Sacramento's Real Estate Market Outlook (2021)

We could be near a peak in a sales values market, which makes many investors question: Is it smart to buy when we may be near a peak in sales values? There are no black and white answers but there are important key things to consider. 

We are not in the same place as we were in 2005 when the real estate market burst and the values dropped by 50%. In 2005, homes were renting for about 50% of the typical mortgage payment.  Rent values did not support mortgages, so property owners who rented often carried large negative cash flow.  In today’s market, however, most homes rent for enough to completely cover the mortgage. Lenders are also much more prudent with their loan requirements - so the people getting loans now can afford them much better than what we saw 15 years ago.   

The rental shortage in the Sacramento area has become increasingly acute as the years have gone by.  We are not building very many new homes compared to the demand put on by our population. New regulations and building permit costs are very costly.  Even with the large run up in value we have had the last several years, it still costs more to build a new house than the secondary market or the used market value.  Because of that, there is not a lot of incentive for builders to increase their production.   Our rental vacancies are consistently receiving anywhere from 5 to 20 applications the first weekend that they are placed on the market.  Our average home rents in less than 10 days. There is a housing shortage, and that alone tends to make the sales values tend to sustain or go up. 

Recently, COVID has exacerbated the rental shortage in Sacramento. Many employers have discovered that their work force can function from home.  Employees do not need to go into the office in the Bay Area - so Bay Area buyers are coming up to Sacramento to live …and the rental shortage has become more acute.  Supply can not keep up with demand. 

Interest rates are also an important aspect to consider. Right now, investors can get a mid 3% investment loan - which is fantastic. During the pandemic the US government has printed trillions of dollars, which has ballooned the national debt.  That is building pressure to increase the interest rates.  It may be that even if values drop over the next couple years, investors will look back at the loan they got in 2020 in the mid 3% range and say, “Wow that was a fantastic buying opportunity because we cannot just get money at the price anymore.”

I always advise investment buyers not to buy just on the anticipation of appreciation - but rather buy on  cash flow and by return on your investment. If you are looking and analyzing by those factors, you are not likely to get hurt purchasing real estate now.   

When an investor can buy a property where the rent will cover the mortgage, taxes, insurance, and property management costs - that is a good investment. The tenants will cover the majority of all costs and eventually the investor will have retirement income. That is true even if the rents do not go up - but we have always seen rents go up. So it only becomes a better investment as time goes on. 

Cash buyers need to be thinking about the return on their investment, and be comparing that to CDs, stock market, and other options they have as investors. If you pay cash for a property, consider how much the rent return is going to net, and how that compares to other investments. If it makes sense, then real estate becomes a good value. 

When an investment makes sense in terms of cash flow and return on investment then appreciation just becomes a huge bonus. Over the years, owning real estate is a great way to build family wealth - and just like rent values, real estate values always go up over the long term. 

Tiner Properties provides expert services for investors, from buyer representation to expert property management. If you would like to talk to John Tiner about whether investing in Sacramento’s real estate market is right for you, click here or call for a no obligation consultation.