.  The knowledge that was uncovered by the buyer will need to be dealt with at some point. Most often, better to deal with it when you have an engaged buyer, rather than when you are waiting for one to come to the table.

In summary, it is important to remember that every sale beings as an “as-is” sale and that all buyers have a right to ask for repairs for significant items they may uncover during the contingency period.

Closed Sales in Carmel

These first few weeks in January have been sluggish with only 3 sales to date in Carmel-by-the-Sea. Looking back, 2012 was overall a very strong year. When you dissect the data further, the first 9 months were strong, with an especially healthy April through September, but we did see a slow down in the last quarter. With that said, the Monterey Peninsula market is a seasonal one.  Typically, activity slows in the fall and winter months and our busy season runs May through October.  This fall and winter season were certainly no exception. But are we seeing more than just a seaonsal slowdown? Many buyers moved to the sidelines in the fall with the election, new taxes proposed for 2013, the fiscal cliff and of course the holiday hustle and bustle. The new year has continued this slow pace as wealthy buyers appear reluctant and wonder how new tax laws will affect them. And now talk of another fiscal cliff doesn’t help the uncertain environment. The lower end market (especially $1M and less) led the charge. Properties under $2M in Carmel, Carmel Valley and Pebble Beach sold in 4 months on average; whereas properties over $3M took at least 6 or 7 months to sell. In Pebble Beach, the first half of 2012 saw 7 closed sales over $4M. The last half – only 4 in that price category. And currently there is only one home in escrow in Pebble over $4M. Carmel has 116 properties currently “for sale” with an average marketing period of 193 days. Even though there are a number of “For Sales” signs up, much of the inventory is stale. The sellers that have been sitting on the market a while refuse to reduce their prices to meet the market – and it’s hurting them. Unless of course they decide to hold it for a year – then I think it will be a different story!

The good news is that volume is picking up while buyers take advantage of our lower prices. Eventually, the dust will settle from the economic uncertainty and we’ll get back to business as usual. The San Francisco markets are “hot” and as corporate profits increase up there, the demand for vacation homes will increase down here. Come summer, sellers should find themselves in a stronger negiotating postion since quality inventory is low. The highest demand remains in the Golden Rectangle of Carmel-by-the-Sea (Ocean Avenue to Santa Lucia and San Carlos down to Scenic) at $2M or less, and inventory is highly competitive in this category.  Although it appears Q1 won’t be too impressive, our selling season should be strong. Buyers and Sellers are on the sidelines now, either preparing their homes for market or educating themselves on current conditions. Even with the optimism, I warn sellers that now is not the time to be greedy. All offers should be taken seriously. Sellers need to come to market with a home that presents itself well (i.e. fresh paint, carpet, landscaping, etc) and is priced at market. If they do, they will find themselves in a stronger negiotating position than in years past. 

Two perfect storms in the California real estate market have collided – low inventory and high demand – creating an environment where six in 10 home sales received multiple offers in 2012, according to the California Association of Realtors’ (C.A.R.) “2012 Annual Housing Market Survey.” Fueling the storm – historically low interest rates! And here locally, a sizeable buyer pool with the ability to pay all cash.

This is the highest report of home sales receiving multiple offers in 12 years; each home received an average of 4.2 offers in 2012, up from 3.5 offers in 2011.  The trend was especially prominent in lower-priced homes, typically foreclosures or short sales.  This competitive environment led to more properties being sold at or above the list price, with 41 percent of homes selling without a markdown from the asking price, the highest since 2005 and up from a long-run average of 32 percent.

Buyers that were able to bring all-cash offers had a distinct advantage in the bidding wars; notably, the number of buyers paying all cash was at 35 percent for the Monterey Peninsula in August, nearly triple what it was in 2001.  In addition, investors are actively jumping into the bidding wars, taking advantage of the still-competitive housing prices.

Here locally, inventory is tight and when aggressively priced homes in prime locations hit the market, you can expect multiple offers. Commonly the bidding wars we see are over distressed properties.  Examples of multiple offer scenarios last quarter include:

1. A property in the Miramonte Neighborhood of Carmel Valley – long regarded as one of the most desirable Valley neighborhoods. This was a short sale priced at just under $1M. After receiving a half dozen all cash offers, the property ended up closing at almost 25% over asking.  And it needed about $225K of work to make it livable!
2. A home built in 2008 with stunning ocean views, once offered a few years ago at almost $4M, closed as a      foreclosure for $1.5M. I actually represented the buyer when this was a short sale a few years ago. We were in escrow above its recent sales price. The bank didn’t approve the sale and countered asking for more money – when my buyers rightfully walked away!
3. A foreclosure in the Carmel Woods neighborhood – asking price $649K. Buyers were caught up in the bidding      frenzy and in my opinion overpaid for this two bedroom home with an awkward floor plan, closing in late October for $800K.
4.  A short sale in the beautiful Sleepy Hollow community is currently pending – over 3,000sf on 8 acres. The asking price is $1.1M and it is set to close in December.

