Santa Cruz Real Estate Market Update: November 2022

Quarter 3 market overview by Dr. Elliot Eisenberg is out. And is is my pleasure to share with you his perspective. I’m Shemeika Fox, Your Santa Cruz Real Estate Expert. And Dr. Elliot Eisenberg has always got a lot of valuable information to share. Lets check it out!

Despite negative GDP growth in the first half of 2022, the U.S. economy remains relatively solid, even as it has been battered by a series of one-offs and bad news. However, factors that drove growth since the start of the pandemic are unquestionably beginning to slow, with individual incomes generally flat, savings rates declining, and most of the pandemic-triggered stimulus having ended.  Early forecasts place 22Q3 GDP at 2% growth as net exports improve. All indications are that 22Q3 and 22Q4 should show growth below trend but positive. That may be enough to offset the bad first half year, so that for all of 2022 we may ultimately have positive GDP growth.  

Importantly, the consensus is that by 23Q2 the U.S. will most likely be in a recession as the impacts from rate hikes become increasingly felt throughout the economy. With inflation as public enemy number one, the Fed is likely to continue to raise the fed funds rate through the remaining two meetings this year and probably into next year as well. The impacts of higher interest rates have been mostly seen in the housing market, though increasingly they are affecting the manufacturing sector. We have not yet seen significant impacts in the traditionally interest rate-sensitive auto market, since the ongoing chip shortage continues to keep supply of autos well below demand. Over time, increased interest rates will broadly impact other parts of the economy, importantly business investment and commercial construction. This situation is not unique to the U.S., as central banks throughout the world are similarly raising interest rates to reduce demand that far exceeds available supply, causing inflation almost everywhere.  As we look to 2023, all indications are that this will be a garden-variety recession, not particularly deep, and lasting around a year.  

Since the beginning of 2022, the stock market is down roughly 20% and has been teetering in and out of bear market territory for months. The impact of rate hikes on the stock market is not a bug of current monetary policy, but rather a feature, as the intent of rate hikes is to cool the economy down by reducing household spending. If history is a guide, the stock market will probably fall somewhat further, as we are likely to see lower corporate earnings in 2023, and higher interest rates will push down price-to-earnings ratios.    

While headline inflation appears to have peaked and is likely to be headed down, core inflation looks to be more persistent and will ease more slowly. Declines in headline inflation are being led by improved supply chains and the resultant reduction in goods inflation, as well as declines in food and energy prices.  However, core inflation, which is made up in large measure of services and rents, is coming down much more slowly, and other highly technical measures of inflation are flat or increasing, making it unlikely that inflation will dissipate soon, or at least soon enough to dissuade the Fed from further rate hikes.

Overall, despite rising interest rates, the economy remains in surprisingly good health, largely led by a surprisingly strong labor market, making it highly unlikely that the Fed will quickly pivot to looser monetary policy.  The most important variable to watch is inflation, since it needs to fall meaningfully and steadily before the Fed becomes less hawkish.

2022 Q3 National Housing Market Overview

The Fed’s interest rate increases are having their intended impact as home price appreciation slows meaningfully across the country, and in some markets, prices are starting to decline. Year-over-year price appreciation that was regularly as high as 15-20% as recently as six months ago is now down to, at best, single digits. Importantly, because mortgage rates were so low for so long and so many houses were sold or refinanced since Covid, data show that as of July 31, 2022, 90% of first mortgages have an interest rate below 5%, and more than 66% have a rate below 4%. With rising interest rates, this rate “lock-in” is preventing a big bump in new listings from materializing, keeping supply low, and thus propping up home prices. This lack of new listings is effectively reducing supply, while simultaneously keeping demand down as well, by constricting the normal “move-up” market. On top of that, the shift from the pandemic to endemic nature of Covid and the associated return-to-office policies are dramatically slowing the second home market. Combined, this makes this housing market much different than those of the past.  

As we look to the pending recession and its impacts on the housing market, there is little chance that this will be a replay of the Housing Bust of 2008.  Demographics are still very strong, homeowners have a staggering amount of home equity built up, and there is still an underlying shortage of millions of housing units needed to meet demand. Additionally, the passage of Dodd-Frank tightened credit availability, and thus mortgage holders are more able to withstand economic downturns. Overall, this remains a seller’s market, though one with more opportunities for potential buyers.

2022 Q3 Regional Economic Overview

The MLSListings area is one of the few in the country where stock market performance has a direct impact on home prices, and the recent stock market declines are undoubtedly impacting home price appreciation across the region.  The S&P is in bear market territory and more importantly, so is the NASDAQ, where growth and tech firms are heavily concentrated. Higher interest rates have disproportionately impacted growth firms because rising rates push down the present value of future earnings, forcing stock prices down, thus impacting individual portfolios. Additionally, as the stock market declines, it becomes much more difficult to raise private and venture capital, and it becomes virtually impossible to raise capital by going public. Thus, the entire ecosystem of the capital funding market for tech is being hit especially hard by the current stock market and financial conditions. Higher interest rates have therefore had a two-fold impact on home prices in the MLSListings area, directly, in terms of higher mortgage costs and a corresponding reduction in demand, and indirectly, in terms of household wealth and credit capability.

