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DeedQuest ReviewMarket Snapshot The old saying goes, “the higher they rise, the harder they fall.” And so it is with Sacramento, California. The Sacramento area may be one of the fastest growing in the country, but it is also one of the markets that has been hit hardest by the national real estate slump. The Sacramento housing market has been coping with rising defaults, slow sales, excess supply and downward price pressure in many neighborhoods. Large building companies flooded the area in recent years, building single family homes and townhomes to the horizon and severely depressing the market in the process. But those builders are now abandoning projects, offering deep incentives and concessions, and, well, getting out of Dodge. Tightening lending regulations haven’t helped: even with prices slashed, homebuyers are scant. As if to add insult to injury, Forbes Magazine recently named the Sacramento housing market the 3rd most overpriced in the nation, indicating, perhaps, that prices still have farther to fall. So the questions for investors become: are the market fundamentals of Sacramento strong enough to warrant us keeping an eye on Sacramento as we wait for the blood-in-the-streets bottom that seasoned investors live for? Has Sacramento fully transitioned from a flipper’s paradise to a buy-and-hold market? Will the population growth and solid, varied economy be able to absorb the excess supply, and once again give way to balanced, appreciating market? If so, how long will such a process take? Housing MarketDepending on which source you believe, the median market value of homes in Sacramento as of Summer 2007 is anywhere from the low $300,000's to the low $400,000's. Prices are down at least 8% from 2006. Foreclosures have surged and the number of area homeowners missing at least two monthly mortgage payments reached record levels, and it is little wonder why: in 2004, an astonishing 31% of all new-purchase mortgages were subprime. We can only assume that this number was higher in 2005 and 2006. If true, then we have yet to see the worst of defaults, as many of the loans still have yet to adjust.
A large inventory of finished homes on which builders were willing to offer huge discounts was responsible for much of the downward pressure on home pricing. Now, home-builders are trying smaller lots, shaving extras to bring down prices, and changing using more traditional marketing tactics. Even so, it appears that Forbes Magazine could be right when it ranked Sacramento the 3rd most overpriced market in the nation: the price-to-income ratio for Sacramento is a whopping 7.7, far lower than the Bar Area but still difficult to manage. In the short term, experts expect to see a level of stabilization within the overall California real estate market in the last part of 2007. However, as the California real estate market continues to be hyper-focused on interest rates, the resulting higher rates will curb market activity, particularly in the most vulnerable market.
Rental MarketWhen lending requirements tighten and people are not able to buy homes, there is typically a higher demand for rentals, which in turn leads to higher rental rates as landlords seize the opportunity to raise rents. Sacramento landlords, however, have not been so lucky. In defiance of norms that see new apartment building permits plunge as single-family permits rise, Sacramento's recent building boom included new apartment units. Moreover, and in a major reversal of recent condo-conversion trends across California, condo owners have been converting their condo overstock back into rentals, thereby flooding the market with yet more apartment rentals.
While rental rates have not yet seen a decline, the slow growth in the face of oversupply is worrisome. With rents up only 2.2% as of mid 2007 over 2006, Sacramento ranked 21st among 24 California metro areas for the size of rent increases in the second quarter of 2007. Average rents in the area have increased only 7.3 percent over the past four years. Add to this anecdotal evidence that property managers have started offering incentives, and we get a sour picture of the rental market. There is, however, a silver lining. As consumers are increasingly priced out of the Bay Area and move into Sacramento County, the need for rentals should rise. HUD estimates that over the next 3 years, an additional 12,150 rental units will be needed. As of 2006, 2,550 were being constructed. 2007 and 2008 are likely to see even lower numbers of new rentals come on the market as builders abandon the area. If so, the pace of new apartment (rental) building will be far short of what will be required to fill the forecasted demand. UPDATE JAN. 2008: As one would expect with the increased foreclosures and sale value, rents are up, particularly for smaller units. Interestingly, HUD *lowered* fair market rents (FMR) for 2008 from 2007.
Local EconomyThe housing market slump has affected Sacramento construction, lending and brokerage industries. Unemployment jumped four-tenths of a percent in June, 2007, to 5.2 percent. In the past year, the Sacramento region has lost 1,700 construction jobs and 900 financial services jobs. Real estate and mortgage-lending employment in Sacramento are both down about 6 percent from a year ago.
On the bright side, Sacramento is the state capitol and the government (which is usually a strong source of economic stability) accounts for the largest number of jobs in the area. Sacramento has a strong technology sector that employs about 20,000 through giants such as Hewlett-Packard, NEC Corporation, and Intel. Sacramento is also major agriculture center and transport center. Employment is expected to grow a modest 2.4% over the next three years.
PeopleElk Grove, a suburb of Sacramento in Sacramento County, is reported to be the fastest growing city in the nation by the U.S. Census Bureau. Because of the affordability of housing in comparison to the Bay Area, the region has been growing rapidly, especially with homeowners with families. Neighboring Placer County has nearly twice the growth rate of other counties due to the availability of land to be developed.
Sacramento and its outlying neighborhoods have a relatively large retiree population, as Webb and other builders have built new retirement communities. Surprisingly, Sacramento has a higher-than-average percentage of residents living under the poverty level, a fact that speaks to wealth extremes in the area. The population is forecast to grow at a rate of 2.5 percent over the next 3 years.
   Additional ResourcesCity Website: County Website: State Website: Local Chamber of Commerce: Local News Sources: Wikipedia Entry: Need more? Member ReviewsMember Reviews from 1 Member(s)Learn from market insiders and other investors who are familiar with this real estate market, but remember: the opinions below are just that. Always do your own research and due diligence before investing in a market. The average member ratings are shown above. If you are familiar with this market, please share your knowledge!
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Market ActionThe Market Action Index (MAI) illustrates the balance between supply and demand using a statistical function of the current rate of sale versus current inventory. An MAI value greater than 30 typically indicates a "Seller's Market" (a.k.a. "Hot Market") because demand is high enough to quickly gobble up available supply. A hot market will typically cause prices to rise. MAI values below 30 indicate a "Buyer's Market" (a.k.a. "Cold Market") where the inventory of already-listed homes is sufficient to last several months at the current rate of sales. A cold market will typically cause prices to fall.  Median PriceThe median home price is the threshold which divides the real estate market into two equal halves, in reference to pricing. One half of all homes in the market were sold at a price above the median home price, while the other half were sold below that price. The median price of 101 sold homes would be that price which is lower than 50 of the prices and also higher than 50 of them. The median home price is one of the most common measurements used to compare real estate prices in different markets, areas, and periods. It is said to be less biased than the average since it is not as heavily influenced by the top 2% of homes sold, which may artificially skew prices higher.  Average List PriceThe average home price, or mean price , is the sum of prices of all homes sold in a certain area in a certain period, divided by the number of properties sold in the same area in that period. Average prices can be quite variable than median prices because they are disproportionately skewed by very high and very low prices. For this reason, median prices are favored by the real estate industry. Indeed, the average price can be quite different than the median price for the same sample group. For instance, if you are doing a sold properties report and the homes are very evenly distributed, the median and average might be very similar. However, if the homes sold were weighted more to one end or the other of the price spectrum, then the median and average could be quite different.  InventoryPut simply, the number of residential properties for sale in a given market. Rising inventory is usually interpreted as a sign a slowing market as complementation among listed properties puts downward pressure on prices. In fast growing areas where there is an abundance of new building, however, rising inventory may be temporary. Cross referencing the inventory chart with the median price chart can provide an illuminating picture of an area's housing market.  DOM (Days On Market)The days-on-market figure is a measure of how long it takes to sell the average home in a market. Together with other factors, DOM is used as a barometer of market health and an inidicator of housing demand. Areas with very short DOM figures are often experiencing very brick markets, much as the San Francisco Bay Area did in recent years when DOMs approached the single digits in areas. Very long DOM figures are seen as indicators of a slowing market, as properties languish on the market without buyers.  MapMap |
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