I can hardly believe it – another new year. Surprising I can’t believe it, as it’s something that happens, every year, pretty much like clockwork. This year though feels like it has a lot of promise – it’s been raining, the economy appears to be solidly on the mend, and it’s an election year, and the California state budget is actually in surplus.
Last week I wrote about how the Bay Area real estate market – including Santa Cruz – is set to explode in 2016. That raised a few eyebrows, and rightfully so. There’s been such a huge run up in the market, where could it explode to?
Well, let’s look at it this way. The median single family home price in Santa Cruz county was up just 0.8% year-over-year in December, to $703,944 from $698,500 in December 2014. The median price last month was still 10% lower than peak pricing – and that’s almost 10 years ago now, while inflation has nibbled away at values. If we look at 2014 as a whole vs 2015 as a whole, the price rise is more visible: the median price of all 2014 sales was $670,000 and $720,000 for 2015 – an increase of about 7.5%. Healthy, but not double-digit.
Now let’s look back a little further, to 10 years ago: using MLS data, the median price in Santa Cruz county for the entire year of 2005 was $750,000. According to usinflationcalculator.com, cumulative inflation since then until now is 21.5%, meaning that the same house purchased in 2005 for $750K would be worth $911,250 in inflation-adjusted dollars today. In inflation-adjusted dollars, prices today are nearly 21% below what they were 10 years ago.
And let’s look at mortgage interest rates – in 2005, the average 30-year fixed mortgage rate was 5.87%. Today, rates are averaging around 4%. Back in 2005, a $600K loan (80% of the then-median $750K) would run you $3,547 per month (just for the loan). Today in 2016, you’d only need a $576K loan (20% of $720,000) – $2,749 per month at a 4% rate over 30 years. But $2749 2016 dollars comes to just $2158 in 2005. In other words, it’s about 27.4% cheaper to finance – in inflation-adjusted real dollars – a median priced home in Santa Cruz today than it was 10 years ago.
At the same time, while it’s actually cheaper to own property today than it was ten years ago, it has become much more expensive to rent. Rents are up by double digits – Zillow says Santa Clara county rent is up by 46% in 5 years, and Santa Cruz is up by 29% in the same time period. The strong increase in rental prices pushing a lot of buyers into the housing market, and is a genuine sign of a stronger economy.
Speaking of interest rates, there’s been a lot of wailing and gnashing of teeth about the move by the Federal Reserve Board to increase the federal funds rate – which they recently increased 0.25% for the first time in over nine years. But now, weeks after the increase, 30 year fixed mortgage rates are down since then, down to 3.93% from 4.08% before the recent turmoil in China drove stock markets down in the United States and across the world.
The reason mortgage interest rates are so low – despite a rising Federal funds rate – is that there’s a savings glut in the world relative to quality investments. The recent turmoil in Chinese equity markets is helping in large part to drive down – and keep down – mortgage interest rates, even as the Fed will probably continue to raise the Federal Funds rate throughout the year.
Let’s say though that 30 year mortgage rates do in fact rise. It’s common wisdom that low interest rates boost home prices – and that higher mortgage rates leads to lower housing prices. However, this is not what the data show. Mortgage interest rates will only rise significantly when the world economy – and the U.S. economy in particular – gather significantly more strength. That strength will need to take the particular form of greater employment and higher wages – which will cause demand for borrowed money, resulting in higher interest rates. That is why home prices rise even as interest rates do – because rising rates are a reflection of a stronger economy.
There are many reasons to think that 2016 will prove to be a banner year for Real Estate sales in Santa Cruz county: a strong economy, low interest rates, lack of supply. All of these suggest that we’ll see both an increase in sales volume as well as sale prices this year. Home owners should know this will be an amazing year to sell a property – and buyers can relax too. Prices may seem high today, but it seems they still have some room to rise.
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!
Santa Cruz By the Numbers
Median Price: $703,944 (up 0.8% Y-o-Y, down xY M-o-M)
# Homes Sold: 158 (up 8.2% Y-o-Y, 23.4% M-o-M)
Average Days On Market for Sold Homes: 58
Sales to List Price Ratio: 98% (vs. 97.8% last month, 97.8% last year)
Single Family Homes Listed on MLS: 333 (down 25.7% M-o-M)
Pending Sales on MLS: 114
Available Homes on MLS: 192
Available Homes under $1 million: 101