Sacramento Housing Market Forecast | Actual Property

Looking at recent housing activity, however, there appears to be a step back in home prices, which may give Sacramento-area buyers some much-needed relief.

Using information from the U.S. News Housing Market Index, we’ve compiled the data you need to understand the current state of the market. Here’s what you should know about the Sacramento housing market over the past year, in its current state and looking ahead into mid-2023.

The Sacramento metro area’s approved permits for new construction single-family homes was at a near five-year low in January 2023, at just 352, a 44% decline compared to January 2022.

Considering that Sacramento hit a five-year peak for single-family permits in June 2022, at 989, the drop in plans for construction activity is even more stark over a relatively short period of time. Plans for construction saw rapid increases in the first half of 2022, but around the midyear point when mortgage interest rates started to rise, construction permits saw an even sharper decline.

Looking at the close of 2022 and start of 2023, there is a slightly dramatic drop in construction permit approvals compared with the same time one year prior, which indicates there may be some seasonality to permit approvals for the metro area. There were nearly 1,370 single-family home permit approvals between November 2022 and January 2023, a 33% drop from November 2021 through January 2022.

A major factor contributing to the decline in new construction permits is the fact that builders are struggling to offload new construction homes that have already been completed. “There’s some really great deals to be had with standing inventory,” says Erin Stumpf, a real estate agent with Coldwell Banker Realty in Sacramento.

Stumpf recalls a recent deal in which she represented the buyer, and the purchase was a newly built house. The buyer received $30,000 off the original asking price and the builder guaranteed the interest rate – meaning the builder would buy down any higher rate offered by the lender.

For multifamily housing permit approvals, there’s even more volatility. Permits were approved for just over 302 units in January 2023, an 82% increase month over month and a 19% increase compared to January 2022.

In the three-month period between November 2022 and January 2023, multifamily housing permits were up 1.3% compared to November 2021 and January 2022.

January 2023 saw 2.4 months of housing supply, an increase of 1.5 months year over year, according to Redfin data. While this increase is a much needed relief for homebuyers, it still indicates a seller’s market for the Sacramento metro area.

“We don’t have a lot of homes for sale so our imbalance of supply and demand is still prevalent,” Stumpf says.

At the national level, Redfin reports there were 3.2 months of housing supply in January, a more balanced market, though still indicating low supply compared to demand.

In the rental market, vacancy is extremely low – just 0.9% in January, according to the U.S. Census Bureau. Rental vacancies are down more than 2% compared to January 2022. Nationally, the vacancy rate for rentals was 5.8% in January 2023.

Considering mortgage applications, the Mortgage Bankers Association reports that as of March 1, the seasonally adjusted Purchase Index decreased 6% from the week prior, indicating a fall in mortgage applications. The unadjusted Purchase Index was still down 3% from the week prior, and was down 44% year over year.

Consumer sentiment in the U.S. was at 64.9 out of 100 in January, based on the Survey of Consumers from the University of Michigan. It’s a 2.3-point drop compared to the same time in 2021, but an increase compared to recent months. However, with more volatile mortgage interest rates and declining mortgage applications, it’s reasonable to expect this number to drop when February numbers are released.

In January, the median home price in Sacramento was $525,000, a 3.9% decrease compared to January 2022, the U.S. News Housing Market Index reports, based on Redfin data. The median price is also down more than 13% from its five-year high in March 2022, when the median price reached $608,000. The median home price nationwide was just $383,000, according to Redfin, a 1.9% increase year over year.

This data is on par with Stumpf’s expectations for the market – she says January is often a slow time of year for Sacramento, with upticks in activity starting in February and leading into spring.

Despite the decrease in median price, Stumpf says she still sees the occasional property receiving as many as eight offers at a time. “That speaks to us not having a lot of inventory on the market,” she says.

The rental market, on the other hand, is still seeing increases. The median rent in January was $2,233, a 1.8% increase year over year, according to Zillow data.

As of December 2021, the latest number from the U.S. Census Bureau, there are 879,000 households in the Sacramento metro area – a number that’s likely to keep demand for housing high and rental vacancies low, especially as would-be homebuyers hold off on purchases due to high mortgage interest rates.

The average interest rate for a 30-year, fixed-rate mortgage in January was 6.27%, according to Freddie Mac. Interest rates have since been more volatile, however, with Freddie Mac reporting an average interest rate of 6.65% on March 2.

The high cost of construction may lead to continued low construction activity in the future – keeping demand for both owned and rented housing high. In January, the U.S. Census Bureau reported its Construction Price Index in the U.S. was 190.6, a 12% increase from January 2022.

As of January, there were 1.06 million people employed in nonfarm positions in the Sacramento metro area, an increase of more than 32,400 people year over year, according to the U.S. Bureau of Labor Statistics. Nationally, there are nearly 154 million people employed in nonfarm positions.

The unemployment rate for the Sacramento market is 3.3%, a decrease of one percentage point year over year. The national unemployment rate is 3.5%, according to the Bureau of Labor Statistics.

In January there were 16,900 construction jobs in the Sacramento area, an increase of 2,400 compared with January 2022.

The strong unemployment numbers help contribute to few mortgage delinquencies – when few people are unemployed, making the monthly mortgage payment isn’t an issue. Foreclosures in the Sacramento area have been at rock-bottom levels in March 2020: 0.1%, according to Black Knight Inc.

The National Home Builders Association and Wells Fargo Housing Market Index reported homebuilder sentiment in the Sacramento metro area was rated 37 out of 100 in January, a 54-point drop from January 2022, when builder sentiment was rated 89 out of 100.

Homebuilder confidence has taken a major hit since mortgage interest rates started rising in mid-2022. Nationally, homebuilder confidence is rated at 42, according to the index. Still, Sacramento’s builder confidence has climbed somewhat from its low point in December 2022, when builder sentiment was just 25 out of 100.

Construction for nonresidential buildings is up in Sacramento, rating 51.3 on the Architecture Billings Index from the American Institute of Architects, up 3.7 points from January 2022. The score of 51.3 is not outside the more normal fluctuation for the area in the past five years.

While the decline in the median home price may be indicative of a mild housing market price correction, in which the market is overvalued and must undergo a period of mild decline, homebuyer activity implies that it may be short-lived.

“It feels like regular seasonality at the moment. I think the big question will be what will interest rates do,” Stumpf says.

Like with the rest of the U.S., mortgage interest rates play an important role in the ability to afford a home purchase. Especially in a place where real estate comes with high costs, a higher interest rate is a greater burden on buyers.

However, Stumpf says she is seeing buyers become more accustomed to rates above 6%. If interest rates continue upward, closer to 7%, there may be more buyers backing away from a home purchase, but Stumpf doesn’t anticipate a wholesale drop in demand.

“No one seems to be scared of the rate, so as long as the rate doesn’t really climb, I think we’re going to be in our typical seasonality for a bit,” she says. “And if rates go down significantly at all, I think we’ll see a lot of buyers coming back to the market.”

Looking ahead, the U.S. News Housing Market Index predicts just under 3,000 single-family home permits will be approved between February and June this year, which would be a fairly significant increase compared to recorded numbers in recent months.

For multifamily construction permits, the index expects approvals to continue their climb, with a little more than 1,600 units between February and June. With homebuilder sentiment remaining low, the focus on multifamily construction makes sense, with low vacancy rates and rent continuing in an upward trajectory.