Is our Real Estate Market headed for a crash?

 

Is our real estate market headed for a bust? Or maybe just a correction?  My quick answer is the market is changing got sure.  For purposes of the market, I will look at the market in Sacramanto, Placer, and El Dorado counties.  This region extents from Sacramento going up both the Highway 80 and Highway 50 “corridors” up to Lake Tahoe.   First let us look at some history.   In this region in the last 5 years, prices have gone up 50%!  We have been seeing a 8-10% increase in prices each year.  Take a look at the chart below.

This rate of increase (8-10 % annually) IS NOT sustainable.   If we look at the trend in Active, Pending, and Sold homes in our region, the market has been fairly steady the last 5 years.  We have been selling about 2000-2500 resale homes in our region for the last 5 years.  Again, I am defining our region as Sacramento, El Dorado, and Placer county.  Eventhough the inventory of homes for sale ( Active homes in our multiple listing service (MLS)) has varied, the actual number of sold homes has been consistant for the last 5 years.  Take a look at the graph below.

 

For the last 5 years, we have definitely been in a “Seller’s market”.  If we have a 3 month or less supply of homes we are in a traditional seller’s market.  If the inventory of homes goes to a 4 to 6 month supply we are in a nuetral market.  If we have more than a 6 month supply, we are in a buyer’s market.  Another way to think of this supply is how quickly our market can absorb this inventory.  So when I say we have a 2.5 month supply that means that if no new homes get listed on the market, we will be out of homes in 2.5 months.  For the last 5 years, we have NEVER exceeded a 2.4 month supply.  Buyers have seen this effect especially when the market supply gets close to 30 days.  This information is an average for the WHOLE region.   In  the lower price ranges, the lack of inventory has been felt by prospective and new buyers.  Take a look at the chart below.

 

So for a quick summary in the last 5 years, we have seen home prices go up 50%.   During the same period, we have been selling about 200-2500 homes per year.  This market has definitley been described as a “seller’s market”.  Home owners have been very happy and new buyers have been frustrated.

But has the market started to change?    YES!

In the last 6 months prices have been very stable.  In other words, values HAVE NOT increased in the last 6 months.   Take a look at the chart below.

In the last 6 months, the prices of SOLD homes has been stable at $234-$236 per square foot.  During the same time period, we have seen the inventory increase 45% and the number of actual sold homes decrease 14%.  Take a look at the chart below.

Also in the last 6 months, the inventory of available homes has increased. Take a look at the chart below.

In April of this year, we were close to a 1 month supply of homes.  Now we are over 2 months.

What about New homes?   In our region the new home builders have been adding about 5500-6000 new homes each year.  That build rate is projected to be steady over the next 2-4 years.  This level of activity is great news for our market.  Back in 2002-2004, we were adding about 17,000-18,000 new homes each year.  Our region can definitley absorb these new homes and still has room to grow.

If you are  are currently selling your home or an active prospective buyer in our market, you are living these trends.  If your home is on the market, you may have had to do a price drop.  Your not seeing the expected number is showings.  If you are a buyer, you may not  be pleased.  Homes may be going under contract before you even get to view the home! Or you may be competing with other buyers for the same home.

What has changed?

Interest rates!!!

In the last 12 months we have seen interest rates on 30 year mortages go from close to 4% to now 5%. 

This increase may not seem significant, but that is actually a 18-22% decrease in the amount of mortgage payment that a buyer can afford. When I ask someone, “how much house can you afford”, the answer comes down to what is the maximum mortgage payment, the buyer can either afford or be comfortable with.

Another way to look at the affect of the interest rate increase is with this anology.  If for example a family was qualifed to buy a $500K home a year ago with a low 4% interest rate.  Now a year later, if all factors in their financial profile remain the same, they can only afford maybe a $420K home!!!!  This change in the buying power of families throughout our region has a direct impact on the entry level home market.  There are simply less buyers in our market that can afford homes in the under $400K price point for example.  Actually at every price point, the potential pool of buyers has now diminished.  Is this change in buyer affordability enough to cause the market to crash?   No, not very likely.

Let us look at some positive points.

Mortgages are solid

Anyone that has applied for a mortgage in the last 5-6 years will understand this point.  There are plenty of sources of home loans for buyers.  Multiple lenders have been in out market and will lend buyers money.  But you have to demonstrate that you can pay the loan back!  “we will lend you a million dollars!, but you just have to pay it back!  The days of the no documetation or minimum documentation loans have been long gone from our market.

Economy and employment

The economy and job market is solid.   In order to qualify for a mortgage, people need income.   We have been blessed with an economy that has allowed families to be able purchase both homes and investment properties.

Mortgage Interest Rates are very low

Historical interest rates are low.   Back in the 70’s, people were paying 16-18% interest rates on a mortgage!  We I purchased out first home in 1985 in San Diego, I thought I had “won the lottery” and was able to get a 9% rate.  

Previous Market Crashes

The last crash was based on bad loans.  When the market tanked in 2006-2008, the reason was that we had been loaning money to people that simply did not have the ability to repay the loan.

Precious crashes have been associated with recessions in the economy.  Some of these drops in real estate values were associated with local recessions.

There is no evidence that the market is “Crashing”.  I think we may be seeing an adjustment in how fast the market is appreciating.  My advice to buyers has always been the same.  When you purchase a home,  you should be planning on remaining in that home for 6-10 years.  Having a long term strategy will protect you from market adjustments.

If you have any questions on real estate or the market, call/text Frank at 919-257-0893 or email frank@frankvalente.com