Hot or Not?

The local real estate market doesn’t look the same at all price points

Back Article Nov 13, 2017 By Ryan Lundquist

Everywhere I look lately, there’s another piece in the news about Sacramento’s rising rents, skyrocketing home values or how desperate buyers feel in the midst of a housing shortage. It seems like our real estate market is on fire, to the benefit of property owners and home sellers. But is the market really that hot throughout the Capital Region?

Let’s talk about this, because there’s more to the story. The truth is the market really isn’t doing the same thing in every price range or neighborhood.

Think of the market like a Russian nesting doll. Just as there are many little dolls within one large doll, there are many sub-markets within the larger market. Or if I borrow an analogy from my college years, I’d say the real estate market is like a Hot Pocket taken out of the microwave a tad too soon. Some portions are blazing hot while others remain only warm — or even frozen. Like a Hot Pocket, we can say the real estate market is hot overall, but it’s definitely not the same temperature in every area or price range.

Consider some examples of the current market in the Sacramento region:

The Bottom

Some of the largest price increases in Sacramento this year occurred at the lowest price ranges. While values increased by 5 percent or so for many price points, in some starter areas, values easily increased by twice that amount. So the market is ultra hot at some of the lowest prices in town, but we don’t see the same rate of appreciation at every price point throughout the region. On top of that, this year, properties above $1 million typically took three times longer to sell compared to properties under $300,000.  

Does it surprise you to know that, regionally, cash purchases have only been 15 percent of all single-family detached home sales this year?

Entry-Level

It’s easy to say the market is aggressive at the lower end, but it’s actually extremely competitive at just about every entry-level price point. In other words: What is the minimum amount of money it takes to buy into a particular neighborhood? In Del Paso Heights, there’s intense competition under $200,000. In Roseville, it’s not easy to get in under $400,000. In East Sacramento, the housing market is really aggressive below $450,000. Buyers are dealing with upward pressure and intense competition at many different price ranges throughout the region.  

The Myth of Cash

We often hear about the force of Bay Area buyers and how they’re bringing wads of cash to gut the local market. So does it surprise you to know that, regionally, cash purchases have only been 15 percent of all single-family detached home sales this year? This hardly reeks of a market dominated by fat cash from the Bay Area, right? That percentage also represents a steep decline since the height of cash buyers in 2012 at 29 percent.

Granted, many investors are using conventional financing because financing terms are so favorable right now, but this still reminds us that while Bay Area buyers are a force in the market, they are not utterly driving the market.

The Anomaly of Midtown

A homeowner in North Natomas recently said to me, “My property is worth more because of the new arena.” I get the rationale, because the arena is causing some property values to increase. The only problem is this man’s home is located almost four miles away from the Golden 1 Center. It’s difficult to imagine someone saying, “I’m going to pay more to live on this street because of the new arena four miles away.”

Midtown, however, is getting a ton of positive local and national media coverage for increased residential property values — with some of this no doubt due to the development happening in the city’s central core. But the “hotness” in Midtown ultimately results from a combination of gentrification, very low commercial vacancy rates, an influx of millennials who view this neighborhood as a destination, new restaurants opening regularly and, you know, an arena with NBA basketball and big-time musical acts not far away.

The Top

Sometimes people talk about the top of the housing market being soft. But over the past five years, the number of million-dollar sales has actually grown by 140 percent in the Sacramento region. Unlike lower price ranges, there’s no housing shortage at this price point. Are you shopping for a house with a budget above $1 million? I have good news: You have more than a six-month supply of homes to choose from, as opposed to a one-month supply of homes in many of the lower prices.  

See what I mean now about that unevenly heated Hot Pocket?

If someone asked me whether the Sacramento market was “hot,” I’d say yes. But, realistically, I’d probably first answer with a question: “Which market are you talking about?” 

Join Ryan every other month as he tackles the big real estate issues of our region.

Comments

Visitor (not verified)November 14, 2017 - 8:37am

What about Davis? Seems pricy and a bit topsy, but with the lack of inventory it may continue to increase at 3 - 8%? Thoughts?

Ryan Lundquist (not verified)November 16, 2017 - 3:37pm

Thanks for the question. Davis is definitely not an inexpensive place to live. Like many places values in Davis have increased exponentially in recent years. It's hard to say how much more values can rise, and I never pretend to own a crystal ball to make precise predictions either. I will say the market in Davis definitely has a strong seasonal trend though as real estate really slows down during the fall when school starts. Thus right now the market is much cooler than it was even a few months back.

Gil Fleming (not verified)November 17, 2017 - 8:46am

We just retired and moved From Fresno to Cameron Park. Talk about sticker shock! We like the rural feel and the 50 corridor. We see the huge new housing development going in on 50 around Folsom. How is this going to affect the neighborhood? Will prices of existing home in the area go up or down? We are living in an apartment and scouting for houses. What neighborhoods east of Folsom and including Placerville would you recommend that we look at? For the goal of appreciation (with a 10 year time line)?

Ryan Lundquist (not verified)November 17, 2017 - 2:42pm

Hi Gil. Thanks for reaching out. It's hard to say exactly how the development in Folsom and the market will evolve over the next 10 years. But in 10 years from now I'll tell you exactly what happened. :) Okay, I'm kidding... sort of. The truth is we have a housing shortage and the market frankly needs thousands upon thousands of homes. The reality is that new construction is going to take many years to build also, so the impact on value for said new construction is going to be felt over time rather than in one instant. If all the units were built immediately right now then that would be a huge problem for inventory and it would cause prices to go down probably because the market would be flooded with listings. But that's not how this is going to work, so it's a good thing for the market that it takes a long while to build. The truth is the market hasn't happened yet and this will be a new neighborhood, so realistically we don't know yet how buyers will perceive the new area and what sort of price point they'll be willing to pay. Will it be a place where buyers want to be? Will buyers prefer south vs north Folsom? Will some buyers in the older northern portion move south for the sake of something new? These are questions that are only theoretical for the time being, which means they don't have definitive answers yet. This is why I exercise humility in giving a precise answer. The market just hasn't happened yet, so time will tell. But overall we actually need the units, so more are warmly welcome, and that's bound to fill a void in the market that needs to be filled. Of course if too many are built and buyers end up preferring newer units to older areas, then that could diminish the appeal of some existing areas. I think we maybe saw that happen in El Dorado Hills as Serrano was built out. But let's see what actually happens.

My crystal ball broke long ago, so I can't answer your last question in terms of value appreciation. But I will say lots of local buyers love Shingle Springs. I really like Placerville personally. I was just there walking around last weekend. By the way, make sure to enjoy a burger at Bricks in Old Placerville. I think you might want to check out Diamond Springs while you're at it. Pollock Pines is definitely further away, but lots of folks are drawn to that area too. I think it depends on how close you want to be to Downtown and what price you are willing to pay too. If you are looking for something closer and more "rural", then you'll probably want to stick to Cameron Park and Shingle Springs. There are some very charming homes and communities on the outskirts of these areas though too, and prices might soften the further you get from conveniences too. I might suggest driving through various portions of Amador and El Dorado County to see what's out there. Get a feel for your commute and what you're going to be comfortable with over time.

Hope that helps. Any thoughts?

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