Fall Market Update 2016

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Fall Market Update – 2016

Santa Cruz County Home Appreciation is Strong As Inventory Dwindles

 

figure-1-1Sometimes it can be a good thing to be a secondary market adjacent to a large metropolitan area with outrageous prices. This year has seen Santa Cruz County set home price records for both condos and townhomes, and the market appears quite strong entering the fourth quarter. Looking at the data for the region, there are similar trends for inventory levels and sales compared to years past, and we might go into the end of 2016 with even lower inventory levels than 2015. The reduced number of sales this year compared to last year also gives more credence to the belief that reduced inventory is constraining the market, as many buyers are choosing not to buy or move because they can’t find anything worth buying or making the move for.

The lower and middle portions of the market are quite active with quality homes seeing full price or multiple offers in most markets. The $500,000 to $1 Million market is still pretty hot due to low inventory, as the majority of activity is going on in that segment. Low-interest rates and easier access to financing (some lenders will now allow 10% down with no PMI on loans up to $1 Million) will keep that market moving. If there are some solid wage gains and/or similar reductions in down payment requirements for the $1M and up market, this could help jumpstart this portion of the market that is exhibiting slightly weaker sales.

figure-1-2Given that this is an election year, the stock market is bouncing near highs, and many people in the US (when polled) think we are in a bubble, it is entirely possible that 2017 could actually be a good year for real estate. We have not yet even begun to reach the top of the “wall of worry” that seems to persist. Both candidates’ policies could be very positive for household formation (either through lower taxes or increased lending/forgiven student loan debt), and it appears that the rest of the US housing market will still be going strong after not keeping up with new home construction for so many years.

As predicted in the last report, there has been a slowing of the economy at the end of 2016 and into 2017, and we are working through that right now. Some of this has to do with the election, and some of it has to do with turning off the startup spigot and consolidation in companies through M&A activity. Some of the things to look out for that could impact our future.

  • Keep an eye on the October and November price and home sales numbers. If there is a slight uptick in pricing, that could be a strong positive sign for another price push in early 2017.
  • The late year numbers show declining inventory levels. If the market has less inventory going into 2016 than we had the previous year, look out for a hot spring selling season.
  • The continued lack of construction will only continue to drive home prices in the region to the highest levels.

One interesting development in the local Santa Cruz County markets is the amount of investment capital that is headed into the region. There are funds from tech companies that are poised to create satellite offices, there are funds to develop town centers and redevelop malls, and there are also local startups that are receiving investment capital for their ideas. The other big change to the region is the introduction of a high speed fiber optic backbone that can support tech companies that want to use Santa Cruz as a hub for innovation. These trends, while good for property owners, are starting to have a detrimental impact to many long time renters that never got on the home ownership path.

Looking at the overall market, we should end the year with about 8% to 10% year over year appreciation in Santa Cruz County, which is on par or slightly higher than the levels seen recently. Given inventory levels, and the likelihood of a more clear policy landscape in 2017, there should be at least 5% appreciation next year as well, but we may see the median home prices stagnate due to selection bias of the median home price statistic. The increased level of lower priced homes that sell in comparison to the higher priced homes will drive the median home price down over time.

Median Home Prices

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The median sale price for single family homes for the January-September selling period jumped 8.5% from 2014 to 2015, and has subsequently jumped 8.3% from 2015 to 2016. While we were unsure if buyers would go along with the higher list prices from sellers at the beginning of 2016, it appears they did Although there was a definite slowdown in the market during Brexit and through the summer doldrums, it appears buyer activity is increasing again in September with some solid sales activity. The overall market dynamics still include multiple offers with few contingencies on highly desirable homes that are presented very well. Homes that do not present well are continuing to sit on the market as an indication that buyers are still being somewhat selective in their purchase. The total number of sales of single family homes in Santa Cruz County during this period has fallen by about 15.1% from 2015, and is 8% lower than the number of sales that occurred in 2014. Similarly there has been a 4.4% reduction in overall sales volume from 2015 to 2016, but still tracking at a 10% increase in volume from 2014 levels. These are very healthy numbers for single family home sales. The Days on Market is also healthy at 38 days on market for the Jan-Sep period.

figure-3The median sale price for condos and townhomes for the January-September selling period jumped 9.1% from 2014 to 2015, and has subsequently jumped a solid 17.5% from 2015 to 2016. Condos and Townhomes are still outperforming in 2016 as one the last bastions of affordability in the area. They are also the homes that are often being vacated by people choosing to move out of the region. The overall market dynamics include few contingencies on highly desirable units that are presented very well. Buyers are continuing to take a closer look at HOA health and lower HOA dues to make decisions on where to purchase with the intent of possibly keeping the home as a rental after they vacate. The total number of sales of condos & townhomes in Santa Cruz County during this period has been down 11.1% from 2015, and is about 3.2% lower than the number of sales that occurred in 2014. There has been a 1.8% decrease in overall sales volume from 2015 to 2016 and a 17% increase in volume from 2014 levels. The Average Days on Market has been decreasing steadily, and is sitting at a very low 31 days on market for the Jan-Sep period.

figure-4Sale Price to List Price Ratio

The sale price to list price ratio is indicative of the full price offer activity in the area. This is still trending healthy for sellers at about 99.8% of list price for single family homes and about 100.2% for condo/townhomes. Still an interesting trend to see the flip-flop of the hot sector to condos/townhomes as they are more affordable for the region, but are also very desirable for investors looking for strong cash flows and low maintenance responsibilities.

For Sale Inventory

The total active inventory of single family homes at the end of September 2016 is down 19% compared to September 2015. For condos and townhomes, inventory is about even compared to September 2015. While we were anticipating more inventory hitting the market in 2016, the opposite has happened, and total inventory and unit sales in Santa Cruz County are down overall. It may take some sort of external shock to generate inventory on the market. If we do see some inventory expansion in the Fall/Winter it could include some price softening as this is typically a weaker sales period, but will instead line up a situation like the end of last year.

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Month’s Supply of Inventory

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The month’s supply of inventory is sitting at 2.4 month’s and 2.2 month’s supply of inventory for single family homes and condos/townhomes respectively. These are still near historic lows for the area, and are indicative of strong buyer demand for homes. The numbers are very similar to this same time last year, which indicates demand is on pace for next year as well.

Conclusion

While there is a general feeling in the air about a slowing market, and the headlines in the newspaper are also fanning the flames of this fire, the data suggests that this may not be our reality. The data indicates that we may be headed for the lowest inventory levels in the history of Santa Cruz County by the end of December, and will likely see some additional appreciation into next year. The amount of appreciation is always difficult to estimate, but with 2015 wage growth in the Silicon Valley being solid and Santa Cruz County continuing on a positive trajectory, it is likely that incomes grow in the region. This growth in incomes increases borrowing power and also the ability to afford a larger home. The next wave of 2017 will include the move-up buyer as long as the mortgage community can get together and develop some bridge loan solutions that make sense. The reduction in down payment requirements may also help on this front.

Notes:

  • All information provided above and referenced in the graphs that follow were provided by MLS Listings. This information is deemed reliable but not guaranteed.
  • The information presented above are the thoughts and views of Sereno Group and its agents, and is not intended to be used as investment advice. Copyright, Sereno Group, CalBRE# 01519580

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