As 2018 comes to a close, we are starting to see the housing market slow down in California. According to the California Association of Realtors, the statewide sales-to-list price ratio (sales price / list price) has hit the lowest level in 20 months and was down from a year ago: 98.5 percent in September 2018 compared with 99.1 percent in September 2017. We are also beginning to see inventory rise as homes stay on the market longer.


Can we expect the market to heat up again in the warmer months of 2019, or will housing prices fall? What does this mean for buyers and sellers in the Santa Cruz Real Estate market?


California Real Estate Market Predictions


A combination of historically high home prices and eroding affordability will likely result in weaker demand in the 2019 California housing market. Home prices are predicted to continue to rise, though at a slower rate than in previous years. This slowdown is predicted to be driven by a reduction in demand, due to three leading causes: Affordability, Buyer-Psychology, and Out Migration.


Affordability


Interest rates are expected to keep rising, making it more expensive to buy a home. It is projected that 30-year, fixed mortgage interest rates will rise to 5.2 percent in 2019, up from 4.7 percent in 2018 and 4.0 percent in 2017, but will still remain low by historical standards. Higher interest rates, in combination with historically high home-prices, will make affordability a major issue in the 2019 market.


Even as the market softens, it is doing so in the wake of a long period of historically high home prices. As seen below, the Home Price Index for California has exceed its 2008 level and is the highest it’s been in recorded history.



Buyer Psychology


This past-period will likely impact the psychology of present day buyers, making them more hesitant to buy for fear of buying at the “top” of the market. As the market softens, some buyers will warm up to buying a home, but others will likely wait to see if prices continue to decline.


Out-Migration


Unfortunately, years of eroding affordability has resulted in an increasing percentage of homebuyers leaving their communities in search of more affordable housing. In 2018, 35 percent of Bay Area homebuyers left California because of affordability constraints. The statewide average was 28 percent in 2018. The California Association of Realtors predicts that, with rising interest rates, out migration will continue to be a problem in 2019, so long as housing prices remain at these high levels.


Implications for Prices and Homeowners?


What does all of this mean for housing prices? They will likely continue to rise, but at a slower-pace. The California Association of Realtors predicts that housing prices will see a 3.1 percent increase year over year. This is down from the projected 7.0 percent increase of 2018.


Regarding home sales, Realtor.com predicts that home sales will be down 2%. However, with inventory expected to remain limited in most markets, if you price your home competitively you can still walk away with a profit. If you do decide to sell, keep in mind that you may not see the competitive offers and lightening speed sales that have been the norm in the past few years.




What Does This Mean For Buyers?


As interest rates rise, it will become increasingly more expensive to buy a home. If you are considering buying in 2019, we do not suggest that you wait for housing prices to soften. Prices will likely increase (though at a slower rate). From a cost-perspective, it is most likely in your best interest to buy earlier in the  year to lock in a lower interest rate.





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