SACRAMENTO HOUSING 4Q18: Market Growth Stalls for 2018; Standing Inventory Levels are at their Highest since 2009

  • Annual New Home Starts weakened in 4Q18, ending the year even with 2017 levels; annual closings were up 8% YoY
  • The median base price for new homes is up 3% regionwide over the past year at $485K.
  • Affordability concerns are rising: Currently, only 25% of starts have base pricing under $400k. At the current base price for a new home, a buyer would need $124k income to qualify, or 176% of the median household income for the region.

Metrostudy’s 4Q18 survey of the Sacramento housing market shows that annual housing starts were on pace for modest growth through the first half of the year, but less active third and fourth quarters finished 2018 nearly identical to the previous year with 6,296 starts. Home closings were up 8% for the year, despite also posting a sluggish fourth quarter, down 7% relative to 4Q2017. Starts have been trending up in Sacramento consistently since 2011, but builders have been met with headwinds as they face difficulties with increasing land prices, labor shortages, and the ability to offer affordable product. Annual starts have outpaced closings for years, indicative of a growing market. As of 2Q18, they have been much more in harmony with one another, suggesting market growth has cooled.

The median “offer to build” base price for new homes is up 3% regionwide over the past year at $485K. Prices continue to increase in this market on a quarterly basis, though at much more modest rates relative to the year prior. As sales velocities have slowed in 4Q18, some builders have begun to leverage incentives once again.

“Start activity has increased in price tiers above $500K as builders adjust pricing to offset increased construction costs,” said Aaron Stubblefield, Regional Director of Metrostudy’s Northern California market. “Affordability is a concern in nearly all markets of Northern California, and Sacramento is of no exception. Currently, only 25% of housing starts have base pricing under $400k. At the current base price for a new home, a buyer would need $124k income to qualify, or 176% of the median household income for the region. Price appreciation is expected to slow further in 2019 as buyers struggle with affordability.”

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In 4Q18, finished home inventory is at its highest level since 2009. Standing inventory has been extremely scarce for years, but slower sales in the second half of 2018 have allowed it to build closer to a more balanced level. Current inventory represents a 1.5 years supply. While the total number of finished vacant homes is not yet concerning, the rate of the increase was swift (+45% YoY) and this measure should be monitored closely going forward. If this trend continues and supply increases substantially, builders will likely cut prices to support the turnover of inventory.

Finished vacant developed lot inventory has been trending down the past several years, but had a sizable uptick in 4Q18. El Dorado County had a 120% increase to VDL this quarter, largely attributed to Lennar’s development at their active adult Heritage community in El Dorado Hills. DR Horton also added significant lot supply to Natomas (city of Sacramento), with 388 lots at their upcoming Parkebridge community. There were 7,219 new lots delivered in the past year, the strongest year in a decade. Nearly half of the annual deliveries occurred in 4Q18. As housing starts have plateaued in recent quarters, this uptick in deliveries will finally support an increase to VDL in this undersupplied market.

While general economic conditions are solid, there is concern regarding the slowing of future job growth. As mentioned earlier, this is most likely due to lack of qualified labor. Fortunately, this market has the ability to attract buyers from the Bay Area where pricing has become unattainable for many. This lack of affordability continues to push demand into affordable markets, Sacramento being a key beneficiary. The migration of Bay Area buyers to Sacramento will supplement local demand while competing for the limited housing stock. Metrostudy expects the Sacramento housing market to remain steady for 2019.

For information contact:
Aaron Stubblefield  – 916-580-2019

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