About to Pop?

The talk of a real estate bubble has been getting louder and louder for the past several years. Lately, it seems to have reached, if not a fevered pitch, something of a dull roar.

Memories of the 2008 mortgage crisis and subsequent collapse of real estate prices linger. Prices are now considerably higher than they were at the prior peak, and housing affordability is as bad as it has ever been, and quite possibly worse. It seems everyone is asking, “Are these prices sustainable?” and “should I wait for the market to correct before I buy a home here?”

Those are two very good questions! If you’re looking for answers to them, unfortunately you’re going to have to keep looking, because I can’t pretend to answer them in any way that you should rely on. Whether you should buy, sell, or hold any real estate in Santa Cruz county is a very consequential decision, and getting to that determination is a path for your steps alone.

I’m just here to provide some information for you which I hope will be of some value if you are struggling to figure out what to do in today’s Santa Cruz real estate market. I’ll begin by addressing the question of pricing sustainability.

Historically, real estate prices in Santa Cruz have marched inexorably upward…with periods where prices have retreated for brief periods of time. Even in the real estate collapse of 2008-2009, prices really only went down for about 18 months before hitting bottom in 2010, and they’ve been climbing (sometimes lurching) upwards ever since.

It’s important to also understand that much of the increase in home prices is just garden variety price inflation. A dollar bill you had lying around in 1984 is equivalent to $2.78 in 2022 money. In 1984, California’s median home price was $114,260 – which means that adjusted for inflation, the California median price “should be” around $317,600 today.

Yet Zillow reports that the California median home price is about $790,000, more than double the increase that can be attributed to inflation. This does beg the question, how can prices keep up?

The answer is simple. Home price increases have exceeded the rise of inflation because income increases have exceeded the rate of inflation. According to the St. Louis Federal Reserve, the median California income in 1984 – in 2021 dollars – was $25,287, and the median income in 2020 was $77,358 – a 300% increase, which is adjusted for inflation.

California home prices have grown about 250% greater than inflation over the past 35-40 years…but inflation-adjusted incomes have grown 300% in that time. This helps to show how and why home prices have risen to where they are today.
Regardless, I am absolutely certain that prices will come down again – but what I can’t tell you is when, by how much, or how long they will stay down. And crucially, I can’t tell you how much more they will rise between today and whenever they do finally retreat. I will say though that I am not expecting that we will see a drop in home prices in Santa Cruz county this year.

A lot of people are very incredulous that home prices will continue to rise, given how far they’ve gone up recently, especially in the face of the sharp – historically sharp, actually – increases in mortgage rates that we have seen over the past couple of months. However, I have yet to see any forecast which predicts that national or California home prices will decrease this year.

Just today I read an article that said CoreLogic, a major real estate analytics and data services company, put out a new report predicting that the median U.S. home price will increase 5.9% between March 2022 and March 2023.

That same CoreLogic report analyzed 392 U.S. housing markets in April of this year, looking to determine the likelihood that there will be price decrease in them over the next 12 months. In the Bay Area, every county – including Santa Cruz – registered a “low” probability (20-40%) chance of a price decrease in that time. However, it should be noted, Monterey county was rated as having a “Medium” chance of home price decreases, in the 40-50% range.

And that leads me to that second question: should you wait to buy, in anticipation of the inevitable correction in Santa Cruz housing prices?

I’m not a big believer in market timing – in most cases, if you’re able to successfully time the market, you owe it to luck. But knowing that real estate prices have tended to rise over the long term, and will likely continue to rise until we reach the Zombie Apocalypse, should help inform your decision. You may want to wait … but you may not want to wait too long.

 Seb Frey was the 2019 President of the Santa Cruz County Association of REALTORS. He’s been selling homes locally since 2003 and is the author of Get It Sold! (available at TheSoldBook.com) and stars on his own YouTube channel at YouTube.com/SebFreyTV