Following is the Sonoma County Q3 Real Estate Report.
Sonoma County: Q3 Results
Sales trends set at the beginning of 2013 continued through the third quarter in Sonoma County: high demand from buyers, a tight supply of homes for sale, and upward pressure on prices.
The market for homes priced from $400,000 to $900,000 was strong, and we saw a surprisingly large jump in sales for high-priced properties – up to $2 million. There was a big drop, however, in the sub-$400,000 market, which in recent years had been the province of foreclosures and short sales. Sales at that price point have slowed dramatically in recent months as the foreclosure and short-sale inventory dried up and homeowners regained equity and were able to hold onto their properties – or trade up at higher price points.
As the market slowly settled from the frenzy of previous quarters, sellers continued to receive multiple offers for their properties, though not as many as before. The inventory of available homes rose modestly in the third quarter.
Looking Forward: After exhausting the supply of lower-priced properties, sales activity will gradually work its way up the market. We anticipate a strong finish for the year, with the recent uptick in interest rates acting as an incentive for both buyers and sellers to take advantage of a market that still offers solid bargains for buyers and quick, uncomplicated sales for sellers.
Defining Sonoma County: Our real estate markets in Sonoma County include the cities of Cotati, Healdsburg, Penngrove, Petaluma, Rohnert Park, Santa Rosa, Sebastopol, and Windsor. Sales data in the charts below includes all single-family homes and farms and ranches in Sonoma County.
Median Sales Price
The median sales price represents the midpoint in the range of all prices paid. It indicates that half the prices paid were higher than this number, and half were lower. It is not the same measure as “average” sales price.
The months’ supply of inventory is a measure of how quickly the current supply of homes would be sold at the current sales rate, assuming no more homes came on the market. In general, an MSI below 4 is considered a seller’s market; between 4 and 6 is a balanced market; and above 6 is a buyer’s market.
Average days on the market is a measure that indicates the pace of sales activity. It tracks, on average, the number of days a listing is active until it reaches “pending” status, meaning all contingencies have been removed and both parties are just waiting to close.
Measuring the sales price as a percentage of the final list price, which may include price reductions from the original list price, determines the success of a seller in receiving the hoped-for sales amount. It also indicates the level of sales activity in a region.
We are frequently asked how long the current real estate market or housing cycle will run. Our industry is not short on opinions, predictions, and speculations. This past month, I reviewed the most comprehensive housing report I have read since 2007: The John Burns Real Estate Consulting Home Value Index.
The report defines housing-cycle risk as a function of demand, supply, and affordability. This is a fairly simple perspective that comes as no surprise. The forecast or outlook is dependent on job growth for demand and excess supply in the forms of new construction or foreclosures. On a relative scale compared with the housing market in the U.S., our local markets have limited excess supply at this time.
The Burns report goes on to note that the markets with the most upside are clearly those that experienced the most significant downs. Again, this concept is not overly complex, and the variables are relatively easy to comprehend.
The most stimulating aspect of the report is in the Burns Home Value Index Forecast for December 2017. We have often struggled with the S&P/Case-Shiller and similar indexes, which generally offer perspectives based on 90 to 120 days trailing market performance and do not look forward.
The Burns report cites summary research from nearly 100 economists’ responses to questions about housing appreciation in the U.S. from Q4 2012 through December 2017. The Burns report estimates 35.9 percent appreciation through December 2017, with more than 9 percent already realized through September 2013. The 100 economists’ consensus for that same time frame was 22.9 percent appreciation, with 6 percent already realized.
The Burns report provides regional outlooks on nearly 100 markets. The Bay Area findings are illustrated in the table below:
With the caveat that real estate is local and each neighborhood and home is unique, these forecasts are very reassuring. In particular, the outlook for 2017 is exceptionally encouraging. However, the report illustrates that the majority of the lift in the market will occur in 2014 and 2015, with modest to flat growth in 2016 and 2017.
The opportunity to realize value in real estate and historically low mortgage rates is now. Mortgages will likely exceed 6 percent by 2016, a 30 percent increase from today’s rates.
Your local Pacific Union real estate professional is uniquely positioned to review macro trends and neighborhood specifics to assist you in your residential real estate investments. Please remember that your most significant real estate investment is in your home — which is a place to live and create memories — rather than just your house.
