Adventures in Sacramento's Real Estate / Rental Market
By Laura Braden
Rent or buy? Rent or buy? Rent or buy?
This has been one of the predominant discussions in our house lately. On the one hand… buying would help us tax-wise, interest rates are low and we can afford what we want where we want. On the other hand… mobility=freedom, and who wants to spend their weekends at Home Depot when your landlord could make the repairs? We’ve also already been homeowners (and landlords) before, and we didn’t enjoy the experience.
But one thing is for sure – no matter what side you’re on, the current Sacramento inventory is LOW and going FAST. Nowadays, it seems you need your financing in order before you walk into your first Open House, and you need to submit an application before they’ll even let you view an apartment.
For starters, am I crazy or is inventory crazy low right now? Why or why not?
KIM: The real estate market in Sacramento has been fast & furious this year. Because inventory is at the lowest it’s been in 15 years, buyers have been battling multiple offer situations and over asking prices. Although I don’t feel momentum slowing down, I do see a slight rise in inventory, and this translates to a healthy and balanced market in my eyes.
AP: YES, inventory is way down this year. According to SacRealStates.com, we’re at 68.6% less inventory than what was available at this time last year. That’s a significant change for our community. Flippers and investors have been purchasing homes by the thousands over the past few years. For the average buyer, affordable housing isn’t as prevalent as it once was.
RYAN: You’re not crazy. Housing inventory has been very low all year for three main reasons: 1) First off, there have been about 10% more sales this year so far, which naturally leads to less homes on the market; 2) Buyers have had this 2004-ish sense of urgency to get into contract before interest rates rise, so there has been an increased demand for housing; 3) We no longer have a distressed market, so we just don’t see the foreclosures and short sales hitting MLS in waves like they were doing several years ago.
Rents and housing prices are on the rise – what do you attribute that to?
AP: Housing prices have gone up 8.9% in the past year, according to Zillow. In Sacramento, 18.8% of homes have negative equity, vs 15.4% nationally. Sacramento has grown 10% in the past decade. Unfortunately, Sacramento incomes have not increased at this rate. This directly impacts first time home buyers and their ability to qualify for rentals or purchases.
KIM: Yes folks, Sacramento has finally arrived! The out-of-towners not only realize Sacramento is still affordable but also how charming, livable, easy and delicious our city is. Of course, we are seeing MANY buyers priced out of the Bay Area who are flocking here, but also plenty of empty-nesters from places like El Dorado Hills and Los Angeles. They have become much more interested in walkability, and they want to be close to the action/ their grandkids. This is one of the factors that I think will contribute to rising home prices and rents. There are simply more people interested in coming to the center of the city than there has been in the recent past. Also, the interest rates are still at historic lows. Shifts will occur and things will slow down at some point, but I don’t expect prices will go down anytime soon.
RYAN: Yes, both rents and values have been on the rise. In early 2012 values stopped declining after a huge downward trek for about six years. At this time, interest rates went below 4% for the first time ever and cash investors began gutting the low end of the market by buying distressed sales (bank-owned sales and short sales). This caused abnormally low inventory, which led to very aggressive appreciation – particularly at the beginning of 2013. However, cash investors began backing out of the market in mid-2013 after ramping up values. Overall we saw modest appreciation in 2014 and 2015, and the market is best described as trying to figure out how to be normal after inflated values ten years ago, massive declines, and then several years of cash investors driving local real estate.
How does our current housing situation fit within the larger historical context? Have we seen this scenario before?
AP: During my fifteen years in the mortgage industry, I have seen two full housing cycles. What I see now is a trend of aggressive pricing and lending options. Rather than being at the start of the bubble, I see us toward the top. I’ve personally had 25% of my purchase appraisals come in short of actual purchase price over the last ninety days. This is important because it shows me we’re getting closer to a pricing ceiling with realtors and sellers. This means that sellers will start to lower their listing prices which in turn will lower housing value across the board.
KIM: I think the prior bubble was driven by the fact that anyone with a pulse could get a loan, and people were borrowing way beyond their means. Lending is highly regulated and responsible now. Sure the market fluctuates, but I don’t think we will see a severe correction like we saw in 2006 because of the lending restrictions. I also think as a society we may have learned a little something from that mistake.
RYAN: Current values are about where they were at the very end of 2007 and beginning of 2004 in Sacramento County, though some neighborhoods are further along (or lagging behind). It’s important to remember real estate trends happening in one price range or neighborhood may not be happening in every price range or area. This means just because Midtown is hot does not mean North Highlands is hot. For reference, the median price and average price per sq ft are currently about 27% lower than they were during the peak of the real estate “bubble” in 2005.
Are we experiencing the start of the next real estate bubble? Where are we (as a community) in the cycle?
RYAN: First off, my crystal ball is broken. Predicting real estate is sort of like predicting what Justin Bieber is going to do next. The truth is nobody knows what the Biebs will do in a few months or two years, and the same is true with real estate. All we can do is look to the past and make educated guesses. Are we in a bubble? Well, I’ll say this: For the past four years values have increased, and the market would never have gone up this much had it not been for the Fed deliberately lowering interest rates to 4% during this time. Thus we do have an inflated market because we have seen artificial growth, and if buyers are affording the higher market because of low-interest rates or low-down payment mortgages, that is an issue. Ultimately we need wage growth and the job market to drive real estate rather than low-interest rates. If wage growth cannot keep pace with values, we’re asking for a correction at some point if rates do shoot up. With that being said, the market was due for an upward correction nearly four years ago because values really did bottom out to the point where it didn’t make sense to rent any longer because it was cheaper to buy.
