ADUs, Corporate Ownership, New Construction and More
We all know that interest rates can affect affordability, and the lack of affordability leads to fewer buyers, and fewer buyers means lower prices…usually.
What’s unusual today is that although we have fewer buyers, we also have fewer sellers. According to renowned housing market expert Ryan Lundquist of the SacramentoAppraisalBlog, 2023 sales volume in the 4 county Sacramento Area was the lowest since 2007, even though the population has increased by over 300,000.
At the same time, we’ve had a 40% decrease in listings. Why? It goes back to interest rates. As of 2024, it is estimated that 82% of homeowners with mortgages have a rate below 5%, 62% are below 4%, and 23.5% are paying less than 3% on their mortgages. These homeowners will not sell and trade for a higher mortgage unless they absolutely have to.
With experts generally agreeing that rates will gradually decrease throughout the year, perhaps to around 6% or less less, that would certainly help with affordability, but would that be enough to get homeowners to move? If not, we’ll end up with more buyers, but still have low inventory. What will happen to prices then?
Before you answer that, let’s look beyond interest rates, and consider these other stories that could cause prices to go in either direction.
1. The Rising Popularity of ADUs
Accessory Dwelling Units (ADUs), often referred to as granny flats or in-law units, are gaining traction in California. A series of laws were passed over the past several years that eliminated single-family zoning, streamlined permit procedures and standardized guidelines, and allow virtually any homeowner with the space to do so, to build an ADU on their lot. Starting this year, they can actually sell the units, treating them the same as condominiums.
Here’s the why of it…
- According to the American Community Survey 2021 5-year estimates, California has 6,883,493 single-family detached homes, and the Department of Housing and Community Development estimates that we need 2.5 million new housing units by 2030 to meet housing needs.
- The Public Policy Institute of California reports that, 83% of homes have at least 3 bedrooms, yet 45% of Californians live in homes without children present.
- The lack of 1 and 2 bedroom homes keeps some people living in more space than they want or need, and ADUs can help with that issue.
- With the new laws removing many of the barriers to building ADUs, we may may see homeowners downsizing to ADUs on their own property, or others having parents or relatives move on-site.
Sacramento County saw ADU permits triple from 2021 to 2022, and although 2023 numbers aren’t in yet, the numbers are expected to grow significantly.
As a burgeoning business concept, new companies are springing up to create standardized packages, so customers won’t have to go through applying for permits, and hiring of architects and contractors.
Locally, companies like Anchored Tiny Homes offer a variety of pre-designed models to choose from, and will build custom homes as well. Bequall builds their standardized units in a warehouse, then ships and assembles on-site, shortening some of the build timeline.
This could free up thousands of housing units in the coming years, and more homes means more choices, less competition for home buyers, and perhaps stabilize prices.
2. Legislation to Curb Corporate Ownership
A significant and controversial development is the proposed legislation aimed at preventing corporations and hedge funds from owning and renting out residential properties. This stems from concerns that these entities buy up large numbers of homes, thereby driving up prices and limiting availability for individual buyers.
One such law, the End Hedge Fund Control of American Homes Act would require them to sell 10% of their properties per year, over a 10 year period. Another, the Stop Predatory Investing Act would not force them to sell, but would eliminate depreciation and other tax benefits, while giving them incentives to sell.
Nearly 14% of Sacramento County sales went to investors in 2023, and Invitation Homes owns 16,000 homes statewide.
These laws, and others, if passed could profoundly impact the housing market. There may be an increase in supply of sale inventory, lowering prices, but there might also be a decrease in essential rental stock.
It won’t solve the problem related to the actual number of homes, but would get thousands of existing homes on the market.
3. New Construction Surge
Typically, 1 to 2.5% of homes sold in California are new construction, but that number jumped to 12% in September.
Why? It’s all about the supply and demand. As mentioned before, many homeowners are reluctant to sell if they would be trading in a 3% mortgage for a 6.5% one. We still have the relocation sellers, as well as the marriage, divorce, death and downsizing sellers, but those that don’t have to move aren’t just yet, holding on as long as they can.
On the opposite side are the buyers who can afford today’s higher interest rates. They are ready, willing and able, but there’s just so little inventory to choose from.
Looking at homes for sale in Folsom today, for example, we find that there are 65 homes on the market, and only 35 of them are existing, resale homes.
The rest are being sold by builders.
With the median price of resale homes at $794k in 2023, and new construction at $850k, it’s obviously not about the price, but rather, the availability. It’s important to note that the developers are often offering seller concessions to help buyers pay closing costs, buy down rates, or purchase upgrades.
As some buyers make the move to purchase new, it could take the pressure off of resale buyers, and slow the price increases.
- Consumer Confidence – Reuters reports that consumer confidence jumped to a 5-month high in December. When people feel good about the economy, they are more likely to buy, keeping up demand. How will consumers feel as the year goes on?
- Elections – Elections come with uncertainty. Who’s going to win? What will their policies be? That uncertainty can cause buyers to hold out until after the election, softening prices, but will that happen this year?
- The San Francisco to Sacramento Trend – Crime, COVID, crowding, politics, and perhaps most of all, prices, all have a hand in driving people away from some metro areas and into less expensive areas, even rural areas. Technology enables them to work from virtually anywhere. There seems to be a growing influx of Bay Area buyers, able to cash out for a million dollars or more, and heading to Sacramento and other inland communities, where homes are cheaper and there tends to be less crowding. It’s happening in many metro areas around the country. It can be difficult to put numbers on it because ‘where buyer came from’ is not something that’s recorded when a home is sold. Ask any active Realtor though, and they’ll tell you, ‘It’s a lot’.
The housing market seems to always be at a crossroads, and new laws, policies, and technology, as well as consumer confidence and elections, all have the potential to affect the market.
My Advice for Homeowners: If you want want to downsize to avoid maintenance and stairs, upsize to accommodate your lifestyle, or move closer to family, know that with low inventory and falling rates, if you price it right, you should be able to sell quickly. There doesn’t seem to be a lot of danger in holding out, as prices are still rising. We have no idea if or when that will change
For buyers: Understand that despite fewer buyers in the market, you will still have competition. If you need a house, and can afford it, you may not want to wait it out. If rates go down but inventory doesn’t increase, prices will. Some are suggesting you buy now at the higher rate and refinance later, but you can’t always count on that. Buy what you can afford without the expectation of eventually getting a lower right. You likely will, but buy what you can live with. If rates go down after you purchase, yes you can refinance. If rates go up after purchase, you’ll then have a rate lower than the market.
Questions or comments?
Drop me a line.
Steve Heard – 916 718 9577 – firstname.lastname@example.org
EXP Realty of Northern Ca Inc – DRE#01368503