If you want to make sense of the unfolding story of real estate in Sacramento, be sure to keep an eye on inventory and interest rates. Take a minute to look over the graphs below to glean some context for how the market is evolving. Then let’s consider some thoughts further down.
Four thoughts on inventory and interest rates:
- Sweet Spot: Rates under 4% are a sweet spot for buyers. What do I mean? Buying was very aggressive in Sacramento when interest rates were below 4% for 19 months in a row. When rates increased above 4% in June 2013 from 3.5% in May, there was definitely an impact as inventory began to increase. Of course cash investors started exiting the market around that time too, which is also a big part of this trend.
- 40 Year Context: Some buyers need convincing to jump into the real estate game instead of waiting for rates to decline. Unless The Fed changes its bond buying patterns (which can lower rates), higher rates are expected to ensue. Think about the context though. Over the past 40 years interest rates have literally only been below 5% since 2008. In other words, we are spoiled with cheap money (even now) compared to everyone in decades past.
- Economics 101 for the Long-Term: If rates and inventory continue to rise, it will have a cooling impact on values over the long haul. This is particularly true since cash buyers are not around like they were last year to absorb inventory and create more competition for the rest of the market.
- Short-Term Economics: For the immediate market, interest rates are still incredibly low and inventory is still very low. This means there is room for upward value movement. Or in other words, demand is still outweighing supply. Last month saw less than 950 sales, but keep in mind January is always slow. The key point for me is that at the end of the month there were over 2000 pending sales that had not closed yet. This shows that buyers are hungry for real estate (I’ll share a graph about this on Tuesday). Right now inventory is still hovering around 2.5 months, so there will be very decent competition to get into contract in coming time. It won’t be the blood bath of 2013 when there was only one month of housing supply, but 2.5 months is not that much to work with for real estate Spring fever.
Questions: Any thoughts or questions? What are you seeing out there in the trenches of the market? Feel free to comment below.