Santa Cruz Real Estate Market Update: August 2022
My favorite market updates are the ones done by Dr. Elliot Eisenberg, MLS Listings’ partner economist. So today I have a treat for you. I’m Shemeika Fox, your Santa Cruz real estate expert. Today, I’m excited to share with you the following Q2 market overview by Elliot Eisenberg PhD.
Without a doubt, 2022 hasn’t been kind to the US economy. 22 Q1 was painful with GDP declining by an annualized rate of 1.6%. And at this point, the best case scenario for 22 Q2 is for slight growth around 1% or so, but may well come in flat or slightly negative as the economy has been battered on multiple fronts. While the impacts of COVID-19 are declining both in the US and globally, resultant supply chain issues remain a problem. Inflation is very high and beginning to dramatically impact household incomes. In fact, national income has declined since fall of last year. Household savings, which had been near record highs, have declined, especially in lower income households. And as a result, they are spending less. Fuel prices are at a record high, impacting both households and businesses, and the stock market posted the worst half year since 1970, both stocks and bonds performing poorly. Monthly employment growth remains strong, although the first time jobless claims have increased meaningfully, but they remain at relatively low levels. Collectively, this is a lot to overcome. And the forecast for GDP growth for CY2022 is at best 1% with the probability of a recession sometime in 2023 at 75%. The good news is that the economy entered this troubling situation in much stronger condition than usual. Corporate balance sheets are strong, household finances are objectively good, and banking institutions are solid. If we do in fact wind up in recession, this is in no way a repeat of the Great Recession in 2008, 2009.
Current expectations are that inflation will top out no later than 22 Q3, pulled back by both the Federal Reserve Board’s interest rate hikes, some organic improvement to supply chains, and slowing consumer demand, especially for goods. That said, the projected decline in the inflation is unlikely to be fast enough to change the Fed’s rate raising trajectory, and certainly not after the recent strong jobs data. The Fed has made it quite clear that they will continue to raise rates due to worsening inflation pressures. They have signaled plans to raise the Fed funds rate every six weeks for the near future, perhaps for as long as a year, with the next several hikes in the 0.5% to 0.75% range, and then 0.25% until the inflation target rate is in sight. If inflation data does not worsen, the Fed will not alter the current course. And as a result, 10-year treasury and 30-year mortgage rates should not meaningfully change from where they are now. Of course, if inflation gets significantly worse, the Fed will tighten monetary policy further. Should inflation dissipate more quickly, or if the economy stalls or falls into a recession, the Fed might institute fewer or smaller rate hikes or stop rate hikes earlier than they would otherwise. Regardless, expectations of inflation went up rapidly in the first half of 2022, and those are already baked into the cake, so to speak. And rates are more likely if anything to fall from where they are now.
2022 Q2 National Housing Market Overview:
Check this out. There are two key factors likely to impact the housing market for the rest of 22. First, while mortgage interest rates are unlikely to get significantly higher than they are now, we are already starting to see the impacts of increasing rates on the housing market. May closed sales based on contracts from March to April when rates had increased somewhat already show signs of slowing. And with higher mortgage rates in May and in June, sales activity is likely to show additional declines. In addition to interest rate impacts as we see some softening in the job market and household savings shrinking, we will inevitably see a slowdown in sales. We already see this in data for weekly applications for first-time mortgages, which continue to decline on a relative basis compared to pre-pandemic levels.
Second, the most meaningful change of late in the housing market is the rise in year over year inventories for the first time since early 2019. But inventory growth, while high in percentage terms, in actual units remain small. At the national level, available inventories are at 1.16 million units still well below normal pre-pandemic levels. Price appreciation through the first half of the year was surprisingly strong, much stronger than most economists had predicted. However, higher home prices and interest rates will manifest in slowing rates of home price appreciation which should go from the 15-20% over the past year to closer to 5-7% by the end of the year if inflation is taken into account. The real price appreciation may be around zero.
In terms of new housing supply, new construction of multi-family properties will continue to do well, but perhaps soften slightly. Single family starts are likely to decline somewhat from where they are now, but not by much. The number of single family units under construction is relatively high, but that is less because of new starts and more because builders have been unable to complete homes under construction due to supply chain issues.
Demand for housing is still high, and demographics remain favorable. Further, even if individual buyers get priced out, Wall Street is still buying, which puts a floor under price appreciation. Thus, even if this is a recession, there will be fewer impacts to the housing market because we have never been in this undersupply going into a recession. The bottom line is this. Housing market is still a seller’s market, but slightly less than it has been for the past few years.
