As the third quarter of 2016 came to a wrap, the Sacramento market area saw continued growth in home sale values, driven by steady demand and ever-dwindling inventory. The average home sale in the third quarter closed around $343,000, which is up 8.5% since the third quarter of 2015 when that figure was about $316,000. Helping to fuel sale value growth are the inventory levels for single family residence (SFR) houses and condos listed on the Multiple Listing Service (MLS), which was down to 2,774 listings in August, versus one year ago when it was 2,876, representing a -3.7% year-on-year (YoY) change. Sales volume in 2016 peaked in June - historically one of the highest volume months for SFR/condo sales - at 1,815 closings, which is actually up 17% since June 2015 when sales volume reached 1,783. This is a solid indication of demand having risen in the last year, and certainly when compared to June 2014 sales volume, when it was at 1,548 closings. Turning to average days on the market (DOM) for SFR (one house on lot) and condo listings, we saw most homes sell in 30 days or less, with 75.3% of those sales being cash deals (naturally - less time to transact than mortgaging). Following the speediness of cash sales, conventional sales (non government-backed loans, that is) reached a five-year high of nearly 55% of total sales in July. During the Great Recession, conventional financing was 20 basis points (BPS) lower in terms of percentage of total sales in July 2011, when that amount was around 35%. Cash and FHA loans came in as close runners up back then, but have since decreased and made way for mostly conventional loans as the financing method of choice from July 2013 to the present. Conventional loans have been relatively easy to obtain with more consumers having improved their credit scores and financial health since the economic downturn, nearly 10 years ago, and consistently low mortgage rates over recent years.
With all of this analysis to put into perspective the facts of how things have transpired in the recent past, how can we use this data to figure out where the housing market is going? The good news is that employment is still solid, with national unemployment remaining at a ten year low of 4.9% and regional unemployment for the Sacramento-Arden-Roseville Mean Statistical Area (Sacramento MSA) also at a healthy 5.6%. Total non-farm jobs in the Sacramento MSA climbed to just over 940,000 positions in Q3-2016, up about 20% since Q3-2015 when the number of regional jobs was up to 923,000. The upward trend in employment is a positive sign that the economy is nowhere close to repeating history and plunging into another chaotic recession like in 2008, but we're not out of the woods just yet. Economic growth phases tend to run for 5-10 years at a time, and if we start with 2011 as the recent bottom in economic expansion and project all the way to the end of 2018, it will then seem more plausible to expect a market correction. This is not a bad thing, as too much growth in home values, for instance, can and always will result in bubbles like we saw in 2005. Economic downturns, whether actual recessions or just colloquially referred to as such, can be a good thing for an economy, believe it or not. It's one of nature's fail-safes, since we all get carried away in the capitalist world, and when we can we invest and invest, hoping for endless gains. Sounds too good to be true, and that's because it is - the old adage of "what goes up must come down" rarely fails to remind us of the power of having rational and realistic expectations when it comes to growing wealth. We saw the damage that was caused by unfettered home value expansion and careless development in the high volume of bankruptcies and half-completed housing developments that were caused by the Great Recession.
Now, with all of that talk of "Ecession-rays" aside, the fortunate thing is that we are most likely not going to have any major downturn as we approach the 2020s, though we will almost certainly have a market correction that will bring the climbing home values back down to Earth a little. This is not to say that buying a home now is a bad idea as a result. In fact, it's just as good a time as ever before if you intend to buy and hold your home as either a residence, an investment, or both. After every market correction, there is usually a new growth period and the whole cycle begins all over again. The catalyst that could begin to draw back home prices, possibly later in 2018 or early in 2019 would be the inevitable increase of federal fund interest rates by the Federal Reserve, which has now been several years in waiting. Sitting for eight years and counting below 1%, it is no surprise that we have had success in the recent years bringing the U.S. economy back from the brink of destruction in 2009. The lower the interest rate, the easier it is for banks to make loans, in brief. This is starkly contrasted with the 5.25% rate at its last high water mark in Q3-2007, before the 2008 calamity began to make headlines. Tight-money policy is meant to help keep inflation under control, as the more money there is out there chasing goods and services, the lower the value of each dollar will be and, therefore, the higher prices in general must climb. We've had the opposite since 2009, when the Fed lowered interest rates all the way down to 0.25% (AKA very easy-money policy) and that rate will have to go back up to at least the usual 1% to keep inflation from gaining on us right when things are going so well for the U.S. economy. Other forces are at play in the economy, as well as the impact of world situations (like wars, emergencies, natural disasters, oil prices, etc.), but keeping an eye on Fed interest rates is probably the simplest (if not the most superficial) way to try to predict when and how far home prices may start to come back down. The harder it is for banks to make loans, the less homes will be able to sell, and the lower home prices would have to drop to entice more buyers - in a nutshell, that's why tracking interest rates can help us predict where home prices are going to go.
To toss out nothing more than an educated guess, it would be safe to expect home values to continue rising and housing market activity to remain on its present course until Q3-2018 at the earliest. Anything could happen to change this, but if you go into purchasing a home with the expectation that you will see peaks and valleys in the value of your investment over time, then you will have no reason to worry about making the important decision of buying a house or condo. If you are solely an investor in SFR properties, then the rule of thumb about timing market recoveries is to estimate at least 50% of the time period in which the preceding expansion took place, but moving in the opposite direction. For example: a 7 year expansion from 2011-2018 using that model would mean a minimum 3.5 year correction before you would expect home prices to bottom out in June of 2021 and begin climbing again in the next bull market for realty. Late 2021 in this case would be the sweet spot if buying property with the intention to resell later on, after the home value had reached its next peak value. The rollercoaster metaphor about the economy may be overplayed, but it will probably never cease to be true, so just keep it in mind when investing in anything, let alone your home, and remember to keep your arms and legs inside the ride at all times!
Sources: Sacramento Association of Realtors, Realtor.com, Cushman & Wakefield Research, & The Atlantic. The information sources used and conclusions provided in this article based upon those sources have been deemed reliable, but are not guaranteed to be accurate. This article is not intended to provide investment advice, and should not be relied upon in making real estate decisions.
Interested in talking about current mortgage rates and options for first-time buyers, veterans, and conventional buyers in the Sacramento Area? Premier Midtown Realty works with a network of knowledgeable and trustworthy mortgage advisers to ensure that you are as well-informed as possible, and can buy real estate with ultimate peace of mind. Looking for a home in Sacramento, Roseville, or a surrounding city? We can help you get pre-qualified and start your home shopping experience right away. Give us a call at (916) 502-0953, or go to our website and fill out our home shopper questionnaire to get the ball rolling! If you're ready to make home-ownership a reality, you'll be surprised how quickly we can help you go from dreaming to doing!
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Ryan Wagner, California Real Estate Broker. CA BRE license # 01968073.
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