The Good news
According to Zillow, Sacramento is the 9th hottest real estate market in the country for 2016. Wow! Sacramento is in the news for more than just a new arena. With the median price of a home in Sacramento County averaging about $310,000, homeownership is still within the grasp of a large segment of the population as compared to the more populous areas of Southern California and the San Francisco Bay Area. Home prices are on the rise. So, is it hot all the way to the top? Let’s take a look.
The inventory crunch
Essentially, the region’s strengthening economy is helping to drive strong demand for housing especially for most houses under $500,000. The listings currently for sale in the Sacramento tri-county area (Sacramento, Placer, and El Dorado) represent a meager 1.2 months of inventory since January 2016. That means that if no new homes came on the market, those homes would be expected to sell in less than a month and a half. Right now, that puts us squarely in a Sellers’ Market where strong demand drives price appreciation for home prices.
So what’s driving the demand you might ask? There are a number of factors at work. New households are forming for millennials. Investors, often armed with cash, are looking to earn more on their investment dollars than they are getting in the stock market. Historically low interest rates and rapidly increasing rental rates are catalysts to get renters off the fence and into home ownership. Some folks are looking to downsize and to lock into a lower cost of living. Lastly, some San Francisco Bay Area residents are cashing out and moving to where the cost of living is somewhat cheaper. For those fleeing the ridiculous prices of Silicon Valley, the allure of what two million buys here compared to the 2 bedroom Craftsman bungalow in Palo Alto for $1,998,000 merits some further inspection.
And Supply? Construction of new homes, quashed by the recent recession, has never fully recovered to meet the demand. With resale homes, there’s a large segment of the population, namely the Baby Boomers, that moved social norms in the 1960’s and 70’s who are not in the moving mindset much of late. Despite the fact that they recognize with an empty nest they don’t need all the space they needed when their kids lived there, they’re more attuned to the monetary impact. The biggest obstacle is prop 13 which gives them tax protections they don’t want to lose! (see previous post for more info on that) I’ve also heard again and again that they aren’t finding single story homes in neighborhoods they want to live in.
Cycles of the market
Timing plays a part as well. While there are buyers in all price ranges all year long, the strongest demand comes during the Spring and Summer. This time of year, the market, as we head into Fall, normally softens. Houses take longer to sell and can shift us from a Sellers’ Market to a Balanced or even a Buyers’ Market. The alarm has been raised that prices are starting to fall, but are they really? Ryan Lundquist, a local area Appraiser, and regular blogger on SacramentoAppraisalBlog.com uses the numbers he sees now and over time to substantiate his view (and mine) that they really aren’t falling. He tells us that inventory is still 11% lower than this time last year and 35% lower than in 2014. His stats are for Sacramento County specifically but they align with the trends in Placer, El Dorado and Yolo Counties. He tells us that the median price of homes increased 12% from last year at this time though prices are 3% down from just two months ago. Here’s one of his graphs depicting the months of inventory by price range which tells us that houses above $500,000 will sit on the market a little longer.
This graph shows us the average cumulative days on market for each price range.
The Bottom Line
And if all the data and graphs make you YAWN, let me offer you some timely advice. Markets fluctuate even while they are trending up or down. We usually run in seven year cycles for real estate and we’re in year #3 of an up cycle – bar any economic event that messes with that cycle, home prices are still up generally speaking but as demand drops down a bit, we see prices settling in for the winter. For Sellers and Potential Sellers: If you haven’t heard this before, it’s worth noting: “We don’t control the market. A house is only worth what someone is willing to pay for it”. Your house will sell when it’s priced right. For Buyers: Be willing to do more of the work or to live in a less desirable area if you’re at the lower end to get your foot in the door. If you’re lucky and trying to purchase in a range above $500,000, you’ve got more selection and more ability to negotiate.