The real estate market continues to soften in Sacramento

Have you ever met someone stuck in the “glory days” from high school or some other period of life? The best example I can think of is the character Uncle Rico from the 2004 film Napolean Dynamite. This guy could do nothing but think about his former life as a quarterback, and how if he could just go back in time, he’d win the state football championship. He simply couldn’t move on because he was fixated on the past. But isn’t that sort of like what is happening in real estate today? Many sellers are stuck in the mindset that the market is still aggressive like it was in the “glory days” of 2012 and the first half of 2013. But the market has changed. Let’s take a look at ten quick talking points to help explain what the Sacramento market is doing, and why it is moving the way it is. I hope this is helpful for you and your clients.

Two ways to read this post:

1. Scan the talking points and graphs quickly.
2. Grab a cup of coffee and spend a few minutes digesting what is here.

1)  The median price has been flat for FOUR MONTHS in a row:

The median price has been $270,000 for four months straight in Sacramento County. Can you see why many in the real estate community have been describing the market as flat? Remember of course that not every neighborhood or property type in Sacramento is experiencing this same flat trend, but there is no mistaking the market has been leveling off.

But Trendgraphix Showed an Increase? Trendgraphix in MLS shows the median price increased from $270,000 to $272,000 this month, but unfortunately that’s not an accurate number since they pulled their data a bit too early before all sales from August were entered into MLS.

2) Average sales price has also been flat:

If you need wisdom, don’t just ask one person for advice, but seek the council of a few. It’s the same in real estate. We need to be careful to not just look at the median price to determine what the market is doing. Let’s also take a look at the average price per sq ft and average sales price in Sacramento County. Of course we can check out other metrics too, which we’ll get into below.

As you can see, the past few months of each metric above shows the market is flattening out. The market tends to cool down as summer fades away, but just as I said last month, the cooling began early this year, so it will be interesting to see how the Fall unfolds.

3) Distressed sales are still very low:

There have been slightly more bank-owned sales over these past few months, but any uptick has minimal at best. There is no “foreclosure flood” that has hit the market as REO sales were still just barely over 5% of all sales last month. Short sales have persisted to decline, and only represented about 6% of the market last month.

4) The number of listings has been increasing (so have price reductions): 

There were slightly more listings in August compared to July. If the market unfolds like it did last year, listings will increase again in September, but then begin to decline as a part of the normal cooling season in Fall (we’ll see what happens though). The psychology of buyers has been changing drastically over the past two months as buyers are gaining more power from sellers. Buyers seem more prone to believe time is on their side, they are aware of price reductions, and they are generally not willing to pay top dollar unless it is truly warranted. The market has been inching toward a buyer’s market over the past 15 months, but these past few months there were some very big strides taken toward a buyer’s market. In August there were seemingly about 400 price reductions every single day in MLS. For every new listing that came on the market, it seemed there was about an equal number of price reductions. What does that tell us?

5) Inventory increased again last month and is now at 2.4 months:

Inventory is now at 2.4 months of housing supply (up from 2.2 month last month). This means there are 2.4 months worth of houses for sale right now in Sacramento County. Inventory for the Sacramento Region increased from 2.5 months to 2.65 months, but I’ll get into that on Tuesday when we look at the regional market and Placer County.

Inventory is one of the X-factors for setting the tone of the market and the direction of values. Housing inventory is still relatively low, but the market is very soft despite having less than 2.5 months of housing supply. Our market has been tapering off being on “steroids” (cash investors and 3% interest rates), and now we’re seeing how strong the local market really is now that regular non-cash buyers have to support the market. By the way, as you can see above, inventory is not the same at each price level. Generally speaking, the higher the price, the higher the inventory.

6) Sales volume is down 11% from last year:

Sacramento County has seen about 11% less sales volume so far in 2014 compared to 2013, and sales volume in August 2014 is down 14% from August 2013.

7) FHA sales were 23% of all sales in Sacramento County last month:

Cash is down and FHA is up. That’s been the story over the past few quarters. Last month 23% of all sales were FHA, while the month before saw 25% of all sales as FHA. This 2% decline shows up on the graph above, but take it with a grain of salt until we add in an extra month of data to round out the quarter. It’s actually nice to see that FHA buyers under $200,000 have been over 30% of the market over the past few months. This is fantastic news since first-time owner occupant buyers can finally get into contract again after getting beat out by cash investors when the market was really hot. If it’s been a while since you’ve brushed up on FHA appraisal standards, be sure you get in tune with FHA minimum property requirements.

8) There have been 44% less cash purchases in 2014 compared with 2013:

Did you know there have actually been more non-cash purchases so far in 2014 compared with 2013? At the same time there have been about 44% less cash sales during this same time period. Remember, if cash volume was still as high as it was last year, inventory would be incredibly low, and the market would feel much like it did in early 2013.

9) It took 3 days longer on average to sell a house last month:

On average it’s taking 40 days to sell a home in Sacramento County and 42 days in the Sacramento Region. Last month it took 37 days to sell a home in Sacramento County, and it’s not a surprise to see the days on market increase since the market has been slowing. Forty days is still relatively quick to sell a home because just a few years back it was taking an average of 90 days to sell in Sacramento. Keep in mind many properties are still selling quickly if they are priced correctly. Generally speaking, the higher the price, the longer it takes to sell. There were only 7 sales above one million last month, so take the 1M+ stat with a grain of salt.

10) Interest rates are hovering in the 4% range:

Interest rates took a very slight dip last month, and they’ve been hovering in the lower 4s all year. The Fed still hasn’t given any indication they will raise rates aggressively since we all know that would be a disaster for the market because of how fragile the housing market and economy still is. It would be an equal disaster to lower rates aggressively too since that would create more upward value movement, and we really need the job market to catch up to the housing market, don’t we?

Was this helpful? I hope this was helpful for you and your clients. My goal each month with writing such a big post is to help illuminate what the market is doing, and in turn help explain why the market is moving the way it is. The real estate market has many “layers” that impact value, which is why it’s important to take a look at so many trends at one given time.

Summary: The market is slowing down, and it’s simply not the “glory days” of 2012 and 2013 any longer. While this is not cheerful news for some sellers, it’s great news for buyers since they are gaining more power to negotiate. Part of the market softening is normal since values tend to cool as the summer fades away, yet part of it is the market adjusting and trying to figure out how to be “normal” and cope without outside cash investors acting as a “steroid” for values. In closing, a few months ago we talked about signs to look for when a market begins to get soft, and many of these things below have been happening.

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Questions: How else would you describe the market? I’d love to hear your take.

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