Is Sacramento real estate headed for a bust? 

BY TONY BIZJAK AND PHILLIP REESE

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August 23, 2018 11:31 AM

 

After six years of price increases, Sacramento residential real estate just hit a wall. Is it the summer doldrums? Or are home prices in for a fall? Real estate experts and economists are of mixed minds.

No one, however, is predicting a catastrophe like the one that happened here and everywhere in the mid-2000s, when home values in Sacramento plummeted 60 percent, tens of thousands of over-leveraged owners lost their properties and new home construction went into deep hibernation.

Christopher Thornburg of Beacon Economics was known as Dr. Doom for his predictions in the mid-2000s that California real estate was about to crash.

There are stricter controls now on home loans. Buyers aren’t getting in over their heads with crazy money or liar’s loans. That means the new generation of homeowners is financially more capable of keeping their heads above water if prices sag.  And home builders are only cautiously adding new homes to the market, nothing like the oversaturation seen a dozen years ago.

Barring something bad happening in the economy, Thornburg said, he thinks home prices will continue to increase, just not as quickly as they have been. If there is a recession, home prices could flatten but not likely drop, he said.

Most real estate watchers agree, however, that red warning flags have popped up in the last few months both in Sacramento and California.

Sacramento and the state overall just hit a 10-year low in affordability, according to the California Association of Realtors. That means that many people who would like to buy a house must now sit on the sidelines because they can’t afford one.

Other red flags: Home sales in Sacramento County and statewide have slipped, and some homes are spending more time on the market.

Sacramento real estate analyst Ryan Lundquist conducted a twitter poll last week among followers that showed most of them suspect the market is in some sort of a bubble. Lundquist preaches calm. “We have to be cautious about saying the market is crashing just because (sales numbers) soften.”

But the California Association of Realtors has noted the market appears to have hit a “what now?” moment. CAR President Steve White introduced the idea of “buyer fatigue” in July, saying a “lackluster spring home buying season could be a sign of waning buyer interest as endlessly rising home prices and buyer fatigue adversely affected pent-up demand.”

Jordan Levine, an economist with the association, pointed last week to early signs of a slowdown in particular at the lower end of the housing market: Sales of starter homes, the least expensive homes on the market, have dipped in recent months.

That may mean millennials and younger families can’t afford even lower-priced homes. Or it could mean the Trump administration’s tax code changes are causing more would-be first-time buyers to choose to rent instead.

Levine said the shift in the lower-end housing market is so recent that it’s unclear whether it will even become a trend. “There’s not enough data yet.”

He said he’s among those who believe we are seeing the market shifting to a lower gear, with lower price increases.

“You want to give incomes a chance to catch up,” he said.

In Sacramento, though, local paychecks may not be the biggest factor governing the health of the real estate market. For better or worse, cash-rich emigrees from the sky-high Bay Area real estate market already are playing a notable role here in keeping sales and prices up.

Dean Wehrli, an analyst with John Burns Real Estate Consulting, said Bay Area buyers are showing up in big numbers at new home subdivisions, and he expects more of that in the coming years.

In order for those people to take advantage of their big piles of equity in million-dollar Bay Area homes, he said, they will have to sell and buy in Sacramento, Stockton, Modesto, Reno or other places farther away where real estate is cheaper.

For those pondering their next real estate move, here are some factors to watch in the coming months.

What is the overall economy doing?

Sacramento and California have been on a nine-year upswing. A down cycle is inevitable. Several experts say the housing market often easily withstands mild down cycles. But a deeper recession will depress home sales and values.

For now, the state and local economies are humming. In Sacramento, that can be seen clearly in home values, which are again far above the national average, as shown in the graph below.

Will sales slump beyond summer?

Analysts point out that the real estate market typically goes through summer doldrums. Home sales typically pick up in the fall, drop off again during the winter holidays and then hit the gas in spring. September and October sales should offer better long-term clues.

Are homes sitting on the market?

For a long time, not enough homes went on the market in Sacramento. Owners weren’t selling and builders weren’t building. Sacramento has been a seller’s market, with multiple bidders driving up prices. But in the last month, more homes went on the market, and fewer were selling. For now, that only suggests that we’re in a transition to a more even playing field between buyers and sellers.

Lundquist, a Sacramento appraiser, said he has his eye on those numbers. “Could it be the start of something? Sure. But in my mind we need more time to see if this is a consistent pattern or just a slower end of the year.”

Where are mortgage rates heading next?

Mortgage rates have been historically low, dipping to 3 percent, fueling the buying spree by keeping monthly home payments low even as home prices rose and rose. Now those mortgage rates are on the rise, too. That means fewer people will be able to afford to buy a house, even if prices don’t increase. (Mortgage rates, by the way, topped 10 percent in 1990, the last time Sacramento experienced a burst bubble prior to the 2005 crash.)

How much are monthly rents?

For many, the question of whether to buy or rent comes down to monthly costs. Rent has gone up dramatically since the housing bust. For several recent years, in fact, Sacramento’s rent escalation led the nation. Even so, those rents did not rise as fast as home prices. That means on a purely monthly cash-flow basis, it is a slightly smarter play for some people right now to rent than to buy in Sacramento — especially now that mortgage rates have climbed.