Recently, a client asked me for an update on the current market conditions. The following is what I sent him. Might be helpful for you too, so I posted it here.
The following is a summary of the market conditions for the Sacramento region focused mostly on the Folsom / El Dorado Hills area:
Historically, the area has seen a seasonal fluctuation in sales activity where sales increase in the spring/summer, and decrease in fall/winter. In these conditions, it is prudent to put a home on the market in mid spring to maximize buyer interest while the property is still fresh on the market. Since mid 2005 this cycle has not been evident. For the last 2 + years we have seen a nominal level of sales activity (fairly steady) across all months. We still see inventory levels rising and falling along traditional patterns. The results of this current pattern is that prices start to decrease in late spring/summer as sales remain steady, inventory rises, and buyers have more choices to choose from. We forecast no change to this current pattern through 2008, and possibly into 2009.
We are also experiencing unprecedented mortgage default impacts on the Sacramento regional market, and these defaults will impact 2008 sales and prices. In January through March 2008 there will be more loans resetting interest rates than we experienced in all 12 months of 2007. While in 2007 many of the resets where in the “sub prime” category (lower end homes) many of the resets in 2008 are in the “Alt-A” category where homeowners legitimately qualified for their home purchases and will impact mid level to high end homes. These resets will increase defaults and foreclosures, and even with the state and federal bailouts we expect more REO (Bank Owned) properties to hit the market during the summer (approximately 90 – 120 days after the loans reset.) This surge in inventory will increase downward pressure on pricing for the near future.
Location has become even more important in preserving equity value in our current market. Our strongest markets are close to employment and business centers and transportation (light rail). The markets being hit the hardest are in the outlying areas of Sacramento, Placer and El Dorado Counties.
All of these factors indicate that if you do decide to sell, then the time to be on the market is as soon as possible. As pricing continues to decline every month you will be losing equity value in your home, and paying your carrying costs. Waiting will put us in a position to market the property with increasing inventory, declining prices, and more buyer options as we approach summer.
For future value – until we absorb the mortgage defaults in 2008 it is hard to forecast the future. That said, assuming a continuing value decline of 8% through 2008, and then a stabilizing market, you might expect to recover a 2005 value in the 2012 to 2014 range, depending on your particular location within the region. Some areas will take longer. This is based on the assumption that the market does stabilize by the end of the year after a total drop from the peak of about 20%, and that we appreciate at a rate of 4% a year thereafter. This is an optimistic forecast; some industry economists are forecasting steeper drops, and a slower recovery.
