SACRAMENTO HOUSING 2Q17: Production Moves to Higher Price Points as Affordability is Pushed to the Limits

  • 2Q17 Annual Housing starts were UP 14% YoY, while closings were UP 30%. Quarterly new home starts are up 48% compared to 2Q16, and quarterly closings were UP 27%.
  • In fact, 2Q17 marked nine consecutive quarters with more than 1,000 starts, and the first quarter since 2Q07 that quarterly starts were above 2,000.
  • Affordability Continues to be an issue in this market: Last quarter we saw the elimination of product below $200k, and now only 3% of homes started are priced under $300k.

Metrostudy’s 2Q17 survey of the Sacramento housing market shows that Annual Housing starts were up 14% compared to 2Q16, while closings were up 30%. Quarterly new home starts are up 48% compared to 2Q16, and quarterly closings were UP 27%. In fact, 2Q17 marked nine consecutive quarters with more than 1,000 starts, and the first quarter since 2Q2007 that quarterly starts were above 2,000.

Annual starts have been outpacing closings since 2Q12, which is indicative of increased demand. 2017 began a little weaker due to weather, but by second quarter, new home starts rebounded impressively. Builders are effectively managing their inventory levels thus far.

“The average “offer to build” base price for new homes is up 2% region wide over a year ago to $509K as builders grapple with increased land, construction and labor costs,” said Greg Gross, Director of Metrostudy’s Northern California region. “Start activity has shifted over last year into the price ranges above $400K as builders adjust pricing to offset increased construction costs. Last quarter we saw the elimination of product below $200k, and now only 3% of homes started are priced under $300k.”

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Finished inventory has steadily decreased over the past year. With 504 Finished Vacant homes, the market now has only 1.1 months of supply. When the number of homes under construction is factored in, the market has about 8 months of supply. Well within equilibrium. The number of homes under construction in 2Q17 is 31% higher than in 2Q16, so we expect closings to increase.

There were 3,982 new lots completed over the past year, yet more than 5,600 were absorbed. This slowdown of lot development will make finished lots difficult to obtain in high demand areas. Understanding sub-market dynamics is crucial in the Sacramento Region.

Metrostudy expects demand to remain steady over the next year. However, interest rate increases and daunting fee and construction cost increases will add to worsening affordability which may point to lower production and closings in the broader Sacramento market. Fortunately, the market has the unique ability to attract buyers from the Bay Area.

While general economic conditions are favorable, there is some concern regarding the slowing of job growth. As mentioned earlier, this is most likely due to lack of qualified labor. The lack of affordable lot supply, rapid price increases, are all factors which may cause new homebuyers to rethink their home-buying decisions during 2017.

The Sacramento, California market experienced slightly weaker economic conditions during the second quarter. The rate of job growth increased slightly in May, but it is 58% slower than 5/2016. Nevertheless, the Sacramento market is experiencing the same conditions as most of the country. Good news is that we expect housing starts to remain relatively stable throughout 2017.

Greg Gross @ 916.231.9370
Email: ggross@metrostudy.com

About Metrostudy: Metrostudy, a Hanley Wood company, is the leading provider of primary and secondary market information to the housing and related industries nationwide. Established in 1975 in Houston, Metrostudy provides research, data, analytics and consulting services that help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day. www.metrostudy.com

About Hanley Wood: Hanley Wood is the premier information, media, event, and strategic marketing services company serving the residential, commercial design and construction industries. Utilizing the largest editorial- and analytics-driven construction market database, the company produces powerful market data and insights; award-winning publications, newsletters and websites; marquee trade shows and executive events; and strategic marketing solutions. To learn more, visit hanleywood.com.