Housing sales slow and inventory rises, but Santa Cruz County still a ‘seller’s market’

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Santa Cruz County’s housing market is slowing as properties stay on the market for longer and fewer homes are being sold countywide.

Local real-estate agents attribute the cooldown to higher interest rates, a shift from all-cash offers to budget-conscious first-time buyers, and sellers who have yet to adjust their expectations to a less-competitive housing market.

But despite the slowdown, some realtors say Santa Cruz County is still a seller’s market — a market in which there are fewer properties for sale than there are buyers, allowing the seller to dictate prices.

“Going forward, we’re still gonna be in a seller’s market, but not the most insane seller’s market of all time like it was a year and a half ago,” said Coldwell Banker’s Jessica Wallace.

Home sales data released Tuesday by the Santa Cruz County Association of Realtors shows the median price of a single-family home fell an annualized 4.7% in Santa Cruz, from $1.6 million in February 2022 to $1.525 million in February 2023. Median prices fell 7.4% in Watsonville, from $810,000 to $750,000. The two markets made up around 55% of all single-family home sales in the county last month.

The county saw 38% fewer home sales last month than the same time last year. Jurisdictions including Ben Lomond, Felton, Freedom, Mount Hermon and Davenport saw no properties sold in February.

At the same time, unsold inventory rose 10% countywide, led by Santa Cruz, where there were 49 single-family homes sitting on the market in February, compared to 38 in February 2022. Houses were also taking longer to sell: The number of days on market hit 47 countywide last month, up sharply from 21 in February of last year.

In Aptos, single-family homes took an average of 70 days to sell last month, up from 17 last February. In the city of Santa Cruz, days on market rose from 25 to 38, while houses were taking more than twice as long to sell in Watsonville, where the average days on market nearly doubled, from 26 to 46.

High interest rates are playing a role in the slowing local housing market, Wallace said. The Federal Reserve hiked interest rates several times in 2022 in order to slow down the economy in an effort to get a grip on inflation. Locally, mortgage rates sit around 7%, greatly affecting those seeking loans. Further, Federal Reserve Chairman Jerome Powell said Tuesday that interest rates are likely to rise even higher than originally expected.

“Let’s say you’re buying a median-priced house at $1.2 million and putting 20% down. You’re getting a pretty hefty loan at 7%,” said Wallace. “When rates were 3% about a year ago, you were paying thousands of dollars less.”

There are also fewer all-cash buyers in the market now than during the frenzied days of the pandemic.

According to Jennifer Watson, president-elect of the Santa Cruz County Association of Realtors, buyers flush with cash dominated the market in 2020 and 2021, with the COVID-19 pandemic making the county a popular “upgrade” destination for many existing homeowners looking to move to a new area.

“The problem was, you had so many people wanting to get space,” Watson told Lookout late last year. “With the pandemic and offices closing down, there were people who could afford to pay cash to go to areas that maybe had a little more space in their yard for kids and dogs to play — something with acreage — and of course our area is primed for that.”

That has since tapered off. Wallace said just 17% of her sales since 2021 have been to cash buyers — only eight of 46. Now, she said, it is definitely more common to see buyers seeking loans rather than paying cash, meaning that today’s buyers are particularly sensitive to higher interest rates.

Wallace added that she doesn’t expect those types of low interest rates to return anytime soon: “If we do have rates that low, then something bad happened.”

Lower prices also contribute to the longer times homes are spending on the market, as some homeowners might hold off on selling with the hope that they can strike bigger deals down the road. At the same time, some current sellers aren’t willing to reduce their asking prices enough to compensate for the changing market conditions.

“Some of our inventory is stuck with the peak pricing. Owners are asking the price that it may have sold before, but the market isn’t what it was last year,” said Marvin Christie, co-owner and president of Anderson Christie Real Estate. “I hate to say it, but it’s unrealistic sellers.”

But with the market as slow as it is for the area, Christie said one group has become more active recently: first-time buyers.

Most first-time buyers use mortgages, which means they need to meet certain requirements to close on their mortgage. When buyers flush with cash are looking to buy a house, they can waive some of those contingencies, making them more competitive buyers. Fewer buyers altogether equals fewer people able to waive those requirements, opening the door for more first-time buyers — even in a higher interest-rate environment.

“First-time homebuyers have been the most abused group, second to tenants, and since the buyer pool has dropped a little, first-time buyers are reaching back out,” Christie said. “They feel that they may actually have a chance of buying something.”

He added: “Even though it’s no more affordable for them, it’s palatable because of having inspection contingencies and things that have been put by the wayside in the hot market.”

But even in a market that has morphed into slightly less of a seller’s market, it’s still rather competitive, as the area is known to be.

Wallace said many properties still get multiple offers. She recalls a 1,200-square-foot, three-bedroom, two-bathroom house on the Westside that got around 13 offers, and another Rio Del Mar house of similar size and features that got six offers. Those houses were listed at $1 million and $1.299 million, respectively.

“And these are entry-level homes for this area,” she said. “The next level up is likely to be at least $1.6 million.”

There are hundreds of new units — a mix of both affordable and market-rate — in the planning or construction stages across the county. But realtors don’t see the future influx of new units affecting home prices in the short term.

“They will probably go very quickly and it will help alleviate, but there is such a demand and such a need that I don’t think it will be significant quite yet,” said Watson.

Rather, real-estate agents will pay close attention to the number of houses up for sale to predict the market’s direction.

There were 182 single-family homes on the market in February — up from 173 in January, but still down from 200 in December and 249 in November. Should that figure hit 300 or higher, said Wallace, the market could shift even more. However, there haven’t been 300 houses on the market since July 2022, and before that, August 2021.

“That’s really the main thing I would look at to see if this market is going to slow down more, and if prices are going to level out or even go down,” she said. “I don’t think that’s going to happen until we get a lot more houses on the market.”

Thomas Sawano contributed to this report.