Kim: Real estate cycles last about every 8-12 years. At some point factors will change (interest rates, inventory, natural disaster, etc.). No one can predict when it will shift, but I we have eliminated the poor lending practices and short-term speculation. If you are in it for the long haul, there is no better investment.
#1 reason you’d tell someone to rent?
AP: Renting allows flexibility. A renter won’t be tied down to a particular location because she can leave when the lease expires. There is no major investment and no commitment.
KIM: Rent if you are just staying short-term. I generally think a two-year period would be the minimum you would want to buy for. Even if your value increased in that time, by the time you pay financing and taxes it may not be worth it.
RYAN: Real estate advice is only relevant depending on what the market is doing. If I was writing this answer in 2012, I’d say, “DO NOT RENT. GO BUY”. But now with values being much higher, it is going to make more economic sense for some people to rent instead of buy because they will save money by renting. Ultimately I recommend renting if it makes sense for a person’s lifestyle and wallet.
#1 reason you’d tell someone to buy?
KIM: If you purchase a reasonable property within your means, it’s like depositing money into a savings account every month. Regardless of interest, maintenance and market value, you are still keeping the majority of that investment. Why pay someone else’s mortgage when you can pay your own? Sacramento is an exciting place to buy right now.
RYAN: Buy if you are comfortable with the mortgage payments as well as the neighborhood. Everyone wants to buy low but timing the market perfectly is a rarity. In fact, most people I talk to who bought in early 2012 were not even aware they were buying at the bottom. They simply bought at a time when they were financially ready… and they got lucky. This is why I emphasize being comfortable with the payments because markets will go up and down over time.
AP: The median sales price of existing single-family homes rose 81% from 1993 through 2013 (NAR). Just in the past 24 months, we’ve seen Sacramento housing prices rise over 20%. And money is still soooo cheap! The average 30 year fixed is 3.94% today, which is quite a bit lower than the 2000 average of 8% (source). Whether or not you decide to buy or rent, the most important thing is to know where you sit financially and credit-wise. Did you know that you can obtain a FREE copy of your credit report, annually? All you have to do is go to https://www.annualcreditreport.com/index.action (this website is more accurate than Credit Karma or creditreport.com). If you decide to buy, getting prequalified for a loan is by far the most important step. This is where my expertise comes into play. Give me a call to find out what I can do for you.
Where can you still get the biggest bang for your buck (renter or owner)?
KIM: Areas like South Land Park, Tahoe Park, North Oak Park, Older West Sac, Hollywood Park and yes, still Midtown are great investment areas that you can get the biggest “bang for your buck” All of these areas have one thing in common and that is proximity to downtown. However in places like South Land Park and Hollywood Park you can get a sprawling 2000 sq. ft. home with a pool and large yard for around 275-450k. Tahoe Park has a great young vibe with many first time buyers choosing that area. North Oak Park just simply has some amazing early architecture, with big trees and front porches, as well a new business district. And you can’t get any closer to downtown than Midtown or West Sac. Check out the State streets in West Sac, huge oak trees with sweet homes on large lots.
RYAN: It’s such a relative concept to get the “biggest bang” because that could look different depending on a person’s goals in real estate. I will say the Broderick area tends to command decent rents while having lower values, so that can be a great place to pick up a rental. There are still streets in Oak Park that are affordable as well as Colonial Heights and Tahoe Park.
What mixed use and/or residential development are you most excited for? Why?
KIM: I’m most excited about The Mill at Broadway and The Creamery in Alkali Flat. The Mill will essentially connect the Land Park neighborhood to Downtown. They are building approximately 200 high-tech homes that start in the low 200’s! The development will have tons of green space, a 2.5-acre urban farm and a 4-acre park. There will also be an outdoor marketplace and public art projects. The folks developing the Creamery haven’t released a lot of information, but the development will be 117 new homes on 8 acres at 10th and D St. where Crystal Cream & Butter used to be. I’m simply excited that this area is getting developed and by Blackpine Communities who build quality homes.
RYAN: There is a storage container development that may be coming to West Sacramento. I am fascinated with building from containers, so I hope this one evolves.
AP: The ARENA! This is a great opportunity both the City and the NBA.
And what’s your favorite neighborhood in Sacramento? Why?
RYAN: I really love Carmichael as a whole. It’s close to the river and very eclectic in terms of small and large houses being next to each other, different designs, and some larger lots also. I prefer neighborhoods without sidewalks too as it feels more “rural” despite being clearly suburban. That’s for living though. Nothing beats eating in Midtown.
AP: East Sacramento is one of my favorites. I admire the architecture, and the mom and pop stores that give the area a distinct personality. Who doesn’t love the Fab 40s? Not only that, the community is very united in times of crisis as well as celebration. They are a community in the truest sense.
- Buying? The Redfin app is the absolute best. Easy to use, save favorites and share with others. It may or may not be my guilty pleasure on a Sunday with a glass of wine with Real Housewives of Whatever playing in the background.
- Renting? Yes, keep checking Craigslist, but HotPads.com and PadMapper.com also deserve a daily peruse. SacRentals.com has amazing pictures (sometimes way better than reality) and inventory throughout the area. If you’re looking in #midtownSac, hop on your bike and hit the areas you love best – some of the best apartments simply hang signs in the window/front yard.