2020 closed out as a record year with housing market here in Sonoma County. Due to the influx of movement from the pandemic and movement within the county, the median sales price increased by an average of 8% above the 2019 homes sales.
The question is whether this is sustainable. A large part four increase was heavily “pandemic induced” as people’s lives changed and they made new choices. Our surge her, which really spiked from June to late October, created a fever pitch for many of the Sonoma County homes sales. As 2021 opens up, the listings are starting back up, but inventory remains low, currently at 211 listings (Santa Rosa SFR only), in comparison to the over 350 we usually run at.
What’s Driven Our Housing Market
Aside from the pandemic, the two major factors in the driving of our housing market are buyer demand and low interest rates. The cost of borrowing money has been relatively low for the last 18 months, fueling the rising home prices. Buyers are able to qualify for more house and coupled with low inventory, it continues to fuel this housing market, many times still creating a bidding war.
What did change however is when the pandemic set in. Everything stopped and vulnerability set in. The shift of 2020 directly affected everyone’s lives, giving us the opportunity for reevaluation. What followed was the fact that people started pivoting their lives, where they lived and how they worked. Many people began to make huge shifts from larger cities to more urban areas, like Sonoma County, which did have the biggest impact on our market here.
Has Sonoma County Housing Peaked?
Herein, lies the million dollar question. It is very difficult to predict the future of the markets. Many are trying to predict both the housing and stock markets because they have become so heated. What is easy to read is current behavior and the facts. For example, dirt lots in Santa Rosa have definitely seen an adjustment. They are sitting much longer on the market and without price adjustments, they end up not selling. The two issues are the rising cost of construction coupled with the fact that many builders are unwilling to hedge their bets 18 months into the future of a market that hasn’t adjusted down in almost 9 years.
For single family homes on the other hand, there is still a tremendous demand from buyers. If the interest rates are to remain low throughout 2021, we could easily see an appreciation of 2 – 4% in home values this year, based off of fair market value.
What Will Change The Housing Market
The biggest factor in changing the housing market, aside from the experience of the Great Recession, will be a rise in the interest rates. Outside of the “all cash” buyer, most buyers are applying for mortgages on homes they buy and even a 2% shift in the interest rate can impact what people can qualify for, invariably affecting home prices. For example, using a $650,000 purchase price and a loan amount of $520,00:
With an almost $600/month difference, this affects how much the buyer can afford. When affordability is effected, the home prices will eventually feel the trickle down from this because the amount people can borrow has changed.
Inflation is the big key to any interest rate changes in the future. When inflation, ( a general increase in prices of goods and services ) rises, rates inevitably go up. The reason being is that the higher the inflation rate, the more interest rates are likely to rise, as lenders will compensate for the decrease in the purchasing power of money. According to many outlooks for 2021, several economists believe that inflation will kept at bay, hovering at 2% or below, which would keep the interest rates low for the time being.
Looking Towards The Future
At 2021 begins, many things are looking up. We have the economy opening up, unemployment coming down and still in strong force are the the two big drivers of the market; buyer demand and low interest rates. If inventory stays low, this will also drive the market as people continue to make moves.
With the release of the vaccine, the future looks even brighter. All factors considered, the housing market should sustain a level of strength throughout 2021. Again, it is difficult to predict markets, so keep your eye on the facts.