It's summertime in Santa Cruz County, and its time to enjoy everything this time of year brings: 4th of July cookouts, family visits, camping trips and plenty of beach time!
Of course, I’m also keeping a close watch on the market. Historically, June can be one of the slower months in local real estate while kids are out of school and families are on vacation. Yet for the past two years the usually slow month didn’t occur as a result of the robust COVID market.
This summer, however, it seems we are turning more towards normal, as evidenced by the fact that nearly everyone I know is on vacation and we’ve seen a 38% annual reduction in single family homes under contract in June. This slowing of the market is certainly not solely travel related; year-to-date, our number of sales is down 22% compared to the same period in 2021.
Market Update: Themes From Q2
Prices are stabilizing.
The market stagnation is primarily inventory related — there is very little to sell. Active listings year-to-date are down 6.4% compared to 2021. Prices aren’t appreciating as aggressively as they have the last few quarters and have in fact dropped in April and May, seemingly stabilizing in June. While that is welcome news to many would-be buyers the median sales price in June is actually up 15.2% compared to June 2021. I forecast little-to-no appreciation in Q3 and Q4 of this year.
While not rampant, price reductions are on the rise. In fact, the number of homes that reduced their price was double what it was just a month prior in May - jumping from 8% to 16% of homes sold and compared to 12% in June 2021. At this point I see these price reductions as more of a reaction to a stabilizing market versus the rapidly appreciating market we grew accustomed to over the last few years.
Higher interest rates are hurting entry level buyers.
There is no doubt that entry level buyers (sub-$2 million) are getting hurt by higher interest rates. It has absolutely removed some buyers from the market (making the rental market even more difficult) and has forced others into less conventional loan products to obtain more desirable interest rates (i.e., 7/1 and 15/1 Adjustable Rate Mortgages, ARMs). That said, entry level homes are still consistently selling relatively quickly with multiple offers, so there are still a lot of active local buyers in the sub-$2 million price range.
In regards to the speed of sales it is worth noting that while the average days on market (DOM) was a speedy 18 days by historical standards this is a slight slow down from May and June 2021’s 13 days. This slowdown is allowing a little breathing room for buyers when it comes to decreased bidding wars. While still receiving multiple offers, some sellers should come to expect a small handful compared to the frenzy of years’ past. This means that homes are selling, on average, for closer to their asking price. In June homes sold for 2.5% above asking compared to 8% in May and 7% above in June 2021.
Stock market volatility is garnering mixed reviews.
One could make an argument that stock market volatility will only drive people more toward large real estate purchases as a safe haven for their investments. While I am aware of that scenario with a few buyers, the luxury buyer sentiment overall is pessimistic as people have seen their portfolios drop in value. Interestingly, our local luxury market is only down in number of sales — not price. That to me indicates this being more of an inventory problem rather than an overwhelming number of buyers pulling out of the market.
The real estate market is multi-faceted and it is impossible to tell how Santa Cruz County will continue to fair amidst the rising interest rates and financial market difficulties. However, at this point in the summer our prices seem to have stabilized (if temporarily) and quality homes still sell quickly. I forecast that our biggest hurdle for the remainder of 2022 will be inventory. Perhaps that is a result of the high interest rates and people “stuck” in their homes with their low fixed rates not wanting to sell? Only time will tell.