April 2023

A Rosy Spring for Real Estate?

The spring real estate market is about to come into full bloom, and from where I’m sitting, our local market is looking downright rosy.

I’m guessing it may surprise you to see me write that, because it runs contrary to the narrative that’s we’re being fed in the media – that rising interest rates have snuffed out the real estate market, the Federal Reserve is working to bring about a recession, and the real estate market is circling the drain.

There’s no question that the market has cooled – and cooled dramatically. Prices are down across the board throughout the Bay Area, to varying degrees. But Santa Cruz specifically is holding up better than most of the Bay Area.

Alameda county has been hit the hardest – down 15%, but followed closely by San Francisco (-14.5%) and Santa Clara county (-14%). Prices in Santa Cruz haven’t dropped nearly so dramatically, with the 3-month moving average down just 5.5% year over year.

Unfortunately, this drop in home prices in Santa Cruz has not shown up in terms of affordability. Rising mortgage interest rates have had a devastating effect on our already abysmal affordability in Santa Cruz County. Check out this next chart:

The data shows that the monthly housing cost in Santa Cruz County has increased 44% for new home buyers, comparing Q4 2021 to Q4 2022. This figure assumes that the buyer has a 20% down payment (as if!) and accounts for principal, interest, property tax, and insurance costs. This is an incredibly steep jump in housing cost in a single year.

This begs the question: who can afford home prices like this? You already know the answer: people who work in Silicon Valley, and those who can work-from-home in Santa Cruz, for well-paying employers the world over. And there’s a small segment of locals who earn enough in town to consider buying – lawyers, doctors, entrepreneurs and the like.

For many would-be homeowners, they’ll need to be looking out of the mid-county area – or consider a (very) small condo or perhaps a townhouse. But single-family homes in the popular mid-county neighborhoods are now by and large far too expensive for most first-time buyers.

Despite the exorbitant prices people are forced to pay to become homeowners, I think today’s market is in solid shape. True, it’s nothing like March of last year – and thank goodness! While last March was Nirvana for home sellers, it was a complete and total nightmare for buyers.

A year ago, the market was utterly out of balance. Regardless of what steps the Federal Reserve might have taken, the market was bound to burn itself out. The Fed’s historic increases in interest rates just doused a flame that was burning way, way too hot.

What’s left is a nicely smoldering, glowing red bed of hot coal. Yes, prices are down, and interest rates are up. But this has led to a real estate market that is much more balanced and sustainable, with much greater opportunity for buyers. And let’s face it: buyers are a key ingredient in any seller’s market.
Many of last year’s buyers were never able to get into a property. In fact, sales last year were down 35-40% from the year before – which means there are a lot of buyers from last year who are looking to get into homes this year.

Right now, the market is loaded with a good chunk of last year’s buyers – plus new buyers from this year. That’s a lot of pent-up demand, making this market feel like a hot one. I’ve written a number of offers so far this year – and in every instance, there have been multiple offers to compete against.

True, there aren’t as many offers per property to beat this year compared to last, and oftentimes, homes aren’t selling much over asking price, even with multiple offers.

But homes are selling – and if they’re priced right, they’re selling quickly, and with favorable prices and terms for sellers.

Mortgage rates could keep climbing, putting the hurt on buyers and a real damper on the market. Layoffs in Silicon Valley and beyond could accelerate. There’s literally no end of things which could happen that might put the market into a tailspin.

But for now, and for the foreseeable future, the market is in surprisingly – and refreshingly – good shape. Let’s enjoy it while it lasts, and take advantage of this period of relatively smooth sailing.

Seb Frey was the 2019 President of the Santa Cruz County Association of REALTORS. He’s been selling homes locally since 2003. His contact info can be found at SebFrey.com/contact – and check out his YouTube channel at SebFrey.TV

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