The other day we went for a consultation with a financial adviser and we couldn’t help but notice the similarities between his profession and ours. The markets are constantly changing. We both feel the pulse of the market at any given moment. Our clients depend on us to advise them based on what their goals are.
Our financial adviser showed us a sample portfolio and how it had grown over the past 10 years. He pointed out that there was a period of time where it decreased a little, but for the most part it increased. That got me thinking about the real estate market and how it has changed over the past 10 years. We do a market analysis each month, but it only looks back one year. I wanted to dive deeper into the real estate cycle, and maybe even break out my crystal ball to predict where the market is going.
The following graphs are a big picture look at all of Sacramento County. Contact me if you’d like to see graphs of a more specific area within Sacramento. This first graph shows the average price per square foot, starting in 2002 through 2017, covering 15 years of data in Sac County. Take a look to get an understanding of the graph, then see if your opinion matches mine, below.
We can see the peak of the market in late 2005. A pretty steep decline follows this peak, and values stay down from 2008-2012 (the recession). Then, values start to go back up again and we are currently getting close to the peak of those 2005 values. Will it continue to go up? Who knows? This is where the crystal ball comes in. Personally, I think it will continue to rise a little bit before we head into a decline. I do not think the decline will be as steep or rapid as 2006-2008 because the rise was more gradual. Notice values shoot up from 2002-2005 (3 years), where the increase is slower from 2012-2017 (already 5 years) and we aren’t even at that 2005 peak yet. That most recent real estate cycle took about 7 years to rise and fall. Being the optimist that I am, I’m hoping we have a longer wave to ride and we won’t bottom out as hard as we did in 2008-2012.
The following graph illustrates pretty much the same thing, if you look at the average sold price (the red one). The green line is the average asking price. Take a look and see if you notice the same things I do, below.
The difference between the two lines is interesting to me. This space shows how “in sync” buyers and sellers are. When the two lines are farther apart at a specific time, sellers were asking for more than the buyers were willing to pay. The closer they are means that buyers were willing to pay closer to what the sellers were asking. During the inclines (2002-2005 and 2012-2017) the difference between sold and asking price are pretty significant. This makes sense because sellers want to push the market to get as much as they can for their homes. During the declines (2006-2008, and little right in 2010/2011) the two lines get closer together. This tells me that sellers get more realistic about what their homes will really sell for.
With these patterns in mind, let’s switch gears and look at inventory. The following graph measures the number of homes for sale (light green), sold (dark green), and pending (red line, which means they have accepted an offer).
There are two big spikes in inventory, which correspond with the two periods of decline of sales price in 2006-2008 and in 2010/2011. I can’t say which one affects the other (inventory vs. sales price) but there is an obvious correlation (you know, the whole supply and demand thing).
So, we all want to figure out where the market is going so we can make the best decision on what to do today. As sellers, we want to get the best sales price for our home. As buyers, we want to get the best deal for our home. It just depends on what your goals and needs are. If you have the flexibility to move at any time, or the patience to not move for a while, and your specific neighborhood and price range follows the same general trends as the entire county, then here are your ideal scenarios:
If you are a first time home buyer: You want to enter the market at the lowest point of the price decline. The problem is that no one knows what the lowest point is until it starts going up again. If you put your mouse on the lowest point of the price decline (between 2008-2009), then scroll straight down to the inventory chart, you’ll see that inventory is on the decline, but hasn’t bottomed out yet. This is true for the other little decline at that 2012 marker, too. So, you have to wait until prices drop, then drop some more, but inventory continues to drop, as well. Or you can just wait until you know for sure that prices have hit rock bottom because they start to go up.
If you want to buy, but also need to sell: You want the best sales price for your current home, but also a deal on your next home. The problem here is that the perfect time to sell may not be the perfect time to buy, and vice versa. You want to sell your home when the market is going up. It may not be the perfect time to buy, but there will most likely be less inventory on the market, and therefore less competition for your house to sell. Once the market starts to decline, the market will start to flood with inventory. You can’t buy unless you can sell, so sell when it’s most advantageous to you. If you can somehow time it perfectly where you sell at the peak and buy during the decline, then you are one smart cookie and we should be friends.
If you have a property to sell, and don’t need to buy another home: Maybe you inherited some property from family (lucky you) or you’re an investor looking to cash out. You want to sell at the peak of the market. Like the first time home buyer’s situation, you don’t know what the peak is until it starts to change. If you compare the pricing peaks to the inventory chart, inventory starts to increase dramatically, but the market isn’t completely flooded yet. Or, you can sell anytime during the uptick because inventory is most likely low (good for you). However, once that you hit that price peak and decline, the market will become flooded with inventory (bad for you).
If you are still reading this, you are probably seriously thinking about buying or selling a home. Almost nobody fits into those ideal scenarios mentioned above because, well, life happens. Contact us to start that discussion so we can help you meet your real estate goals.