Making Sense of an Unprecedented Housing Shortage

Making Sense of an Unprecedented Housing Shortage

Tiner Properties has watched the Real Estate economy cycle through 4 decades of changes and we have never seen a housing market like the one we are currently experiencing. Typically, when the sales market is hot, the rental market tends to slow down, and vice versa. Right now, both the sales and rental markets are red hot!

Our fantastic Real Estate market has been getting national attention, with articles being released by CNN, Fox, Zillow, and Trulia, among others. According to rankings released by Zillow, Sacramento is listed ninth among the top 10 hottest housing markets for 2016. Zillow's definition of a hot market is “one that has rising home values, low unemployment rates and strong income growth.”

The driving force behind our hot market is a lack of available properties. There are 2 primary reasons for our low inventory: lack of distressed properties (homes going to foreclosure or short sale), and lack of new housing being built.

Foreclosures per 10,000Foreclosures have dropped to 1/24th of what they were at the peak in August 2008 (Zillow). Investors tend to buy when there are many distressed options on the market. Since we do not currently have many distressed properties, investor purchases in Sacramento have declined dramatically. As a result, there are fewer new properties coming into the rental market. Tiner Properties also noticed that during the crash in 2005 – 2010, many of our rental applicants were families with multiple generations desiring to move in together in order to survive economic hard times. As the economy has improved, many of these families who had been living together are finding their own separate housing - further increasing the housing shortage. Although the lack of distressed property affirms Sacramento’s healthy Real Estate Market, it has also driven rental rates up significantly faster than income. The average rent has increased 10.5% since this same time last year. An addition 8.8% increase is predicted for next year (Sacramento Business Journal).

Building permitsBuilding Permits for new properties are also significantly down from 10 years ago (FRED), and a high percentage of the building projects in Sacramento have been for low income and subsidized housing. We have seen very few larger single family homes being built. Although sales value of properties are on the rise, costs to build a new home are still higher than the cost of an equivalent existing home.

Low inventory has created a strong seller’s market. Homes introduced to the sales market are selling quickly, often receiving multiple offers higher than the listed price. Sacramento home values have gone up 11.2% over the past year, and predictions are that they will rise 5.8% within the next year (Zillow). Interest rates have also remained low and sale prices are still reasonable, making this market equally appealing to buyers. The “breakeven horizon” (the number of years after which buying is more financially advantageous than renting) is only 2 years (Zillow).

Rent price indexWith such great numbers for both buyers and sellers, it is a wonderful time to own Sacramento real estate. With rent values going up quickly and interest rates very low, Renters have more reason than ever to buy now. When renters become buyers they are protecting themselves from increasing housing costs and being forced to move. Renters are happy to learn that the mortgage payments for their own home are often similar to the rent amount they have been paying.

Sacramento home values are not over-inflated! Unlike the investor market peek in 2005 where you had to put 50%+ down to break even with cash flow, investors can currently put 25% down and break even (after paying principle, interest, taxes, insurance, and management)! Whether you are an tenant considering buying your own home or an investor looking to increase your rental portfolio, now is a great time to enter the Sacramento Real estate market.

Sources:
http://www.zillow.com/sacramento-ca/home-values/
http://www.bizjournals.com/sacramento/news/2016/03/04/sacramento-apartment-rents-continue-to-skyrocket.html?iana=ind_rre
https://research.stlouisfed.org/fred2/series/SACR906BPPRIVSA