2022 Q2 Regional Economic Overview:
If 22 Q2 was unkind to the US overall economy, the stock, financial and capital markets have been especially unkind to the tech sector. Tightening financial conditions have made it much more difficult to raise capital. And as a result, venture capital deal making declined from 70 billion in 22 Q1 to just 47.5 billion in 22 Q2. IPOs have declined precipitously, and SPACs have collapsed. Bond yield spreads between investment grade and non-investment grade have increased significantly. Crypto values declined by 2 trillion from the peak and are under 1 trillion for the first time in years. The decline of the stock market has had a disproportionate impact on growth stocks compared to value stocks. And since tech is fast growing and future oriented, higher interest rates have outsized impacts on growth stocks. As a result of these market forces, a growing number of tech firms have announced layoffs and job reductions.
The evolution of return to work policies will continue to play an outsized role in areas surrounding San Francisco. San Francisco was one of the cities most adversely impacted by COVID-19 and still has one of the lowest ratios of workers who have returned to the office on a regular basis. There seems to be a consensus though while the financial sector is more likely to pull employees back into the office, the tech sector is likely to see more employees remaining in a work from home environment. Much will depend on how employers are able to lure employees back to the office because as employees are able to decouple work from life, there is a flight to lifestyle. The MLS Listings area has and will continue to benefit from employees who have or can move outta San Francisco area and into the desirable lifestyle area surrounding. An additional trend to watch will be to see if some of the political and court decisions in the national arena will lead some tech firms to rethink location out of California.
2022 Q2 Regional Housing Market Overview and Highlights:
In the MLS Listings area, 22 Q2 followed the national script of a slightly slowing housing market. Price appreciation remains solid, although it has slowed noticeably compared to prior quarters, and sales are down demonstrably compared to the overheated past several years. For the first time in a very long time, overall sales volume compared to last year is down. Importantly, year over year active inventories are beginning to rise and month supply of available inventory rose. That said, average days on market decline compared to 21 Q2 and the percent of list price received at sale remains above 100%, demonstrating that despite rising interest rates and high prices, buyers are still willing to pay a premium to get a home under contract. As Dr. Eisenberg notes, “While inventories have improved, they remain very tight. The next variable to monitor is days on market, which should begin to exhibit year-over-year increases. That will be another sign of a slightly less frenetic market.”
Once again, median home prices in the MLS Listings area rose to record highs. San Mateo County had the highest median single-family home price at 2,103,000, 7.8% gain since last year. Santa Clara County saw the highest rate of year-over-year price appreciation, and the median single family home price at 1.88 was 12.9% more than last year. Single-family prices in San Benito County rose 12.2% to 857,980, and prices in Santa Cruz rose 8.4% to 1.35. The Monterey’s medium single-family home rose to 875, was up 2.9 from last year.
In the common interest market, San Benito saw a staggering 40.3 gain over last year on the 10 sales during 22 Q2, rising to a median home price of 601,250. The most expensive townhouse and condos are in Santa Clara County, where the median price is 1,037,862, which is up 15%. Prices in Santa Cruz County rose by about 15% last year to 863. In San Mateo County, prices rose 7.4% to 1,020,000. And in Monterey County, they’re up 4.1% to 635.
Single-family dipped 20 to 25% around the region in San Benito County, seeing 25.9 decline in Monterey County sales, declining by the smallest year-over-year percentage of 19.8. Common interest market generally saw larger year-over-year declines in closed sales, despite rising prices. The dip in sales cause overall sales volume to decline across the region compared to years over heated market.
While the number of new listings decline across the region compared to last year, the larger slowdown in sales pushed year-over-year single family inventory levels up. Single-family inventories rose by the largest percentage in Santa Clara County, where there was a 50.3 increase in active listings. Active listings in San Mateo County rose 20.3, and they rose by 10.5% in San Benito County. Active inventories were nearly flat in Monterey County, and declined by 2% in Santa Cruz County.
Still, inventories remain tight with about 2.5 months supply of single-family homes in Monterey and San Benito Counties, about two months of inventory in Santa Cruz County, and 1.4 months in San Mateo and Santa Clara Counties. Average days on market declined compared to last year with single-family homes remaining on the market for as little as 11 days in Santa Clara County to just 20 days in Monterey County. Buyers remain willing to pay premium over list prices, with highest in San Mateo and Santa Clara Counties, where homes generally go for 112% over their listed price.
I’m Shemeika Fox. If you have any questions or would like to schedule a complimentary confidential consultation, please reach out. As always, I’m here to help. Make it a great day.
