Santa Cruz Real Estate Update February 2015

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Welcome to February, the first month where we report what’s going on in the new year. I know you’re dying to hear the headline news, so I’ll cut right to the chase: the median price of single family homes in Santa Cruz county in January 2015 was $677,500. That is an increase of 10.2% compared to a year ago, but it is down 3.6% from the month prior.

Sales volume though was way down in January: just 86 homes closed escrow. That represents a decrease of 30.1% from a year ago – ouch! The fact that so few homes closed in January is not surprising, given the low number of pending sales a couple-few months back. Demand today is considerably stronger than it would appear looking solely at the drop in closed sales volume. This demand shows up in the form of multiple offers on listing after listing across the county: what’s available is moving.

Inventory is down, too: just 225 active listings were reported at the end of January, compared to 361 a year go – that’s a drop of 37.67% in inventory year over year. However, because there were so few sales in January, the actual relative supply of inventory has been jumping up. Check out this month’s absorption-ratio-vs-price chart:

Price vs. Absorption Ratio

Price vs. Absorption Ratio

While inventory is lower than it has been in absolute numbers, it’s interesting to see that when the absorption ratio spiked twice in the past three months (this January, and November 2014), the median home price dipped at the same time.

The median price – that’s the green line in the chart above – seems to have peaked in July 2014, when the median price came in at $729,250. There were only three months in 2014 when the median price was above $700,000: July, October, and December. But July was the high, and October was $716,554 and December was just barely over $700K at $702,500. And, in all fairness, the median price was exactly $699,750 in June 2014, just a few kopeks shy of $700K.

In fact, if you look at the single-year chart, you will see something kind of interesting there too:

Santa Cruz Home Prices, One Year

Santa Cruz Home Prices, February 2014-January 2015

That is, for eight of the past 12 months, the median price has been between $600K and $700K. February of 2014 came in at $598K, and then there were the three months when the price exceeded $700K. But since May, the median home price in Santa Cruz county has hovered between about $674K and $729K, and does not seem to be rising above or falling below that price level.

Is low inventory the new normal?

Our inventory has been running low for years now, and it’s been keeping upward pressure on prices. There are forces at work which are keeping the inventory of homes in Santa Cruz low. Learn how and why we’re in this situation, and if there’s any way to fix it in this in-depth article.

From where I’m sitting, it looks to me like this is the trading range the market has reached, and will probably stay here throughout the spring. I don’t expect prices to soar, or collapse this spring, and that’s because the market as we have it right now is about as good as it’s going to get. I just can’t see it getting significantly worse in the short term.

There are many signs pointing to at least steady, if not strong, demand. We have interest rates that are still very low, and more jobs are being created, with wages finally rising a little bit.

This should be the formula for rising prices, however prices have already risen to the point where affordability is a real stretch for most buyers. Without a sudden and sharp increase in hiring or wages, or a significant drop in interest rates, it’s hard to see how prices could quickly rise much further than they are already.

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Longer term, there are a few factors which could drive prices higher. One such factor is the ease of credit. If credit standards continue to ease up, we could see more buyers enter the market and potentially push up prices higher, or allow current borrowers the “flexibility” to borrow greater amounts – although the new ability to repay rules could well limit that.

Another factor which might drive prices higher, in nominal terms anyway, is the rate of inflation – which is way below target. But inflation is nowhere to be seen, and actually, the real worry at the Fed these days seems to be the threat of deflation. The worry about deflation is going to keep the Federal Reserve from raising interest rates, which will help to keep mortgage money so cheap.

What’s YOUR home worth in today’s market?

Home prices are up a healthy 13.9% compared to a year ago – but how much is YOUR home worth in today’s market? Find out now with this free, quick, and accurate tool!

In fact, if there’s anything which will actually serve to drive higher prices, it’s probably the same thing that’s been driving it for the past couple of years: very low inventory. Inventory, in terms of absolute number of homes available on the market, is the lowest it’s been in anyone’s memory. Low inventory – especially for homes under say $650,000 – is squeezing buyers right out of the market, by pricing so many of them out of the market. What little that’s available is going to ever smaller circles of highest bidders.

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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