Santa Cruz Real Estate  Digest,  Ed. 30
February, 2018 - In This Issue:
In This Month's Issue

Over the past few decades, the Santa Cruz housing market has been closely linked to the Silicon Valley market. Read about recent trends in employment and housing over the hill, and how they may affect our local market. 

Lenders use the lesser your home's appraised value or the purchase price when determining your loan amount. If the appraisal comes in under the sales price that you and the seller have agreed upon, we run into an appraisal deficiency issue. Learn how to  avoid this kind of situation, and how to prevail
if it comes up in your deal.

Attention first-time-homebuyers: if you have not done the things listed in the third article of this month's issue, you will most likely end up wasting time, money, or both. Following these steps is the best way to prepared, efficient, and timely when purchasing your first home.

The Tax Cuts and Jobs act clearly reduces the incentives for homeowners,  however landlords and other real estate investors stand to benefit from the new law . Read more in Christine's Corner below.
Real Estate Market Statistics 
For Santa Cruz, Santa Clara, and  Monterey

The reports contain median home prices, real estate price statistics, valuable information about mortgage rates and much more.

"A 10 percent increase in housing costs in a county is associated with a roughly 5 percent increase in housing costs in its neighboring counties."

"Historically, Santa Cruz has provided housing base for major job centers located in Silicon Valley. This relationship has been one of the major drivers of housing demand, especially for single family dwellings in the above moderate household income category. Further, jobs in Santa Clara County are significantly higher paying than jobs in Santa Cruz, at approximately $92,000 median income in 2014 versus $66,000 median income in Santa Cruz, and homes in Santa Cruz are less expensive than in Silicon Valley, factors that contribute to upward price pressure on for-sale homes and rental markets in Santa Cruz".

The average home price in Santa Cruz County continues to climb to historical heights. Keeping all else equal, to determine the sustainability of our current average price level we need to examine those factors that are pushing up prices and ask, are they are sustainable in the long run?

Over the past few decades, the Santa Cruz housing market has been closely linked to the Santa Clara Market. Quoted in the beginning of this article, the Santa Cruz County 2015 Housing Element identified the heavily weighted jobs to housing ratio of neighboring Santa Clara County in combination with the wage imbalance between the two areas as one of the largest external contributors to rising housing costs in Santa Cruz County. So, to understand the health and long term future of our local market, it's important to take a look over the hill and assess the economy and housing market trends.

A study published by the Silicon Valley Institute for Regional Studies shows that job growth in Silicon Valley has been declining since early 2016.

Additionally, since May of 2017, labor force growth in Silicon Valley has come to a halt, adding fewer than 1,000 workers over the previous year. Nationally, employers have record-high levels of job openings, and unemployment in this area is the lowest it's been since the peak dot-com boom. This suggests that job growth has been slowing from a shortage of workers with appropriate skills, in part due to the high cost of housing in Silicon Valley.

Net migration flows for of Santa Clara County have been close to or below -10,000 persons every year since 2011 . If the talent leaves Silicon Valley, firms will follow suit. As we discussed in last month's digest, article, Redfin CEO Glenn Kelman predicts that skyrocketing housing costs in thriving coastal cities will lead to a "mass migration" of companies and talent to other parts of the country. Pandora's recent decision to shift its business operations from Oakland, CA to Atlanta, GA suggests there is some validity to this prediction.  On the other hand, major players like Apple, which just purchased 16.3 acre property in north San Jose, and Google, which is investing in housing locally, appear to be staying put. The following developments may increase the amount of available housing and help job growth to rebound:


  • Google and the City of San Jose are working on plans to bring thousands of jobs, housing and retail to the area between downtown and Diridon station 
  •  City of Mountain View is planning to add nearly 10,000 housing units in the North Bayshore area 
  • Santa Clara County passed Measures A and B for housing assistance and transportation improvements


Will this be enough?

As seen above, Silicon valley is in a deep housing supply deficit. While government leaders and developers work together to increase the housing stock, large companies and startups may follow workers to other major metropolitan areas throughout the country to improve their bottom line.

Santa Cruz County will likely continue to both benefit and suffer (depending on your perspective) from high housing demand as long as this deficit continues. While the economic growth over the hill may slow due to housing restraints, this area will likely continue to function as a major economic center in this country due to well established presence of Fortune 500 companies like Apple and Google.

