In this issue The Mountain News begins a multi-part series on how the nationwide economic downturn is impacting the Lake Arrowhead area. The first installment looks at its effects on the real estate market.

The plummeting real estate market that has rocked California and rolled through the rest of the nation has not left Lake Arrowhead unscathed, yet assessing the severity of its impact may depend on whether you look at glasses as half full or half empty.

Interviews with several real estate professionals this week have outlined the good and bad in the local market. The bad news is that fewer houses are selling these days; the good news is that, because they’re largely vacation homes owned by people who can afford to wait out the bad times, prices haven’t fallen as much as in other Southern California communities.

That the number of homes sold in 2007 dropped dramatically from 2006 is clear; the half-empty-glass approach shows some communities experienced drops of more than 50 percent, according to statistics compiled by Steve Keefe, owner of Coldwell Banker Sky Ridge Realty in Blue Jay and posted on his website, www.cbskyridge.com.

Specifically, the number of escrows closed in 2007 dropped 52 percent in Arrowhead Villas compared with 2006, with one-year drops of 48 percent in Cedar Glen, 47 percent in Arrowbear, 44 percent in Twin Peaks and Blue Jay, 37 percent in Green Valley Lake and 19 percent in Arrowhead Woods.

sales off a third

And, using Arrowhead Woods as a microcosm, sales declined by nearly a third in the first eight months of 2008, compared with the same period of 2007, and may end the year more than 22 percent down, predicts Bob Bailey, a respected local market analyst.

But in the 11 neighborhoods highlighted in Keefe’s reports, those prone to look for the silver lining may derive comfort from knowing sales prices actually rose in four of those areas during 2007—Cedar Glen, Deer Lodge Park, Twin Peaks/Blue Jay and the lakefront area of Lake Arrowhead—with the highest one-year price slide being only 9 percent.

Meanwhile, the reduction in the number of Lake Arrowhead-area homes being sold, combined with a rise in the inventory of houses on the market, has produced an inevitable result—a sharp upturn in the number of houses available for rent.

In fact, a comparison of houses-for-rent classified ads in the Aug. 14, 2008 issue of The Mountain News with similar ads one year earlier shows 89 houses on the rental market this year and only 65 the year before, an increase of 26 percent.

“A lot of houses became rentals when their owners realized they weren’t selling,” said Sue-Ellen Knapp of Re/Max Lake Arrowhead Realty. And because of the flood of houses for rent, renters can get more for their money.

more for your money

“What used to go for $1,500 now goes for about $1,200,” Knapp said, detailing how the law of supply and demand operates in the rental market as well. Knapp said finding a rental home with the desired amenities at the right price can be “hit and miss” for a renter, but that $1,200 a month might translate into a three-bedroom, two-bath home in Lake Arrowhead, while $1,500 could rent a similar home with a garage. The latter property, she said, would have rented for $1,900 before the economy’s downturn.

Rolf Garthofner, who has owned Lake Arrowhead Village-based Arrowhead Property Rental for 30 years, said that whereas his company normally carries an inventory of “eight to 10 houses for rent, over the last year (since the Grass Valley Fire) we’ve had an average of 20 to 40.”

Garthofner said after the fire many Realtors sought out vacation rentals for occupancy by people who had lost their homes, and that influx of rental houses has only been added to by people who, “with the crunch, are saying ‘I’ve either got to sell or rent my second house.’”

Brand-new homes that would normally sell in the $500,000 range but have no buyers are renting for $1,800 to $2,000 a month, Garthofner said. Whereas the rule of thumb in the industry several years ago was that rents would be 1 percent of a home’s market value, Garthofner said the ratio has now fallen to less than one-half a percent, meaning a $400,000 home can now be rented for less than $2,000 a month.

challenging market

Bob Bailey, a real-estate veteran who works at Coldwell Banker Sky Ridge Realty, has been analyzing Lake Arrowhead real-estate trends for 19 years. Acting in the face of what he termed “the most challenging market in more than two decades,” Bailey recently mailed his mid-year review, called “Arrowhead Trends,” to every post office box in Arrowhead Woods.

The publication shows a total of 321 homes selling in 2007 in Arrowhead Woods and along the lakefront, at prices ranging from $230,000 to $6.275 million. Their total median prices slipped only 1.43 percent from median prices in 2006. Of the 321, 240 had been sold through August.

Adding yet-to-come sales in 2008 to the 163 sold by Aug. 31, Bailey predicts 2008 will end with just 250 homes having closed escrow, a projected one-year sales dip of 22 percent for Arrowhead Woods.

Just as a glut can drive rental prices downward, “more listings could sink this struggling (for sale) market,” Bailey’s mid-year review cautions.

