October 2018: Santa Cruz County Real Estate Update

The time may have finally come. After what has felt like an eternity for many would-be home buyers, the crazy seller’s market we’ve grown so accustomed to seems to be cooling off…but it comes with a catch: rising interest rates.

It has been relatively smooth sailing for sellers over the last few years. Demand for housing has risen in conjunction with the improving economy and builders have struggled to keep pace with demand. This has resulted in a shortage of housing inventory that allowed sellers sit back, kick their heels up and let buyers quickly bid up the price of their homes.

Data is increasingly suggesting that those easy days may be behind us and that the housing market is entering a new stage where home prices have risen beyond people’s capacity to pay. Instead of frenzied bidding wars, properties are sitting on the market longer and price reductions are becoming increasingly common.

Buyers are starting to regain the upper hand.

Keep in mind that the housing market always lets up a little bit in the fall when kids return to school and the home buying season takes a breather for the holidays. This fall and winter, however, are shaping up to be more favorable for those buyers who have struggled to purchase a home for several years due to red-hot competition.


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Year-over-year existing single family homes listed for sale increased 5.7% in October in Santa Cruz County at 204 compared to 193 in 2017. Total year-to-date listings (January 1st through October 31st) is also up by 1.8% compared to the same period in 2017.

This bump in inventory has caused the Unsold Inventory Index to rise to 2.5 months, the highest level the Santa Cruz County market has seen in 14 months since June 2017.

Unsold Inventory Index - This measures the number of months it would take to sell the current supply of homes on the market at the current sales rate, also known as months of inventory.

Historically, anything below four months has been considered a seller’s market, four to six months a market in equilibrium, and anything above six months a buyer’s market. We will be watching for flat or possibly declining resale prices should the Unsold Inventory Index reach the five month mark - but that is likely a ways away from now.

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Home Prices

Signaling a market in transition - whether seasonal or a bigger shift - the median sales price for a single family home dropped in October. County-wide the median price was $885,000, down 1.8% from September yet up 2.1% from October 2017. Last October, the median price was up 9.2% compared with October 2016 for reference.

Price appreciation has slowed over the last few months in Santa Cruz County and inventory has risen gradually since June when the median price hit an all-time high of $931,250.

There is an increasing gap between sellers who are trying to squeeze out what they have seen in the past three or four years in price increases and buyers who have more options to choose from and simply can’t afford today’s sky high prices.

Price Reductions

As a result of this growing divide and deceleration of price growth there was a significant increase in the percentage of homes that reduced their price prior to selling. In October 39% of homes that sold in the county reduced their price compared to 33% in September and 29% in October 2017.

Of the 404 single family homes currently for sale in the county, a staggering 47% have reduced their price by an average of 9.67% and are still on the market looking for a buyer.

These more prevalent price reductions can be attributed to the slowdown of price growth (sellers are chasing the market down) and inventory levels that are on the rise. The more widespread price cuts could be a confirmation that the market may finally be starting to shift in the favor of buyers.

Sale-To-List Price

To make matters worse for sellers, in addition to price reductions the sale-to-list price ratio in the county hit the lowest level in nine months with homes selling for 99.11% of (or 0.89% below) the list price. The same time last year homes were selling for an average of 99.55%. The decline is another indicator that buyers may be gaining more negotiation power in the current market.

Days On Market

Demand is cooling with more listings for buyers to choose from combined with rising interest rates and higher prices. As a result the market is seeing homes sit on the market longer before accepting an offer.

In October homes were on the market for an average of 44 days, compared to 36 days in October 2017. As the market becomes less competitive with increasingly more homes for buyers to choose from things are taking longer to sell.

Interest Rates

The 30-year fixed-rate mortgage - the most popular loan for home buyers - is inching closer to the 5% range.

Rising rates could limit affordability more and force would-be buyers to sideline themselves from the housing market. At the same time, rising rates may push some to buy sooner rather than later - perhaps why closed sales remain strong. Closed sales of single family homes rose 33.6% month-over-month in October despite still relatively low inventory levels, high prices and rising rates.

Speaking of low inventory, rising interest rates are creating a disincentive for homeowners with low rates to sell their homes. This further limits supply and restricts existing home sales from reaching higher levels. To explain it another way, there is less incentive to sell your home if borrowing the same amount from the bank at today’s rates will be more expensive than your existing monthly mortgage payments. Many homeowners are feeling increasingly financially imprisoned in their own home combined with a lack of options to choose from when looking for a new home themselves.

Homeowners are now staying in place longer than ever before despite healthy equity in their homes. The median tenure of homeownership in the country has jumped to ten years. By comparison the median was four years in 2007 right before the financial crisis and after the market’s meltdown the median was seven years.

As mortgage rates continue their climb upward, reaching the decade’s highest rates this quarter, an increase in the supply of affordable homes has become even more important to help alleviate price growth.

If you happen to be one of those home buyers planning to wait it out in hopes of more inventory and cooling prices, you might want to reconsider that mortgage rates are only expected to rise - and at a faster pace than inventory increases and cooling prices.

For perspective, it is important to remember that rates are still very low by historical standards.


While the signs aren’t glaringly obvious, it seems clear that the market is transitioning from a strong seller’s market more towards equilibrium.

More would-be buyers are waiting in the wings as they believe home prices will begin to come down soon, making housing more affordable despite rising rates.

Today it is important for sellers to reset their expectations of the market and understand that its not as frenzied as it was in 2017 and at the beginning of this year. Now more than ever it is important to price their homes correctly and understand that it is taking longer than it used to to receive an offer from a buyer. Savvy buyers, with a bit of patience and strategizing, may be able to find great opportunities in the market in this shifting environment.

Ready to get started? Say hello today. 831.431.8787, sccoastalliving@gmail.com

Liz Kroft and her team are top-producing & award-winning Realtors at Keller Williams Realty with over 53 years of combined experience creating amazing success for their clients. Your turn!


The Kroft & Hulsey Team

Keller Williams Realty

831.431.8787 (direct)


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