Out in the field with our buyers, we've been seeing multiple-offer situations on a number of homes, driving up the home price beyond what a reasonable comparable market analysis (CMA) would support. This is to be expected in a market like ours with tight inventory and high demand. Unfortunately, this also means that a number of buyers who rely on a mortgage for their home purchase may run into what we call, an appraisal deficiency issue. In this article, we explain how your lenders use the appraisal to determine your loan amount, and what you can do to both avoid and prevail in the occurrence of an appraisal deficiency issue.

For those who do not know, an appraisal is a professional estimate of the value of a property. Appraisers have various techniques at their disposal to determine this value, but in general their estimate will be based on recent sales in the surrounding area, as well as the condition of the property being appraised. Other important factors that the appraiser takes into consideration include square footage, appearance, and amenities. As a buyer, you have the right to request a copy of the appraisal.

Lenders will require an appraisal to ensure that their investment is safe. If a buyer purchases a property above its true market value, and then later defaults on his or her mortgage, the lender is stuck with a property that may not cover their losses. Therefore, once a lender receives an appraisal, they will use the lower of the Sales Price or the Appraised value when determining your loan amount. If the appraisal comes in under the sales price that you and the seller have agreed upon, we run into an appraisal deficiency issue.

How do you avoid this? In general, avoid making outlandish offers on a home, even if the sales-price falls within the loan amount you've been pre-approved for. While this advice may be hard to follow at times, it may save you a lot of time and heartache.

However in a market like this, appraisal deficiencies may turn out to be unavoidable for some buyers. So what are your options if your appraisal comes in low? Usually your contract will include a contingency that requires the property appraisal value to fall at or under the sales price. With this kind of contingency, you can always walk away from the deal. However, a majority of buyers want to make the deal work, so what are your options? Here is a list of both common and creative remedies:
  • Negotiate with the seller and reduce the sales price. In a competitive market like this one, this may seem like a long shot, but don't be discouraged. Chances are, if the seller has accepted your offer, your combination of price and terms are the most attractive that they've seen. Every buyer with a mortgage will likely run into the same issue. For these reasons, seller's often want to make your deal work, so don't be afraid to negotiate.
  • Put more money down to cover the difference between the appraised value and the sales price. You can use your additional funds, or this may be a good time to ask friends or family members for help. A creative and novel way to go about this is through crowdfunding. To learn more about crowdfunding a downpayment, take a look at our blog post on the topic
  • Dispute the appraisal, wisely. What do we mean by this? If you are going to dispute an appraisal, do so with data that supports your argument. This data will usually take the form of poor comparable properties used in the appraisal, or well-suited comparables that the appraiser missed. Your real estate agent can help you collect this kind of data.
Find additional tips to avoid a low appraisal here .

"The future belongs to those who prepare for it"
-Ralph Waldo Emerson

If you are a first-time homebuyer, you are probably excited to start scouting the market for your dream home. You may have already started looking on real estate search portals like Zillow or, filled out a form, talked to an agent, and set up a showing. Take caution: if you have not done the things listed in this article first, you will most likely end up wasting time, money, or both. Following these steps is the best way to prepared, efficient, and timely.

#1 Preparing for a mortgage:

If you are going to obtain a mortgage, there are steps you should take to get your financing in order before you start looking at homes.

Finding out your credit score:
While there is no defined cut off between good and bad credit, 620 and under is generally considered less favorable and will make it difficult to obtain a conventional mortgage. However, if your mortgage is under 620, you may still have access to a Federal Housing Authority, or FHA loan which requires a 580 credit score or higher for a 3.5% down payment loan. FHA loans for borrowers with a credit score of 500 to 580 require 10% down. ( source )

Clearly, it's important to know your credit score. It will not only dictate your mortgage-eligibility, but it will also determine the interest rates that you are offered. If your score is lower than expected, it may be worth it to spend some time improving your credit score before starting the home-search process.

Getting pre-approved

In our local Santa Cruz County real estate market, properties can move quickly. Some stay on the market for less than a week. Most listing agents (the person helping the seller sell his or her home) will not accept offers without pre-approval letters, or if they do, will not take these offers as seriously. Imagine this: falling in love with a house on a Friday afternoon, and offers are due the next day. Your loan officer will be out for the weekend, and so there will be no way to get your pre-approval letter in time. You may write the offer and promise to send the letter on Monday, but if four other offers have come in at a similar price with a pre-approval letter, you are no longer competitive. This kind of scenario illustrates is why it is so important to get pre-approved before looking at houses.  

