March marks the beginning of Real Estate season. As snow melts and flowers bud, current and aspiring home buyers alike are coming out of financial hibernation to assess their real estate affairs. That’s why I hope this annual market forecast is a timely message to many of my clients and readers.
I’ve always said forecasting is a fancy word for guessing. No one knows for certain what lies ahead in our local real estate market. Nevertheless, as someone who witnesses the front-lines action in the market, I have the chance to share observed indicators with you.
These “markers” signify much of the same patterns we’ve seen in the market for the last three years: high demand, low supply, and rising prices. Frankly, I don’t see these altering course in 2017. Here’s why:
Without further ado, here are three significant real estate predictors to watch for in 2017.
Welcome to the Party, Millennials!
Millennials are discussed for many reasons, and for good reason! They are the largest generation by population in our country, so their actions will have profound impact on many industries, including real estate. Research from Zillow indicates Millennials were the largest generational buying group in 2016, and they are predominantly buying in the suburbs. This is a big deal, as Millennials have deferred home buying longer than their predecessors. The conceived factors vary from their high levels of student debt to their emotional scars of witnessing others before them lose homes and wealth during the Great Recession, but the simple fact is Millennials have not been buying homes at typical rates…until now.
Last year, the United States’ Home-ownership rate dipped below 63% for the first time since 1965 a symptom not necessarily of affordability (after all, home-ownership rate hit an all-time high when prices were at all-time highs in 2005) but rather due to a lack of appetite. With Millennials poised to remain hungry for homes of their own, the demand for housing will persist into 2017 and beyond.
Where are all of the new homes?
In last year’s forecast post, I shared some shocking statistics regarding the relatively low level of new home construction in Sacramento. Without enough homes to go around for everyone, prices are forced to go up. New home permits are increasing (up 20% from a year ago), but not at a rate fast enough to meet current buyer demand. 2016 had over 6,000 single-family home permits filed in the Sacramento area, the most seen since the Great Recession but far fewer than the peak of 18,523 in 2004.
Furthermore, there are fewer and fewer homes available to rent. In the 4th quarter of 2016, the Western region of the United States had a rental vacancy rate of 4.2%, the lowest reading since the Census department began collecting this statistic in the mid-1950s!!!
Until new home construction picks up considerably, there will be upward pressure on the prices (& rents) of the limited number of homes for sale (& rent).
Never Say Never (to new housing highs)
When the real estate market crashed ten years ago, many people said home prices became so inflated that they’d never reach those levels again. In 2011, the “never again” prophecy seemed accurate. Sacramento home prices had lost over 50% of their values from the peak seen in 2005. Beginning in 2012, however, the market rebounded with a vengeance and now has clawed back to price levels seen in 2007, before the Great Recession. This 5-year rally has market observers wondering if we will break through to new price highs soon.
Some pockets of town have already earned this accolade. East Sacramento, for example, is experiencing higher home prices now than ever before. I believe other neighborhoods will follow suit, but not prolifically in 2017. We may need to wait one more year before breaking new records, but sooner or later the “never say never” prophecy will ring true.
In 95819, the median home price hit a peak of $500k in 2005.
Presently, it’s $525k!
Is This a Bubble Waiting To Pop?
Some view these hot market factors and predict a market bubble forming. After all, how much longer can a 5-year rally last? While I agree that a rally can’t last forever, the rare combination of scarce housing options, home-ownership rates at 50-yr lows, and an emerging generation of home buyers leads me to believe the Sacramento housing market is well-insulated from another bubble. Even with the looming possibility of rising interest rates impinging housing affordability, our real estate market should see steady gains (5-10%) yet again this year.
If you are thinking of buying or selling a home, I’d love the opportunity to serve. With 15 years of local market experience, I am able to provide honest insight on how to best navigate the current market dynamics to help make your real estate transaction a success.
As always, thank you for reading Matt’s Memos!