Contemplating entering a bidding war? Nothing ventured – nothing gained! It doesn’t hurt to try and it helps to be as prepared as possible.  First of all, be ready to act. If you are getting a loan, come with your pre-approval letter in hand and for all cash buyers, provide fund verification with the offer. Don’t get caught up in the excitement of a bidding war. Set your ceiling – and stick to it. And of course, contact me to receive new listings the day they hit the market – or better yet – before they hit the market.

The 3^rd quarter illustrated yet again that location is king. The most active neighborhoods were Carmel’s Golden Rectangle, the estate section of Pebble Beach and in and around Garland Park and Miramonte in Carmel Valley.

Activity is up, but buyers are still negotiating aggressively as the price per square foot is actually lower this quarter. For sellers, it is critical to price at market value. There is an expectation that sellers have adjusted and prices are realistic. Homes, even in prime locations, that are listed as little as 10-15% above market, are taking longer than average to sell. In Carmel-by-the-Sea, homes that sold in 30 days or less received an average of 98% of asking price, as compared to 92% for homes that have been on the market over 3 months. The same is true for Carmel Valley where we have pent up demand but limited inventory. When a quality home comes on the market at a fair price – it sells quickly. We had 16 homes last quarter in the Valley sell within 30 days for an average of 99.69% of asking, as compared to 84% for homes on the market over 3 months.

Off Market Sale on San Antonio & 7th

We are also seeing increased activity in the off-market segment. Off Market sales are properties that are not actively offered on the Multiple Listing Service. These homes are typically in the most sought after locations. I participated in 3 off market deals this year: Lopez & 4^th, San Antonio & 7^th and Lincoln & 13^thin Carmel-by-the-Sea.

We also saw an increase in multiple offer scenarios across all neighborhoods and price points. I was involved in multiple offer negotiations last quarter on 3 properties: a total remodel in Carmel-by-the-Sea just under $3M, a short sale in the Valley just over $1M and a traditional sale in Pebble around $2.5M. In the case of short sales specifically, the list price is almost a “teaser” price. These buyers are typically competing against half a dozen all cash offers, pushing the sales price above asking. One such example was in Carmel Valley where after a half dozen all cash offers, the home sold for almost 25% over asking.

According to the National Association of Realtors, 27% of all sales nationally in the month of August were all cash. On theMontereyPeninsula, the percentage of all cash sales is closer to 35%. With that said, even buyers who are able to pay all cash are opting for a loan with rates currently as low as 2.3% for a 5 year adjustable.

Short Sale in Carmel Valley

In regards to distressed sales, there were fewer short sales and foreclosures in the third quarter as compared to the same time last year. Carmel-by-the-Sea had a total of 5 distressed sales in Q3, with an average sales price of $893,200. These sales were located in the Southeast, Northeast, Hatton Fields and Carmel Woods neighborhoods. The number of distressed sales in Carmel Valley went down dramatically from 17 in Q3 2011 to 7 in Q3 2012. These sales ranged in price from $320k to a $3.8M property in the Preserve. Pebble Beach had 3 distressed sales ranging in price from $676k to $3,450,000.

All in all a strong selling season with an optimistic outlook toward 2013.

There are many misconceptions about the 3.8% tax that goes into effect next year. Kevin Stone, Government & Community Affairs Director of the Monterey County Association of REALTORS®, put together the following list to help clarify the tax and its implications.

 Top 10 things to know about the 3.8% Tax

1. When you add up all of your income from every possible source, and that total is less than $200,000 ($250,000 on a joint tax return), you will not be subject to this tax.
2. The 3.8% tax will never be collected as a transfer tax on real estate of any type, so you’ll never pay this tax at the time that you purchase a home or other investment property.
3. You’ll never pay this tax at settlement when you sell your home or investment property. Any capital gain you realize at      settlement is just one component of that year’s gross income.
4. If you sell your principal residence, you will still receive the full benefit of the $250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion on the sale of that home. If your capital gain is greater than these amounts, then you will include any gain above these amounts as income on your Form 1040 tax return. Even then, if your total income (including this taxable portion of gain on your residence) is less than the $200,000/$250,000 amounts, you will not pay this tax. If your total income is more than these amounts, a formula will protect some portion of your investment.
5. The tax applies to other types of investment income, not just real estate. If your income is more than the      $200,000/$250,000 amount, then the tax formula will be applied to capital gains, interest income, dividend income and net rents (i.e., rents after expenses).
6. The tax goes into effect in 2013. If you have investment income in 2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040 tax return in 2014. The 3.8% tax for any later year will be paid in the following calendar year when the tax returns are filed.
7. In any particular year, if you have no income from capital gains, rents, interest or dividends, you’ll never pay this      tax, even if you have millions of dollars of other types of income.
8. The formula that determines the amount of 3.8% tax due will always protect $200,000 ($250,000 on a joint return) of your income from any burden of the 3.8% tax. For example, if you are single and have a total of $201,000 income, the 3.8% tax would never be imposed on more than $1,000.
9. It’s true that investment income from rents on an investment property could be subject to the 3.8% tax. But: The only rental income that would be included in your gross income and therefore possibly subject to the tax is net rental income: gross rents minus expenses like depreciation, interest, property tax, maintenance and utilities.
10. The tax was enacted along with the health care legislation in 2010. It was added to the package just hours before the   final vote and without review. The National Association of Realtors strongly opposed the tax at the time, and remains hopeful that it will not go into effect. The tax will no doubt be debated during the upcoming tax reform debates in 2013.

Our official selling season is here and along with it an unusually warm and sunny start to summer. The San Francisco Bay Area is in the midst of huge buyer demand coupled with low inventory, resulting in a steady increase in sales prices. The Monterey Peninsula typically lags behind the Bay Area by 6-9 months and we are slowly seeing that energy trickle down this way. This is felt strongest in Carmel-by-the-Sea, where activity is fueled by demand from vacation home buyers. In general, we’ve seen a pick-up from the doldrums of the downturn. Prices may not be on a rapid rise, but it’s refreshing to say activity has picked up. While every neighborhood does act differently, it is important to dissect the three market segments I cover.

Carmel-by-the-Sea

With a new mayor, Jason Burnett, and a recent visit to Sunset Center by Vice President Joe Biden, Carmel-by-the-Sea is enjoying some lime light. Carmel is also ready to play host to some of its most anticipated summer events such as the Carmel Bach Festival & Concours on the Avenue. Still our market leader, Carmel-by-the-Sea enjoys the bulk of demand, where up to 80% of the Golden Rectangle properties are vacation homes. Inventory under $1.7M is low, especially in the walk-to-town locations. Sales prices have stayed relatively stable since the beginning of the year, but are on an upward trend of about 5% from 2011.

Carmel Valley

 The Carmel Valley market is flat, but the spring did witness an increase in buyers. Buyers, however, that are still looking and not yet pulling the trigger. With the increase in buyer demand we also have a shortage of inventory in the Valley. The number of closed sales for the first half of 2012 is on par with the first half of last year. Only 9 sales, out of 35 in April, May & June, were over $1M. Communities, such as Carmel Valley Ranch, did see a sudden pop in sales. Other good news for the Valley – Quail Lodge, owned by The Hong Kong & Shanghai Hotels, solidified the purchase of leased land where holes #12 & 13 sit, as well as announced plans to re-open the hotel. Sales of raw land, however, remain stagnant not only in the Valley, but throughout Monterey County.

Pebble Beach

 The Coastal Commission finally granted the Pebble Beach Company approval to develop a new 100 room hotel, expand both the Spanish Bay Hotel and The Lodge and sell 90 new home sites. Granted all of this will take years to come to fruition and not all 90 home sites will likely be put on the market at once. There were 5 sales over $2M, out of a total of 26 during April, May & June: $14M, $5.7M, $5.155M, $4.7M and $3.625M. These sales were located in the Lodge/Central Pebble & Country Club West regions. Compare that to the first quarter of this year with 12 sales over $2M, the highest sale at $6.75M. The number of properties selling in Pebble Beach is up this year over last, but prices are down. So far this year, 60 homes sold with an average sales price of $1,722,012, as compared to 37 for the same time period last year with an average of $2,232,959.

Spring Newsletter

The real estate market is certainly picking up here on the Monterey Peninsula. Last week I wrote 3 offers: one on a foreclosure in downtown Carmel that had 3 other offers in and another in Carmel Valley for a short sale with 7 other offers. Both went for above asking price. Confidence is on the rebound as the San Francisco Bay Area saw home prices edge up 8.3% in April. Silicon Valley has noticed a pick-up everywhere from an increase in restaurant reservations to orders for new cars. The success in the Valley is trickling down to our quaint coastal town as more buyers are looking for vacation homes thanks to the success at notable companies such as Google, Apple and of course, Facebook. Off market deals, or properties that never hit our multiple listing service, are increasing. I participated in two off market deals in the past 2 months in Carmel-by-the-Sea. So far this month, Carmel-by-the-Sea has had 17 closed sales ranging in price from $675K – $3.85M.