Mark A. McLaughlin, CEO, Pacific Union
Move-Up Buyers: Now Is the Time to Act!
Many would-be move-up buyers have been sitting on the sidelines in recent months, crossing their fingers that the Bay Area’s superheated real estate market will cool. But conditions are about to get tougher – so hesitant move-up buyers should act now.
Looming ahead is the prospect of rising interest rates coupled with continued price appreciation in home sales. Buyers who don’t seize the moment will likely regret it with their checkbooks down the road.
“I tell people to buy everything you can afford to buy with these interest rates today,” says Patrick Barber, president of Pacific Union’s San Francisco region. “They cannot stay this low forever.”
We’re already seeing the truth in that statement. At the start of the year, the APR for a 30-year, fixed-rate mortgage was 3.41, one of the lowest levels ever recorded. But in June, rates crept above 4.0 percent. By the end of August, they were at 4.46 percent – a 31 percent rise.
In mid-September, the Federal Reserve unexpectedly announced that it would continue purchasing mortgage-backed securities, a move that some feel could keep interest rates fairly low for the remainder of the year. Savvy buyers, however, will want to be prepared for a worst-case scenario.
For example, let’s suppose that buyers who are upgrading their home will spend about 35 percent above the median sales prices, which was $715,714 across Pacific Union’s seven Bay Area regions as of September 9. Let’s also assume that the median sales price in the region will increase 12 percent annually and interest rates will climb 1 percentage point per year.
By that math, move-up buyers who delay their purchases for two years could spend over $26,000 more each year in monthly payments, as well as almost $50,000 extra for their down payment.
Some people have already worked out the math. In San Francisco, one of our top real estate professionals notes we are seeing the most activity in the move-up-buyer population since the recession. In Marin County, increasing inventory has spurred an uptick in purchases by move-up buyers, says Brent Thomson, Pacific Union’s senior vice president in the region.
Out With the Old – But How?
Whether they’re primed to act now or not, Bay Area move-up buyers face one dilemma that first-time buyers do not: They not only need to find new homes in a hot market, they also need to sell their current properties.
That’s not a problem if you’re flush with cash. But if you have limited funds, you might need to sell your current home before buying a new one or negotiate a rent-back agreement, which would allow you to remain in your sold home while you search for a new residence.
“The safe bet is to always sell your property and get a rent-back,” says Barber. “If you buy a piece of property (before you sell), you have a large financial commitment. Most families cannot afford two mortgages.”
Our real estate professional reports that she has had some success working with clients who attempt to sell their existing home while buying a new one. “Once their offer (on their new home) is accepted, they prepare the old home for market as fast as possible,” she says. “But everything has to go very smoothly in order for the seller not to be in the stressful position of owning two homes at once.”
You might be able to make the sale of your current home contingent on finding another acceptable property, but the success of this strategy depends on market conditions. The approach has worked for some move-up buyers in Marin County, says Thomson, but there’s a catch: “The key is that the house that they are selling has to be priced right,” she says.
And in many markets where sellers are receiving multiple offers, they may be less likely to accept your contingent offer when other, clear offers are available.
Financing Options for Move-Up Buyers
If you’re ready to hop off the fence but don’t have money to put toward a new home, bridge-financing products – short-term loans that can help you purchase a new home before your current home sells – may be a solution. While bridge loans can help ensure you don’t miss out on your dream property while your current one sits on the market, they do carry higher interest rates than regular mortgages.
Another option is the REX HomeBuyer product from FirstREX, offered in combination with loans from Pacific Union’s partner Mortgage Services Professionals. FirstREX’s product enables you to make up a cash shortfall by contributing up to 50 percent of the down payment in exchange for a stake in your new home’s eventual price appreciation or depreciation.
As with any homebuying transaction, you should consult with a reputable mortgage provider who can offer guidance on all your financing options.
Whichever approach you take, one thing’s for sure: It’s time to come off the sidelines and get into the game, or you risk some big financial penalties in years ahead.
Bay Area 10-Year Overview
Here’s a look at home sales in the Bay Area’s real estate markets in the third quarter of 2013, with a glance back at the 10 preceding third quarters.