At the beginning 2018, there are some important changes on the horizon for Santa Cruz Real Estate. The Tax Cuts and Jobs act, which is making its way through the House and Senate, will be a major determinant of 2018 housing market health. We’ve written about its potential impact on the California real estate market in a separate blog post, and will provide regular updates on this topic. Here, we summarize some other major factors that will affect the housing market. Note, national and even statewide housing stats and predictions may or may not apply to a local market. Therefore, whenever made possible by local-data, we will tie national predictions to our local Santa Cruz Real Estate market.

 

Millennials and First time Home Buyers

 

Millennials and other first-time homebuyers made up 34 percent of the market, which is the fourth lowest share since 1981. A number of factors are contributing to the lower-than-usual demand from these buyers.

 

41 percent of first-time buyers indicate that they have student debt and 25 percent said saving for a downpayment was the most difficult task in the home buying process and 55 percent said that student debt has delayed their savings for a home purchase.

 

Other reasons that millennials are waiting to buy include delaying marriage and having children, higher rental costs, and lower relatively affordability. Here in Santa Cruz, the problem described above is exacerbated by some of the highest home and rental prices in the state. With no sign of student-loan debt decreasing in 2018, we expect millennials and other first-time homebuyers to make up a similar fraction of the market, with modest increases attributed to job-growth.

 

GDP and Wage Growth

 

While it may disincentivize a home-purchase, the Tax Cuts and Jobs act is poised to boost wages and GDP. Higher wages and a growth in GDP typically result in higher demand for housing. However, this demand-increase may be dampened by a reduction in home buying incentives proposed in the tax-reform bills. Nevertheless, if wages increase, we do expect housing demand to follow suit.

 

Home Prices

 

As described in the tax reform article above, national housing prices may decrease. However, due to the persistent inventory shortage throughout California, economists expect to see a continued, yet more mild increase in home prices. The California Association of Realtors (CAR) predicts that, with tight inventory being the new ‘norm’ for the past few years and at least the upcoming year, we’ll continue to see fierce competition driving up prices. However, CAR expect to see slower price growth than the previous year: the California median home price is forecast to increase 4.2 percent following a projected 7.2 percent increase in 2017 to $538,500.

 

As seen the the graphs below, here in Santa Cruz we’ve seen prices steadily going up since 2012. Economic growth locally and in the Bay Area has the potential to maintain these historically high home prices. However, due to the tax-reform and saturation of the higher-priced housing market, if housing prices further increase these changes are expected to be mild.

 

 

(source)

 

 

Tightening Inventory and Rising Rates: A Seller’s Market

 

As we’ve written about in the past, new housing construction in California does not satisfy growing demand. According to this article, the state estimates that it needs to build 180,000 homes annually just to keep up with projected population growth and maintain a health prices. Unfortunately, for the past 10 years, the state has averaged less than half of that. If the new tax reform further incentivizes homeowners to wait to sell, we can expect tight inventory to continue throughout 2018.

 

We’ve already experienced one rate-increase before the new year, and have three more quarter-point rate increases planned for 2018. National Association of Realtors Chief economist Lawrence Yun predicts that mortgage rates will continue to rise to an average of 4.5%.

 

Both of these movements push us into a seller’s market. What does this mean for buyers? Be ready to act when you see a property that you like. This means having your financing in order, knowing who will be on title, and having a working relationship with a real estate agent who can write a contract at a moment’s-notice.

 

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