As the year fades away it’s now time for the beginning of what I call crystal ball real estate posts. What do I mean? Everyone will be speculating about what is going to happen in the 2014 market, and most posts will make very vague predictions. Since I don’t personally own a crystal ball, I’ll steer clear of some of that, yet I still want to point out some fundamentals to watch. Let’s think together below.

Watching the Layers: I keep mentioning the idea of the multi-layered real estate cake analogy. I don’t mean to be repetitive, but the gist of this analogy is that value in a real estate market is like a multi-layered cake since there are many “layers” in the market that help impact or create value. As you can see above, when “layers” like interest rates and unemployment are low, it tends to create space for values to rise. At the same time, it’s important to realize the Fed can artificially manipulate a market by lowering interest rates, which means jobs end up playing a lesser role in driving the housing market. This is definitely part of what happened with our recent real estate boom (doesn’t sound too healthy, right?).

Now let’s add in the extra “layer” of housing inventory. I know this is a busy graph, but spend a minute digesting what is happening here, and then I’ll make things easier on your eyes by zooming in on the trends.

After years of declining values, the Sacramento market hit the bottom in the first quarter of 2012. Can you see that above? It’s important to note that as values began to increase, there was a huge drop in inventory and interest rates persisted to decline – both of which put upward pressure on home prices.

Keys for 2014: Investors, low inventory and historically low interest rates have been the X-factor in the most recent value boom in the Sacramento area. It helps of course that the unemployment rate has been trending downward, but there is still quite a bit of healing needed for the local economy. As you can see in the graphs above, housing inventory and interest rates have begun to increase lately, which has been putting pressure on rising values. Personally I tend to think interest rates moving up a bit will matter less than what happens with inventory. Rates are still very low and their increase does make a difference with how much buyers can afford, but ultimately the market feels far more sensitive to inventory increasing. At the same time, cash purchases have been declining for two quarters, which is also helping to cool off values from an unsustainable rate of appreciation. It’s also worth mentioning that it will matter if Blackstone goes for Round 2 or not. Last year this one investment fund purchased anywhere from 1100-1500 houses (depending on whose numbers you use). They have been seemingly slowing down for the time being, but if they decide to ramp up their local focus again, it could effectively make the market more competitive by decreasing inventory.

By the way, this is my spoof appraisal ad for Black Friday. What do you think? I posted this on my Facebook page last week for fun. My advice: Even though I want your business, don’t buy anyone an appraisal for Christmas.  🙂

Questions: Any thoughts, insight or stories to share? I’d love to hear your take.

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