Second, the San Francisco and MLSListings areas continue to have fewer employers who are demanding that workers return to the office, undoubtedly because there is such competition for talent in the tech sector. While other cities are showing increases in workday office traffic (at least mid-week), that has not yet happened in the Northern California area. In fact, a recent report from the Federal Reserve Bank of Chicago identified California as the number two state for outbound moves. Changes in work-life balance, remote work opportunities and the Great Resignation phenomenon were all cited as reasons for moving out of California.  

Still, this should not be construed as a harbinger of a massive price correction in the MLSListings market. As evidenced by the still-strong home price appreciation across the region during the third quarter of 2022, the area remains a highly desirable market, both for its nexus to the tech industry and its close proximity to the amenity-rich Bay area. Just as the national housing market is unlikely to see any sort of housing market correction like that of 2008, the same is true of the MLS Listings area.  

2022 Q3 Housing Market Overview and Highlights

Mirroring national trends, the MLS Listings housing market continues to slow in response to higher interest rates. While prices across the region were mostly at quarterly highs again this quarter, the rate of home price appreciation has significantly slowed, and in the case of San Mateo County, prices actually declined compared to last year. Closed sales plummeted in comparison to 2020 and 2021 and are even lower than pre-pandemic levels. New listings are down significantly as well, no doubt due to a reluctance of buyers to move up due to higher home prices and higher rates, especially in comparison to the low-rate mortgage they most likely have. Active inventories grew by about 20% across the region and month’s supply of inventory dramatically rose compared to last year, but still remains below the national level of 3.2 month’s supply. Importantly, the bidding wars of the recent past are fading and while properties across the region are generally still selling for a premium over listing price, the percent of listing price received at sale has dropped significantly compared to last year. Dr. Eisenberg says: “The fastest increase in interest rates in 40 years combined with a virtually non-existent IPO market is making itself felt across the board in all housing metrics across the MLS Listings area.”

Home price appreciation across the MLS Listings area has slowed significantly compared to the last several years. The highest priced homes were in San Mateo County, where the median price of $1,800,000 declined by 5.3% compared to last year. Everywhere else across the region, prices rose to Q3 highs. The highest rate of price appreciation was in Santa Cruz County, where the median price of $1,250,000 was up 4.1% over last year. Monterey County prices rose 3.0% to $850,000, while prices in San Benito County rose 2.3% to $798,000.    

The most expensive townhomes and condos across the region are in Santa Clara County, where prices rose 1.4% over last year to $920,000.  Townhome and condo prices in San Mateo County declined 5.2% compared to last year to a median price of $900,000. The highest level of year-over-year price appreciation was in Santa Cruz County where prices rose by a staggering 13.8% to $802,500. Prices in Monterey County rose 5.4% to $687,500 and prices in San Benito County rose 1.3% to $530,000.

Closed sales dipped meaningfully across the region again this quarter, with most areas reporting single-family home sales down about a third compared to last year and common interest sales down a similar amount.  

Rising prices were not enough to offset the declines in closed sales, and overall sales volume compared to last year declined by about a third for both types of properties.    

New listings were also down about 20% across the region compared to last year, with the largest single-family year-over-year percentage drops in Santa Cruz (-26.8%) and Santa Clara (-24.9%).

As a result, inventory levels rose about 20% over last year and were relatively stable compared to last quarter. The largest year-over-year inventory gain was in single-family homes in Santa Clara County (+27.0% to 1,045 active listings) while the smallest was in Monterey County (+1.3% to 466 active listings). Inventories of common interest properties were down slightly across the region.    

With slowing sales, single-family month’s supply of inventory rose significantly, doubling in Santa Clara (to 1.4 months) and in San Benito County (to 3.9 months). Inventories in San Mateo County increased to 1.7 months, while in Santa Cruz County they improved to 2.2 months and in Monterey County, inventory levels reflect 2.6 month’s supply of inventory.

The largest year-over-year decline in the sales price to original listing price ratio was in Santa Clara County, where it declined from 109% in the third quarter of 2021 to 100% in 2022. San Mateo County properties sell for the highest premium of 102%, down from 109% last year.  

Average days on market rose this quarter and range from a high of 41 days in San Benito County, 27 days in Monterey and Santa Cruz Counties, and lows of 24 days in San Mateo and Santa Clara Counties.

I hope this information was valuable. If you would like to dive deeper into the real estate market and your personal real estate goals, please feel free to reach out. I’m Shemeika Fox, your Santa Cruz Real Estate Expert and as always, I’m here to help.