December 2017: Santa Cruz County Real Estate Report

It could be argued that 2017 was the year of the Rollercoaster rather than the Rooster given it was a year of rising prices, low inventory and strong demand.

Last year is now quite squarely in the review mirror, and good riddance some would argue.

Despite the ups, downs and loopty-loops buyer and seller confidence remained strong throughout the year and all the way to the end. In fact, despite continued price growth and low inventory closed sales were up. 

The end of the year is typically a slower selling season, but 2017 proved to be anything but typical in that regard. I have been tracking the numbers going back to 2005 and this is the first time that more single family homes sold in Q4 than in Q3. Over the last ten years an average of 17% fewer homes sell in the last quarter of the year. In 2017, however, 7% MORE single family homes sold. 

Wait, what?

December was not the instigator here. Only 167 single family homes sold compared to 181 in November. Despite that dip (it happens more often than not in December) total closed sales were higher in all of 2017 than 2016 by 6%.

 

Now that might not seem like too much of a head scratcher except for the fact that the number of single family homes listed for sale on the Multiple Listing Service (MLS) in 2017 was 5% lower than 2016. See where this is going? In 2017 fewer homes were available but more homes sold. 

Lack of inventory has been perhaps the hottest topic recently. Well, the hottest topic in real estate. I realize 2017 had a few weather events, a lot of awesome pink hats a solar eclipse and whatnot. 

In December, only 81 new homes were listed for sale on the MLS, compared to 124 in November and 193 in October. 

Despite December's new inventory being lower, more listings came to the marked in both Q3 and Q4 of 2017 than in 2016. Keep this in mind later on as we get into some predictions for 2018. 

In line with the healthy buyer demand at the end of the year, fewer homes reduced their price before accepting an offer - 33% in December compared to 37% in November. These same single family homes also received closer to their full asking price when the sold. On average sellers received 98.92% of their asking price in December compared to 97.98% in November.

Demand has been so strong, in fact, that when I ran the numbers just a few days ago there was less than a month of inventory for sale. This means that current inventory of homes for sale would be gobbled up in just under a month if no new homes were listed. Traditionally a 4 to 6 month supply of inventory indicated a market balanced equally between buyers and sellers - anything below that being a sellers’ market and anything above being a buyers’ market.

Homes took ever so slightly longer to sell in December as their Days On Market increased from 43 days the month before to 45 days. The 2017 average was the same as 2016: 42 days. 

[Drum Roll Please] This is the number everybody is most curious about: The median price for single family homes dropped to $831,000 in December from $875,000 in November. Year-over-year prices appreciated by 6%, a bit more gentle than the 8% increase from 2015 to 2016’s median prices. 

WHAT IS IN STORE FOR 2018?

In my last market update I promised to dust off my crystal ball and look ahead at what may be in store for the Santa Cruz County housing market in 2018. There may still be some streaks on the glass, but here are 7 predictions for 2018:

 

1. INVENTORY WILL CONTINUE TO DRIVE THE MARKET

Economists reckon that tight supply will continue to be a thorn for homeowners, developers and realtors alike. Despite inventory being seemingly on the upswing as mentioned earlier, it still remains uncomfortably low in Santa Cruz County and across the United States as a whole. 

Perhaps Q3 and Q4 of 2017 are an indication that inventory declines will decelerate slowly throughout the year or maybe stop shrinking altogether and rebound from the low levels we have become accustomed to in recent years. 

There are a number of things that will be pivotal for this change, one being growth in new construction. If you’ve read the local news lately you may have noticed (perhaps begrudgingly depending on if you're a NIMBY or a YIMBY)  that a smattering of new housing projects are in various stages of development.

Sadly, starter home inventory hasn’t increased meaningfully since 2011. Not only are we not building enough, it has also kind of been misplaced and mispriced across the country. 

Existing home sales may begin to increase, but would-be sellers still find themselves in a pickle. They know that they will likely have no problem selling their existing home, but they will not list it until they have found a new home to buy and if they can’t find somewhere to buy, they won’t list.

Despite any growth in inventory, it will remain a sellers market in 2018. Demand will continue to exceed supply, but a slight increase in inventory will help take some heat off the market. 

 

2. STATE AND LOCAL TAX (SALT) DEDUCTION CHANGES WILL DRIVE HOMEBUYERS AWAY FROM HIGH-VALUE MARKETS

Tax law changes may cause a small exodus from high SALT tax locations like the Bay Area. Tax reform could negatively impact homeowners and dissuade aspiring home buyers, which will prolong inventory shortages and hight mortgage rates that have risen to their highest level in 10 years. Google “Tax Reform Impact On California Housing” and you’ll be occupied on the subject for hours (for better or for worse). 

 

3. MORTGAGE RATES WILL REACH 10 YEAR HIGHS

Rates continue to baffle forecasters as the anticipated rise that many of us have been predicting for several years has yet to materialize. 

Rates for 30-year fixed mortgages are expected to reach somewhere between 4.4% and 4.8% in 2018 (still remarkably low when compared to historic averages). 

 

4. DON’T WORRY ABOUT A HOUSING BUBBLE

Home prices have been rising at breakneck speeds following the recession causing some to start banging on the bubble war drums. Rest assured that experts across the financial and real estate industries are confident that a bubble is not imminent. 

There are a few factors that keep bubbles at bay: sale-to-list price ratios and homebuyer debt. The market has been seeing solid sale-to-list price ratios, declining home-buyer debt and there really isn’t the same speculation happening today like there was in 2005-2006. 

A bubble requires both overvaluation based on fundamentals and speculation. Two measurements are used to determine speculation in a housing market

  1. The number of homes purchased by an investor
  2. The number of home being flipped.

Investor purchases are down dramatically compared to pre-bubble 2005 and the speculative flipping mania of 2006 is absent in many metro areas across the country including our own. 

 

5. HOMES WILL BE SELLING FASTER THAN EVER

In 2017 across the county 42% of single family homes sold in two weeks or less and 14% sold in less than a week. In 2018 the industry consensus is that more homes are expected to sell in two weeks or less. This is all the more reason to be absolutely ready as a buyer when it comes to looking for homes (psst, my team knows how to hep buyers position themselves quite well in this regard). 

 

6. CONDOS WILL MAKE A COMEBACK IN 2018

I have always said that you have to get on the elevator if you want to get to the penthouse. Sometimes to own a sprawling beach home you have to start with something a little more modest. And there is no harm in that. Keep in mind that the majority of new construction will mean infill versus sprawling neighborhoods and most of the new homes being built in Santa Cruz County will be in the form of condominiums and townhomes. Bright, shiny, freshly painted ones.

 

7. BUYING A HOME IN 2018 WILL PROVE A BETTER FINANCIAL DECISION THAN RENTING. 

Buying a home can actually make more sense in metro areas experiencing unprecedented price gains. We saw this trend begin n 2016 and gain momentum through 2017. Mainly because the market is appreciating faster than most consumers can save. So the notion of renting and building up a larger downpayment to buy a home in a couple of years may not make as much sense as it once did. 

It is easy to hunker down and sign another lease, but deferring a purchase by even a year could mean the loss of tens of thousands of dollars when factoring income taxes and potential capital gains. It is of course, best to speak with a financial and tax advisor to learn what is best for you since everyone’s circumstance is different. 

 

IN SUMMARY

Time will tell which of these predictions will come through in 2018, but one thing is for sure: the market will continue to be hot for sellers and Santa Cruzans will continue to debate who has the best hot sauce in town.