Santa Cruz Real Estate Market Update – January 2014

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It seems to have happened in the blink of an eye – 2013 came and went. And what a year it was! There’s no denying that the Santa Cruz county real estate market of 2013 was an exuberant one, with surging prices that came within 11% of the all-time peak price we reached in 2007.

Santa Cruz 2013 Home Sales

Santa Cruz 2013 Home Sales

The 2013 peak median sale price for Santa Cruz county hit $680,000 for November – but for December, the median home price retreated considerably, down to $610,000 – a drop of 10.2%. Not only did the median price drop, the number of closed sales also dropped – to 113 homes closed, down 8.9% compared to 124 in November, and down 25.7% compared to the 152 homes sold a year ago in December 2012.

The biggest drop, though, was the amount of inventory available: we closed out December with just 247 homes available for sale, county-wide. That’s down a whopping 29.4% in a single month, as there were 350 homes available at the end of November! Most of these homes were pulled off the market, possibly to re-appear in the spring…most of them didn’t sell, as pending home sales (homes under contract) also dropped. Just 166 homes were in contract at the end of December, down 27.2% from November, when 228 homes were in contract at the en of the month.

Looking at December 2013 alone, it’s easy enough to say that the market softened considerably at the end of the year – but it’s hard to spot a trend looking at just one month’s data, and when you compare it to November when we reached the median high for the year of $680,000 – it’s difficult to say that the market has really cooled. While the median price did drop considerably in December from the month prior – year-over-year, prices were up 11.9% in Santa Cruz county, and that’s a very healthy gain.

Absorption Chart

Absorption and Prices Chart

But what of the year to come, 2014? Looking at the chart above, you can clearly see the jump in prices in the past couple of years, as indicated by the green line. At the bottom of the chart, the bars represent the “absorption ratio” – that is, how quickly the market is absorbing available inventory. The shorter the bar, the quicker inventory is being bought up. As you can see, the available inventory is selling almost as fast as at any time since July 2009 (when the market hit the post-bust low).

At the moment, the market looks great for home sellers – there is very little inventory out there. In many neighborhoods and price points, if someone wants to sell their house, they can still expect to receive strong interest from the buying public. But as quickly as the market changed from a buyer’s market (which lasted for years, from 2007 through early 2012) to a seller’s market, it could change right back again.

It all goes back to that fundamental, supply versus demand. Supply has been severely constrained, and coupled with healthy demand, has lead to surging prices. You can see in the chart – when the absorption ratio sunk down, prices skyrocketed. What will happen in 2014 if either supply improves, demand weakens, or both?

There are some troubling signs as regarding demand for real estate. For instance, mortgage applications reached a 13-year low in December. And, with the economy improving, interest rates are continuing to rise. Not only that, thanks to financial reform, lenders are tightening their mortgage standards considerably, effective January 10. In all likelihood, that will mean fewer buyers qualifying for loans, or qualifying for lower loan amounts, which will work to tug prices downward.

On the bright side, the economy appears to be improving overall, with a 4.1% growth in GDP in the 3rd quarter of 2013 (a key reason that interest rates are gradually rising). If workers start seeing more money in their paychecks, fewer furlough days, and greater employment overall, this should help to boost demand overall. But make no mistake: there are strong indications that demand may be weakening in 2014.

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While demand may be weakening, the supply may be set to improve. People don’t talk much about shadow inventory any more, but it’s possible that we may see some of that inventory move out of the shadows this year, as in recent months, banks have begun stepping up the foreclosure process, with a surge in both notices of default and notices of trustee sales. And, just talk to your neighbors – how many of them have been waiting for years to sell, once prices rebounded? Might 2014 be the year that finally gets sellers off the fence and their homes onto the market? And what will that mean for prices, especially if demand has weakened?

It’s really hard to make an accurate prediction for what will happen to prices in 2014 – but that doesn’t stop the California Association of Realtors from doing so…they are predicting a 6% increase in the median home price this year (and an average of 5.3% interest rate for a 30 year fixed mortgage). Our friends at Zillow are predicting a similar 5.9% increase for Santa Cruz county home prices within the next year.

I will not hazard a guess as to what the market will do in the near-and-mid-term future. Rather, I’ll wrap this up by reiterating what we know about the market today – prices are high, inventory is low, and demand is healthy. If you’re thinking of selling your home this year – remember a bird in hand is worth two in the bush. The market could go up or down in 2014, but my advice is to get in while the getting is good.

As always, to get the full, PDF version of my newsletter, broken down by different areas of the county and also by Single Family Residences as well as Condominiums, click here to download the full the Santa Cruz Real Estate Market Trends newsletter.

Please share my newsletter with anyone you think is interested in what’s going on with the Santa Cruz real estate market – just send them the link and they can sign up to receive an e-mail every month when the newsletter is ready. Thanks so much for taking the time to read this – I hope to hear from you soon!

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