Many of us have begun to get our tax paperwork in the mail, and are beginning to get into that annual financial mindset of planning for the upcoming year. It probably doesn’t hurt that every third TV ad is H&R Block or Turbo Tax commercial! This annual market forecast is a timely message to my clients and readers who may be wondering if now is a good time to buy or sell. 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.
Perception is Reality
From 2012 to 2017, demand was VERY high, supply was low, and interest rates were low (but rising). Those years were certainly a strong sellers’ market characterized by multiple offer situations and home values increasing 10% and higher year after year. 2018 on the other hand, the market began to shift. The combination of interest rates rising 1% coupled with low inventory has had a twofold effect on both buyers and sellers. Rising rates hurt buyers’ purchase power. Higher rates make it more expensive for sellers too, and many opt to not move further contributing to the low inventory problem. Many buyers anticipate (and hope) the market will run out of steam and have a wait and see mindset. These factors have led to the number of homes sold to decline for 11 straight months. While the rate at which homes are appreciating has slowed, values aren’t declining. In 2018, the Sacramento area saw an appreciation of 6-7% in home values. In 2019, I expect appreciation closer to 3-5%.
Buyers are getting picky (and they should)
According to the California Association of Realtors, the median sales price and median income in Sacramento County last year was $371,000 and $63,000, respectively. It would take the “median buyer” 16 years to save enough for a down payment of 20%. Fortunately for buyers, there are many options to purchase a home with less than the traditional 20% down payment. Many buyers can’t afford 20% down, but they’re able to afford the housing payment. With home prices at all-time highs, buyers are not willing to spend more on a house that is in need of improvements.
The Fixer Upper Effect
Everyone has a favorite home renovation show-I’m personally a fan of Nate and Jeremiah by Design. We watch while updating our Pinterest board with ideas for our dream home. But home renovations aren’t cheap! I know. My wife and I are 2 years and several $1000’s into our own. Like I mentioned above, it’s more difficult than ever to save money for a home purchase. Because of that buyers are no longer willing to pay extra for a house that isn’t turn key. If buyers are going to pay record prices, many want and expect the home to come with higher end finishes. A word of caution to sellers that are considering listing. Price accordingly. Yes inventory is still low, but it’s trending up. Don’t expect to list your home that has floral wallpaper, blue carpet, and avocado colored kitchen counter tops at an unrealistic price simply because you’re the only house for sale. Buyers aren’t willing to overpay for a fixer.
A Balanced Market is Coming
I anticipate sales activity to rebound in 2019; especially in the Sacramento area. Sacramento and the surrounding communities continue to be a popular destination for bay area transplants as well as other buyers looking to relocate. In fact, last year Sacramento was the number one destination for one way U-Haul rentals in the country! Yes, California (Sacramento included) is still in the midst of an unprecedented housing shortage that makes it one of the most expensive places to live in the U.S. However, over the last 2 months rates have fallen .5%, and we anticipate they will remain stable for the foreseeable future. Lower rates combined with increase inventory will help move the market more towards a balanced market. Expect to see home appreciation to slow to 3-5%. In my opinion, this is a win/win for buyers and sellers. Home values continue to go up, but not at a rate that prices out potential buyers.