You may have heard; the real estate market is changing. The feds’ interest rate hikes have had their intended effect of slowing the market. Rising interest rates mean less buying power and fewer interested buyers. It may also mean that buyers have an opportunity that hasn’t been present in two-plus years; increased leverage.
While more inventory feels like a sign of change, an increase in inventory exclusively doesn’t necessarily mean a change in the market. It is normal in our seasonal real estate market to experience increases in inventory as we march toward our yearly new listings peak in the summer months. The inventory peaks and valleys are fairly predictable year-over-year. If you’d like to learn more about the seasonal trends of Santa Cruz real estate, I dove deep into it here.
Now, there are plenty of other indicators besides inventory that tells us the market is changing. We’ll dive into how prices have changed since their peak in March, how available inventory has increased substantially, and how demand is still very high for the properly-presented homes (sellers, this is for you!).
The goal of this data deep dive is to determine three things:
- How much the market has actually changed
- How much of the change is seasonal and how much is an actual divergence from recent trends
- How today’s market compares to past years
Before diving into just how much the market has changed, I want to briefly summarize some of the global impacts that are affecting supply and demand here on the coast. Material costs due to supply chain bottlenecks, lack of available land for new builds, and immobility created by high-equity tax liabilities are decreasing supply. Interest rate rises, the Ukraine War’s impact on global supplies, and a stock market correction due to inflation-related poor Q1 performance are decreasing demand.
Now, let’s dive into the data and determine how much the market has changed:
March 2022 was the month of records for Santa Cruz real estate. Since then, we realized it was also the peak (at least in the short term). Median and Average Price, Price per square foot, and Percentage over List Price are all down while New Inventory and Active Inventory are up.
The median home price is down 17.2% from its $1.6M peak in March ’22. The average home price is down 12.2%. The median and average prices are down for the third consecutive month and are the lowest since January of this year. Meanwhile, the price per square foot is $884, the lowest since January. The percentage over asking price is 8%, down from an all-time high of 9.8% in April.
Active and new inventory are up, and have been going up, for 6 consecutive months. The graph above clearly shows the seasonality of our market. The inventory dips as we head toward winter and rises as we head toward summer.
So how much is seasonal and how much is an indication of a new trend? Let’s find out. The best way to determine whether new inventory is seasonal is to compare it to previous years. Unlike other markets with new construction creating year-over-year growth in new inventory, Santa Cruz has stayed relatively flat.
While the first three months of the year underperformed from a new listing’s perspective compared to the previous 12-year monthly averages, May of 2022 was nearly identical to May’s average from the previous 12 years (264 vs 265.8). This means that the recent shift in the market is minimally impacted by NEW listings on the supply side but instead almost exclusively related to how decreasing demand is impacting ACTIVE inventory.
I’ll say that again: Santa Cruz real estate is almost exclusively driven by demand. New supply is remarkably consistent year-over-year. It is demand that is pulling the levers on how much active inventory is available. To really determine how much demand has decreased since March, we need to look at Months of Inventory (MOI). MOI indicates how long it takes to sell homes in a given market. It is calculated by taking the number of active inventory and dividing it by the number of sales in a given month. Notice the upward spike and trend from April to May of 2022? Months of Inventory jumped 68%- the highest it’s been since May of 2020!
While this is really exciting news for buyers, I don’t want sellers to get the impression that the bottom is falling out of this market. All you have to do is zoom out to gain a little perspective on this market. A healthy, balanced market typically has around 5 months of inventory. At 1.8 months in May, we have a long way to go to reach true equilibrium.
The final, and probably most interesting piece of the current market is how the homes that are selling, are selling quickly. The 13 Days on Market in May was the lowest ever recorded in Santa Cruz County. This is while percentage over list price is still 8%, the third-highest ever! This tells me a few things; buyers are getting more selective as available inventory increases and they are still willing to “overpay” for the right homes. This only increases the value and importance of high-quality staging, photography, and representation for sellers.
To summarize the data and conclusions, the market is definitely changing. Driven by a change in demand due to interest rate hikes, active inventory is increasing. This means less competition for buyers and more supply to choose from. From an objective point of view, the recent changes are very good news for buyers. Zooming out though, we are a long way off from true balance in this market.
I think there is a window of opportunity for buyers where uncertainty has frozen many into inaction. Decreasing demand will undoubtedly alleviate some covid-related supply chain issues and eventually ease inflationary pressures. When that happens, where do you think the market will go?
The last point I’d like to make: it’s impossible to time the market. The best time to buy is when it’s the best time for you. History shows us that, if you maintain a long enough time horizon, the value of your home will go up.
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