A pre-approval letter will make you a serious buyer. It will also help you understand how much home you can afford and what kind of mortgages you'll have access to. To get pre-approved you will need to complete an official mortgage application. The lender will be performing an extensive check in your financial background and credit history, and so you will likely need to provide her or him with the following:
  • Proof of employment
  • Proof of Income
  • Tax Documents
  • Place of Residence
  • Bank Account
  • Credit Information
  • Gift Letter (if your family member or another party is going to help you with your down payment)
  • Self-employment documents (when applicable)
You kind find a description of each of these items here .

You do not need to know exactly what house you plan to buy when getting pre-approved. When you do find a property you would like to purchase, you can further refine the pre-approval letter to reflect the price you'd like to offer and address of that home. Please note, pre-qualification is not the same thing as pre-approval. You can read more about the differences here .

#2 Determining Your Budget

Here, we are talking about your budget for purchasing the home, including closing costs and unknown expenses that may pop up, as well as your long-term budget for homeownership.

After getting pre-approved, you will have a relatively accurate idea of the cost of your mortgage. Other fees that are incurred in the homebuying process include closing costs , which typically fall between 2% and 5% of the home purchase price. You can ask for an official estimate of closing costs once you are in escrow on a property. These costs will cover lender fees, the appraisal, title or attorney fees, escrow fees, and interest that has been prorated. Note that some of these can be paid by the seller if stipulated in the contract.

Once you purchase the home, know that additional costs for repair and maintenance will emerge over time. The actual amount you will need will vary widely and depends on a number of factors. Most estimates range anywhere from 1% to 5% of the purchase price of the home. You'll find a more precise method of determining your home's repair and maintenance costs here .

#3 The Property and Neighborhood

Finally, before you start shopping for homes, it's important to consider the kind of home you want to buy and the neighborhood you'd like to live in.

Are you looking for a single family residential home (SFR), townhome, condo, or mobile home? Do you understand the difference between these options? For example, townhome and condo buyers needs to be aware of HOA fees and factor them into their budget. Similarly, while a mobile home is often considered a more affordable option, a majority of mobile homes in Santa Cruz are on leased or co-op owned land and come with monthly (and sometimes steep) fees. Not sure where to get started?

Here are a few resources that explain each of these options in detail:
  • Read about the advantages and disadvantages of buying a SFR over a townhome here
  • Click here to read about the difference between town-homes and condos. 
  • What does it take to buy a mobile home in Santa Cruz County? Click here to find out.


Santa Cruz County offers a very diverse collection of neighborhoods. Everything from school ratings to proximity to the beach may factor into where you'd most like to live. As you weigh the pros and cons of each area, try not to cast too-small a net. Sometimes properties that would work perfectly for you, but fall just outside of your pre-defined search radius, will come on the market. If you're on an automatic search, you may miss it. Try to pinpoint where you'd like to be, and then come up with a maximum distance from that desired location that you'd be happy living in.

Imagine how confident you will be walking into a showing after doing all of this background-work. Once you've found the right kind of property in your desired neighborhood, at the right price, with pre-approval letter in hand, you will be able to make the quick, decisive, and intelligent actions needed to buy your dream home.

Christine's Corner

Owning an investment property may have just became much more attractive.

The Tax Cuts and Jobs act clearly reduces the incentives for homeowners, with the standard deduction doubled, MID limited and SALT capped at $10,000. Congressional estimates that only 5 - 8% of filers will now be eligible to itemize (34% of filers in CA use SALT deduction) and for 90% of taxpayers, there will be no tax differential between renting and owning. However, a reduction in incentives for homeownership results in strong demand in the rental market. This fact, and a new deduction on taxable income of pass-through companies suggests that landlords and other real estate investors stand to benefit from the new law.

Real Estate investors and landlords can now take advantage of a new break that provides a 20 percent deduction on taxable income for pass-through companies. Business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship will be taxed at individual tax rates less a deduction of up to 20%. Read more about the new tax structure, restrictions, and limitations for pass-through companies here .

For those who do not know, pass-through businesses are those that pay their taxes through the individual income tax code rather than through the corporate code. These sole proprietorships, S corporations, and partnerships make up the vast majority of businesses and more than 60 percent of net business income in America. Additionally, limited liability companies (LLCs) can elect to be taxed as partnerships, which are now used to organize a substantial share of finance, real estate, and investment management activities.

Read more on this topic here .

Would you like to explore your real estate investment options? Give me a call: 831-600-6550.