Around this time of year, people start asking what the next year holds for real estate. Let’s face it – if I had a crystal ball I probably wouldn’t be working any more. Still, having worked through some peaks and troughs in this industry, and being a constant observer of not only our local market but also the national economy, here’s an outline of some trends.
This chart illustrates the number of homes for sale and the monthly number of homes sold in Santa Cruz County during 2018.
Sales – the number of sales is falling as a new trend emerges in home ownership. On average, people used to stay in their home for about 7 years. The average has recently extended dramatically to 10 years or longer. This puts a constraint on the number of homes available for sale. Meanwhile, the millennial generation – a large demographic – will soon begin turning 30: traditionally a prime age for household formation and home buying.
Interest rates – Mortgage rates rose nearly 1 percent over the past year, putting a pinch especially on first time buyers as their prospective monthly payments rose by as much as 10 percent given the complication of higher home prices too. Most recently the Federal Reserve sounded like they may not continue to raise interest rates as aggressively as they’d been thinking of doing earlier this year. On that news, mortgage rates immediately softened from 5% back down to about 4.6% now. Still, forecasters say if there are any more signs of economic strength, that could cause the Fed to push rates up another ½% over the next six to twelve months, with the first ¼% increase as soon as this month.
Delinquencies – I watch this indicator carefully because rising delinquencies back in 2007 eventually set off the last financial crisis leading to the great recession where real estate prices dropped precipitously. Recent mortgage delinquencies remain at a ten year low, attributable to stricter loan underwriting requirements, higher down payments, and home price appreciation. CoreLogic measured August delinquencies at 4%, down from 4.6% last year. They expect delinquencies to continue to fall due to national home price appreciation, but note some risk in overvalued metros like San Jose, should job growth falter.
The above chart illustrates Santa Cruz County Home Prices over the past 5 years
Prices – after years of double digit growth, we might be in for a healthy period of leveling off. Normal long term real estate appreciation rates are around the inflation rate, so prices may rise 3-5% give or take. There have been plenty of price reductions on the multiple listing service lately, but some of that is because those sellers were overly optimistic and initially listed their properties at too high of a price. Just recently I’ve heard of a few companies issuing layoffs, so the steamy pressure spilling over into the San Lorenzo Valley from the Silicon Valley just might cool down. On the other hand, with tens of thousands of homes recently lost due to wildfires, and continued job and population growth throughout the SF Bay Area, new homes simply aren’t being built fast enough to meet demand.
I originally wrote this article in December for the Santa Cruz Mountain Bulletin. Here is a link to an article I just read, that corroborates my outlook (always a good feeling!).
Here are major economists’ price forecasts for California as mentioned in that article:
California Association of REALTORS +3.1%
Chapman University +3.1%
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