Autumn was in full swing in October, but activity in the Santa Cruz County housing market stayed at summer-like levels.
The median price of $867,000 for existing single family homes in October was two percent higher than in September and a staggering nine percent higher than October last year when the median was $794,950.
Condominum/townhomes dropped to $511,250 from $545,000 in September on the other hand.
Last month we weren’t just having summery weather - we were also experiencing a heatedly competitive housing market. Just like the area gets a last little blast of warm summer temperatures, so too does the housing market around this time of year, with prices jumping in October in four of the last five years. Luckily, another general trend is a drop in prices in November and again in January.
Demand continues to push home prices up, even though the home-buying and -selling season is winding down in many respects.
It may be easy to assume that another bubble is forming (or already has), with home values growing 7 to 9 percent per year in Santa Cruz County. Fear not! The housing market, I would argue, is reacting to basic economic principles and is doing what we would expect as a result of good overall growth, a tight supply of homes for sale and decent housing affordability thanks to still historically low mortgage interest rates. Remember, the annual average in 2006 for a 30-year fixed rate was 6.41 percent whereas it has hovering around 4 percent for most of this year.
With an insufficient supply of homes on the market to meet the demand, homes are selling 44% faster than a year ago even though prices are as high as they’ve ever been (except for May’s peak of $875,000). In October single family homes homes sold in an average of 34 days compared to 52 in 2016 and 41 just a month ago in September.
These quicker sales may very well be correlated with the fact that 29% of properties reduced their price before accepting an offer compared to 32% in September.
Those home buyers who waited until fall in hopes of scoring a bargain are finding the pickings frustratingly slim. On the upside for market-weary buyers though is that new listings are up slightly so far this fall compared to last year. September and October’s combined new listings total 399 versus 320 for the same period in 2016.
I’m still telling the same story - Not enough homes for sale and too few buyers able to afford those that are on the market at today’s prices. A lack of inventory and affordability are really keeping a lid on the local housing market and the greater California market as well.
Oddly enough, big home-price appreciation typically leads to a supply reaction where it is expected that more homeowners will take advantage of higher prices. Strangely though we just haven’t seen that happening yet lately.
One reason? Sellers face possible consequences after big price gains. Not only do they lose their Prop. 13 tax advantages when they move, they can also face a capital gains tax on profits that exceed $250,000 for individuals and $500,000 for married couples. Seems strange there is a downside to big proceeds from a sale doesn’t it? Many would-be sellers are struggling with weighing the pros and cons of selling and determining what makes the most financial sense.
Meanwhile, buyers remain constrained as well. Rents have been rising so fast that few millennials can save up for a down payment to buy a home. On top of that, there is still the long-outdated misconception that a 20% downpayment is still required to purchase a home. Fun fact: IT’S NOT.
In part as a result from underbuilding, for now the lack of homes for sale has become the new normal not just in Santa Cruz County but across the country. This scarcity is most pronounced for lower-priced, entry-level homes for first-time buyers. The low end, it would seem, is kind of disappearing.
What Lies Ahead?
Prices have rather steadily been on the rise for the last six years with the run of increasing home prices expected to last another three to five years (this is of course assuming no major catastrophes or shifts in the greater economic and political world). The California Association of Realtors forecast home prices will increase an additional 4.2 percent in 2018 in the state.
Single-family home sales are also projected to increase in the next year, but at a much more modest pace. Total sales for the year in Santa Cruz County are at 1463 compared to 1441 during the same period in 2016.
The California Association of Realtors expects mortgage interest rates to rise slightly next year, but not enough to shock the market. Rates for traditional 30-year, fixed mortgages are forecast to rise to 4.3 percent in 2018. This is still low compared with historical average but up from 4 percent this year and 3.6 percent in 2016.
As mentioned earlier, this cycle won’t last forever perhaps three to five more years where things can eke out the kind of increases that we’ve seen over the past couple of years. Stick with it, what goes up must come down and even though it may seem bananas out there you can successfully achieve your real estate goals with the right planning, patience and team behind you.
References: MLSListings; A Cooldown In Housing? Not This Season; California Home Prices On Track To Hit A Record High In 2018, Realtor Forecast Says; Double-Digit Growth In The Wild West: Is A Bubble Next?