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Adapting to the New Residential & Commercial Markets

By Datta Khalsa, Broker

In an economic environment where homeowners are faced with the prospect of having to give up their current loan for one that is literally twice the monthly payment, we have seen a new kind of sheltering in place, and this time it’s not due to a pandemic. And with reporting that soaring rates have made owning more expensive than renting in all but 5 of the top 50 markets nationwide, savvy sellers have started to pivot, offering incentives such as owner financing and 2/1 rate buydowns which can give a buyer relief on a conforming loan with interest at 3.99% in year 1, 4.99% in year 2, and 5.99% for the remainder of the loan.

It remains to be seen if these types of strategies will be able to bring our local residential market back to former levels as we move into Spring, but for the month of December this translated to a corresponding 37% reduction in the number of homes that were sold in Santa Cruz County, while our Median selling price only dropped by $36,500. I noted a similar drop in our office’s residential sales levels while our commercial transactions actually increased.

One notable growth segment has been properties with existing income in place that doesn’t support the asking price, but where the recent statewide mandates and density bonuses have added enough upside to inspire investors to pay more than expected with the strategy of making up the difference by taking these properties through the entitlement and redevelopment process in the coming years while letting the existing rents help cover carrying costs.

On the other hand, the local multi-res inventory has seen a similar slowdown to the housing market with only three apartment listings posted on the MLS countywide. And while at first glance they look like pretty good deals with claimed Cap Rates of 5.3, 6.4 and 5.9, when you review their stated expenses a different picture emerges. As a rule, operating expenses range between 35% and 42%, but here all three agents have grossly understated their listings’ reported expenses at 11.5%, 18.2% and 23%, which translates to inflated value claims that become apparent when you start to calculate their other metrics.

On the bright side, in the midst of this low inventory, 1031 Exchange Buyers nearing the end of their identification period were recently given a bit of relief by the Federal Government allowing extensions for certain counties that were impacted by the recent flooding disasters and Santa Cruz County is one.

Specifically, the IRS has issued extensions for areas impacted by the storms flooding and mudslides in California, allowing people who closed on their first leg of their exchange prior to January 8, 2023 to postpone their 45-day identification deadline to May 30, or 120 days, whichever is later. Correspondingly, their 180-day deadlines to close can also be pushed out by the same amount provided they fill out the necessary extension paperwork.

With enough information and planning there is still usually a way to make good things happen, sometimes it just takes a little more know-how.

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