With only an estimated 250 Arrowhead Woods sales predicted for this year, Bailey notes in his publication the current inventory of 490 homes on the market “is nearly a two-year supply,” adding that “more listings will encourage price cutting as the public and market is tuned to the drum beat of nationwide falling prices.”

Bailey’s message seems to be if you can wait to sell, then wait, for your benefit as well as that of the community’s overall market.

big drops elsewhere

But though prices may fall in Lake Arrowhead, their rate of tumble has paled in comparison with values in Los Angeles and Orange Counties, Bailey reports. In the 12 months ending in June 2008, Orange County sales prices plunged 27.2 percent, and those in Los Angeles County nosedived 24.3 percent, while Arrowhead Woods prices dropped only 12.8 percent.

Because a high proportion of Lake Arrowhead homes—perhaps two-thirds—are second residences, their owners tend to be more affluent and less subject to the pressures to sell brought on by unemployment or other financial reverses. They can say, “I don’t have to sell and give my home away,” as Bailey writes.

Other owners, however, are less well off and less able to wait out the market. Those living paycheck to paycheck may meet their mortgages, but when there’s no longer a paycheck, panic sets in. When it does, unless their home can sell quickly, foreclosure looms on the horizon. Once that happens, one man’s pain can become another’s gain.

“There are some good bargains out there now,” said Clark Hahne, managing broker of Lake Arrowhead Re/Max Realty, referring to homes available via trustee sales. “There are probably 50 houses in Arrowhead Woods under $300,000. Let’s face it; it’s tough times now.”

trustee sales

Hahne said that “for practically every trustee sale the deed was recorded in 2006 or 2007. They bought at the top of the market or refinanced or had a small downpayment.” He cited one Lake Arrowhead house, refinanced four times in 10 years, that had $419,000 worth of mortgages and eventually listed, because of the declining market, at $339,000. Another, a bank repossession, he said, sold in September 2005 for $775,000, with a $620,000 loan, yet was listed not long ago at $399,000, and has a $350,000 offer pending.

Hahne said he sees the foreclosure market lasting “one more year in California,” less time than in other states, where the process of foreclosure is more complex and time consuming because foreclosures must go through the courts.

Hahne said anyone contemplating buying a house at a trustee sale “should get an attorney or a real estate broker to guide them through the process.” Potential pitfalls, he said, include liens or loans on the property that may not be readily apparent. Would-be buyers may be better off, he said, waiting until the bank has taken back the house, resolved its debt issues and repriced it for sale for even less money.

David Vail, also of Lake Arrowhead Re/Max, said he sees the state of the market as being strongly affected by both America’s political climate and the way the news media portray it.

recovery predicted

“I think the good news is that though ‘08 will turn out to be slower than ‘07 in terms of units sold, the turnaround will be in February ‘09,” Vail said. “The market is run by attitudes. The inauguration will be in January, and there will be a miraculous recovery shortly thereafter, no matter who wins the presidency.”

The kinds of risky loans—with little or no proof of income or adjustable rates with balloon payments—that have led to so many foreclosures in other areas aren’t prominent in Lake Arrowhead, Vail said. “What affects us is the perception of doom and gloom.”

Another real estate industry observer, who asked not to be named, said “now is the best time to buy real estate on this mountain. I haven’t seen prices this low or discounted in years. If I had a lot of money I’d buy as many houses as I could and put renters in them. In the next three years if it (the investment) doesn’t double, I’d at least make a handsome profit.”

The observer cited a “gut instinct that we’re coming out of this (depressed market) in the next 18 months. We’re at the bottom, or close to it, now.” In the meantime, the observer said, “if you want to sell, your competition is the bank-owned house or the repo down the block. Once the existing inventory is depleted, it’ll be a seller’s market again.”

The observer’s overall take on local market conditions was reminiscent of an old adage about another market: “It’s like the stock market; buy low and sell high.”

Lake Arrowhead Re/Max’s Sue-Ellen Knapp, a 12-year real estate veteran, capsulized the importance of home sales to the local economy, saying, “As real estate goes, so goes the mountain. Our entire mountain community has enjoyed the effects of an appreciating market for the last 12 years due to the phenomenal growth of homes purchased for full-time living. Now with the decline of people moving here for full-time living, our market has slowed dramatically.”

Knapp said only two of the last 15 transactions she’s closed will be full-time homes, whereas the ratio was much higher in the past.

“Ten years ago the least expensive home in the Lake Arrowhead-Arrowhead Woods area was under $100,000. Now, entry-level into the same market is over $200,000. With Lake Arrowhead as a premium destination location, the sales to second-home buyers and investors should carry us over this hump,” Knapp said.

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