Sacramento Real Estate...is it time for a change?
I have heard so much recently about the real estate market changing or not changing that I thought I would chime in with some actual data. I do believe the market is changing currently, but when you have done this for as long as I have you already know that the market is ALWAYS changing. It is never stagnant. It is either trending upwards or trending down. That is the beauty of living in California rather than the midwest. We all know that real estate can go up (and always has in CA if graphed over the last 100 years), and we also know that it can definitely go down. This up and down of CA real estate makes me a busy guy at social gatherings where I am always asked, "so...how's the market?" Let's take a moment and look at it.
Looking at the graph above it is pretty clear that things are slowing down in the 1st time home buyer market (graph above depicts activity for homes under $350K-). I lead with this graph because CA real estate is a domino effect. The million dollar buyers generally need to sell their $750K home, which has a buyer who needs to sell their $500K home, which has a buyer who needs to sell their $325K home, which has a 1st time home buyer who needs to qualify for their 1st loan. It all starts with the 1st time home buyer. If they cannot get into a home due to pricing being too high or they are afraid the market is at a peak of values with a correction imminent then the cycle of "up buying" doesn't happen. It all stops. Notice the graph above...it is pretty clear that the market is slowing and has been slowing over the past 3 years. Look at the number of homes that were for sale in August of 2015 (nearly 2000 homes for sale under $350K). Now compare that to August of this year (under 1300 homes).
There is a difference of about 700 homes for sale!
I don't profess to know all the answers but I will give my professional opinion on a few:
1) Interest rates have steadily gone up. Every time interest rates go up, buying power goes down. First time home buyers are generally trying to stretch themselves into qualifying, and when rates adjust up, they can easily get priced out of the market. Interest rates were so low for so long, many secondary buyers are reluctant to pay 1% or more higher than their current mortgage rate.
2) Home values have steadily risen. This has the same effect of reducing buying power for home buyers. If there are now less homes to choose from in their price range then there will be more competition among the pool of buyers. This then pushes prices higher, causing less homes to be available in their price range....and round....and round we go! Look at the difference in dollar per square foot on homes less than 1300 square feet from August 2015 to August 2018. It is roughly over $70 a square foot more. At 1300 square feet you are looking at a $91,000 increase in just 3 years!
3) Incomes from jobs have not risen in proportion to the rise of home values. Lack of income growth consistent with home price gains is making homes less “affordable”. The duration of the current economic expansion following the great recession is now at a record term. This has a number of buyers feeling wary of making a commitment for any housing expense greater than they have now, effectively pressuring the move-up market. Student debt is preventing a number of households from feeling confident in the ability to take on a new mortgage or increased housing cost.
There are many more factors that are at play in this current market. I didn't even go into the other side of why the market will continue to be strong. Those talking points are lack of "for sale" inventory, lack of apartments built to supply demand of affordable rents, and the rental market escalation that has actually climbed at a faster pace than real estate sales.
I think the bottom line is that we will see a correction but it will be nothing like 2008 (come on people, that was a once in a lifetime event due to many factors that are not in place today, so let's stop comparing everything to it). I believe it will be a correction that is more of a soft landing than a large thud which dramatically upsets our delicate balances of life. No, the sky is not falling!
Agree? Disagree? Tell me!
Matthew Stewart can be reached: