Where is this market headed?

Lately, it seems like this question is plaguing both buyers and sellers?

Why you ask? There are a variety of reasons…

For Buyers:

  • They are concerned they are purchasing at the top of the market
  • Worried about another market correction like we witnessed in 2008
  • There is a limited amount of inventory which requires quick purchasing decisions
  • Limited leverage for negotiation (especially with multiple offers)

For Sellers: 

  • Struggling with pricing the property correctly
  • If they sell now, will it make sense to purchase now?
  • Should they repair or renovate to extract more value?
  • Can they net more at closing if they wait until next year to sell?

These are all great questions and legitimate reasons to be cautious. After all, real estate is always changing so its good to keep a pulse on the market and the direction its headed.

For that reason, I wanted to provide a 15 year snapshot of the Placer County market so that we could look back and reflect on the market behavior through a market high, to a market low, and back to a market high.

Lets look at a couple different categories…

For Sale / Sold / Pended

The chart below does a 15 year look back of single family homes within Placer County that were put up for sale (AKA listed on MLS), went into contract (AKA pended), and closed escrow (AKA Sold).

15yr snapshot - sale, sold, pended 7.11.19.PNGInteresting items to note:

  • Sales volume has remained very consistent.
  • During the height of the Great Recession (2008-2010), inventory (AKA homes listed for sale) almost tripled, yet sales volume dipped only slightly and for a relatively short period of time.
  • Closed sales and homes in contract (AKA pended) follow a very predictable pattern  – they peak in the summer months and dip in the winter months.

Average Price Per Square Foot

This chart does a 15 year look back of the average price per square foot of single family homes within Placer County.

15 yr - avg price sq ft 7.11.19Interesting items to note:

  • Price per sq ft peaked around July of 2005 at approx. $265 per sq ft (average).
  • We are now approaching an average of $250 per sq ft which is still $15 off the all time high.
  • The record low averaged $135 per sq ft around November 2011.

Months of Inventory

This chart is one of my favorites because I believe its a good indicator of what to expect moving forward in the market.

“Months of Inventory” refers to the total number of homes listed for sale at a given point in time, and how many months it would take to sell those homes if nothing new hit the market.

Inventory can create a “buyers market” or a “sellers market”…

It usually looks something like this:

Buyer’s market: more than 6 months of inventory based on closed sales
Seller’s market: less than 3 months of inventory based on closed sales
Neutral market: 3 – 6 months of inventory based on closed sales

Anyhow, lets do a 15 year look back and see what the market did…

15 yr snapshot of inventory.PNGInteresting items to note:

  • In 2008, inventory peaked with 10 months worth of inventory – this was the height of the recession. The increased inventory put downward pressure on home prices.
  • Since early 2010 (9 years ago), we have averaged just over 2 months of inventory which kept sales activity high (despite the lower prices).
  • Today we still have less than 2 months of inventory create a high demand (great for sellers)

Mortgage Rates

The image below is a 15 year historical average of the 30 year fixed mortgage rates. If you would like to see more historical rates or the full write up from ValuePenguin, check it out HERE.

Rate Chart - 15yrInteresting items to note:

  • In the height of recession in 2008, the average rate was 6.03% (about 1.5% higher than today).
  • From 2012 to 2017 (five years) the average rate was just under 4% – this was likely to fuel price appreciation and sales activity.
  • As rates rise, buyers purchasing power decreases. As a general rule, a 1% increase will reduce purchasing power by 10%.

Summing it all up

Even though we cannot predict exactly what the future holds, we can look at the data and try our best to make an educated guess on where the market may be headed.

Here’s what we know:

  • We are about 9 years into a bull market in real estate (price increases), but we have not surpassed prices seen in 2005 (on average).
  • We have a huge demand for housing with less than 2 months of inventory.
  • Interest rates are 1.5% lower today than they were in 2008.
  • Sales activity has remained very consistent over the last 15 years.

Here’s what we DON’T know:

  • Where are interest rates headed?
  • What sort of government intervention will occur (i.e. will fed lower rates, 2020 election, etc.).
  • Inventory levels (i.e. Baby boomers are retiring and downsizing), how will these homes impact the market.

With the information at hand, my personal belief is that we will likely see moderate price appreciation over the next couple of years which will be contingent on inventory remaining low and interest rates maintaining their current levels.

Buyers who are feeling priced out of the market due to income restraints will need to be creative and strategic about their home purchases. They will need to seek value in “sweat equity” projects, and/or rent out portions of their home to maintain affordability (aka House Hacking). Its all about being a little more creative and finding unique ways to make the market work in your favor.

Sellers can benefit the most in this market… However, they need to make sure they are pricing the property appropriately and preparing the home correctly. They can and will benefit greatly from some strategic upgrades and repairs to make sure the hope show well.

Hope you find this information useful.

All the best!

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