SACRAMENTO HOUSING 4Q16: 2016 Finishes Strong but Affordability Concerns Persist as Production Shifts to Higher Price Ranges

  • 2016 was a strong year for housing in the Sacramento region, with annual new home starts up 17% over 2015; 4Q16 marked seven consecutive quarters with more than 1,000 starts.
  • We continue to see a squeeze on affordability, as start activity has shifted over last year into the price ranges above $400K. Last quarter we saw the elimination of product below $200k, and now only 5% of homes started are priced under $300k.
  • The number of homes under construction in 4Q16 is 18% higher than in 4Q15 since quarterly starts are flat this quarter, this is most likely due to increased build times, and overall lack of finished inventory.

Metrostudy’s 4Q16 survey of the Sacramento housing market shows that Annual Housing starts were up 17% compared to 2015, while closings were up 36%. Quarterly new home starts are flat compared to 4Q15, yet quarterly closings were UP 35%. In fact, 4Q16 marked seven consecutive quarters with more than 1,000 starts. While 2016 ended slightly weaker than originally forecasted, it appears the market did stabilize, as starts have flattened.

“Annual starts have been outpacing closings since 2Q12 which is indicative of increasing demand,” said Greg Gross, Director of Metrostudy’s Central California market. “During 2014, closing pace slowed which caused inventory to increase. However, this year, the closing pace has increased, and builders appear to be effectively managing their inventory levels thus far. Our average base price for new homes is up 2.9% region wide over a year ago to $504K as builders grapple with increased land, construction and labor costs.”

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 5% of homes started are priced under $300k.

screen-shot-2017-02-08-at-7-13-34-am

Finished inventory has been steadily increasing, but improved during the third quarter. With 585 Finished Vacant homes, the market now has 1.4 months of supply. When the number of homes under construction is factored in, the market has 8 months of supply. The number of homes under construction in 4Q16 is 18% higher than in 4Q15 since quarterly starts are flat this quarter, this is most likely due to increased build times, and overall lack of finished inventory.

Finished Single Family lot inventory has declined 14% over the past year and now stands at 11,109 Also, Months of Supply has dropped from 36 to 26 over the past year. There were 3,272 new lots completed over the past year, yet more than 5,000 were absorbed; which deceases lot inventory; in comparison, more than 4,000 lots were delivered in 2015. 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.

As 2016 came to a close, the Sacramento market grew respectfully. Will this growth be sustainable throughout 2017?  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, we have the ability to attract buyers from the Bay Area.

“The lack of affordable lot supply, rapid price increases, are all factors which may cause new home buyers to rethink their home-buying decisions during 2017,” said Gross. “Given the above, Metrostudy does not expect the
housing market to fall, but another steady year as the economy continues to grow modestly. We expect 2017 to end with 5,700 new home starts for the year barring any substantial global economic crisis. Sacramento and the Stockton regions continue to benefit from the expanding Bay Area economy, as some homebuyers may seek more affordable homes outside of the Bay area, but stronger job growth and in-migration will be needed to increase housing demand substantially.”

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.