Sac housing affordability, market growth to be talk of the town in 2018 | Crain's Sacramento

Sac housing affordability, market growth to be talk of the town in 2018

Modestly priced homes, such as this model at New Faze Development’s Renaissance at Dry Creek subdivision in Sacramento, will be even harder to find in 2018. | Courtesy of New Faze Development.

It’s going to cost more to live in Sacramento, and even harder to find that dream home in the New Year – but you might get more for your money, according to local real estate appraisers and housing market analysts.

Here’s a look at what they say are expected to be five major discussion topics in 2018:

Homes will be less affordable – and there will be fewer of them. Following up on the National Association of Realtors’ projections that show housing affordability nationwide will continue to decline in 2018, Sacramento-area homebuyers and renters can expect to hear that topic repeatedly this year, according to Ryan Lundquist, publisher of the Sacramento Appraiser Blog. Buyers will also see the end of the $150,000 home by the end of the year, Lundquist predicts. “It’s not just the lowest prices in the market that are experiencing upward price pressure. It’s really entry-level homes in most neighborhoods, regardless of the price,” he says. “Yet the median price in Sacramento has been hovering around $350,000, which literally means half the market is shopping below that price point. This alone reminds us it can be much more competitive at lower price ranges since more buyers are shopping there.”

Prices will also be pushed up because the area’s housing shortage is expected to continue for at least another year, according to Lundquist. Call it good news, bad news: The shortage – a result of limited new construction over the past decade, mostly due to the Recession – is now keeping builders extremely busy and creating some additional housing within the region. “But the bad news is it takes time to build, so sprinkling in some homes and apartments here and there is not a quick way to solve a housing shortage,” he says. “Moreover, many skilled laborers left the area when the previous real estate bubble burst, so having enough workers is an issue.” But there are signs of relief going into 2019: Housing inventory in 2017 was slightly higher than in 2016, a positive but “anemic” trend that could carry over next year.

The nation’s new tax plan may temporarily slow down home sales. This is not a Sacramento-only impact, but it will be felt strongly in this region, according to Lundquist. At the moment, it’s a coin flip: “Some say the new tax plan will create less incentive for home ownership and cut values drastically, whereas others say there won’t be much impact in most of the country beyond some higher-dollar pockets,” he says. “The truth is the future hasn’t happened yet, so in humility we must admit we don’t yet know the extent of any impact.” But the new law is effectively an “uncertainty casserole” because potential buyers and sellers don’t know what to expect. It will take one to two years for people to “adapt to the new world order.” Sales and prices will stall somewhat during that time, Lundquist notes.

Projections by realtor.com echo that sentiment. The site forecasts a 3.2 percent growth rate nationally in new home prices for 2018, down from 5.5 percent in 2017. The Sacramento housing market is expected to grow by a mere 1 percent in sales and 2.61 percent in prices in 2018, down from 4.9 percent and 7.2 percent, respectively, last year.

Most of the decline will be felt in neighborhoods with larger, more-luxurious homes, while areas with starter homes will retain their pricing due to limited supply. “The tax reform legislation will be the wildcard in 2018,” says Javier Vivas, realtor.com’s director of economic research. “While more disposable income for buyers is positive for housing, the loss of tax benefits for owners could lead to fewer sales and impact prices negatively over time with the largest impact on markets with higher prices and incomes.”

Legalized marijuana growth could be a headache for buyers, sellers and brokers. The full legalization of marijuana in California will impact everything from commercial rents to public perception of an area, according to Lundquist. Savvy land buyers have already purchased most of the prime large parcels surrounding Sacramento, but there are other opportunities available. There will be greater interest in industrial properties, which could drastically reduce commercial vacancies. Real estate agents and private lenders may even attempt to find ways to promote properties with marijuana growth potential, from billboards to listings with carefully phrased statements such as “good for income-producing crops.”

Disclosure will be a problem. Currently, real estate agents and brokers have to include information about known property defects, hazards and any other issues that could affect a buyer’s decision to enter into a deal. Where marijuana fits in is a gray area. “My sense is if it becomes more common to see pot growing in homes, we’ll need to hone our skills and consider what disclosure needs to look like,” Lundquist says. “[For example], does the smell of a nearby pot farm need to be disclosed?”

Lenders will be in a quandary. More land sales means more business – but most banks are federally managed, and the U.S. government still prohibits marijuana growth. As such, these financial institutions won’t lend to borrowers who make money growing pot, nor will they generate loans to buy properties that will be or are being used as marijuana farms, according to Lundquist.

Most of the financial impact locally depends on how many cities actually agree to sale of marijuana. “So far, the City of Sacramento has been a lone wolf in allowing commercial cannabis cultivation, since surrounding cities have basically said ‘no,’” Lundquist says. “[But] in 2018, I suspect we’ll see other cities jump on the cannabis wagon.”

Buyers will ask for – and get – more for their money. Offering the latest and greatest always appeals to homebuyers, so expect to see more builders and sellers promote “smart” technology in a home – from Amazon Echo-controlled light switches, thermostats and sprinkler systems, to cloud-based security cameras and programmable light bulbs. But there will also be a retro-feel to what buyers are looking for, with many seeking more color throughout the house. “Some [designers] say totally white kitchens are on the way out,” Lundquist says. “Others anticipate seeing more avocado green on walls – hello, 1970s – and a return to brass fixtures, circa 1980s.”

Lenders will offer more-creative financing to prospective buyers in an effort to keep prices high – a practice that could backfire down the road, Lundquist warns. “Keep in mind we are nowhere near 2005, when money was being given to anyone with a pulse,” he says. “But if lenders loosen things up too much, it’s probably a good thing to be concerned about.”

Meanwhile, expect many of those buyers to be tech-savvy millennials, according to Vivas. This coming-of-age group will still face major hurdles in finding homes they can afford, they will continue to grow as a home sales influence simply due to its size. Roughly 43 percent of new homebuyers are expected to be thirty-somethings, up from 40 percent in 2017. “Millennials already dominate lower price home mortgages and are getting close to overtaking older generations for mid- and upper-tier mortgages,” Vivas says “While financially secure in general, their debt to income ratios have started to increase as they compete for higher priced homes.”

The end of the “bubble” is almost here – or is it? As values creep back to or surpass their previous peak in some neighborhoods, conversations will increase about whether the housing bubble is about to burst, Lundquist notes. It’s a natural concern, given the impact of the Recession. But one positive is that some owners who sense the top of the market is near may choose to list this year, and that can create some inventory. “I [recently] spoke with someone who is planning to leave California,” Lundquist says. “This guy’s idea is that he’ll list his home in a few months in order to cash out while values are high. Does this man represent all sellers? No. But does he represent some? Yes.”

Real estate marketing strategist Gord Collins expects the Sacramento market to remain an investors’ stronghold for at least two more years, as housing needs and job availability even out. In that time, investors should go after any solid opportunities that present themselves, especially in rental markets. “In-migration has been strong at a time when millennials are leaving home, contributing to rocketing apartment and home rental costs,” Collins says. “This is fueling a tremendous demand for investment income properties. With no one building new homes and the government not acting to help, it’s up to private investors to take the helm.”

January 10, 2018 - 5:06pm