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:
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?
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.
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.