a for sale sign on a house

Santa Cruz County homes for sale hit lowest level in more than 20 years

The drop in home sales and new listings in Santa Cruz County can partly be attributed to the “mortgage lock-in effect,” or the reluctance for a homeowner to sell their home when they have a low interest rate locked in. Buyers took advantage of low rates during the pandemic, and are now choosing to stay put as a result. And the building of single-family homes hasn’t kept pace with demand.

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Santa Cruz County’s housing market inventory is the smallest it’s been in more than two decades, pushing home sales to a 15-year low, according to an analysis by real estate group Compass.

Over the past 12 months, Santa Cruz County saw its lowest number of homes on the market in more than 20 years, and sales dropped to their lowest point since the post-2008 recession, the Compass report found.

There were just 281 single-family homes on the market and 123 sales in May, according to the Santa Cruz County Association of Realtors. That’s the lowest level of inventory since the county real estate association began publishing monthly home-sale statistics on its website in 1996. Local housing inventory most recently peaked in May 2008, when there were nearly 1,400 homes on the market.

Real estate experts attribute the low inventory to a variety of factors. The region has built fewer single-family homes in recent years, even as the housing market has been under pressure from an influx of students and remote workers who moved to Santa Cruz during the pandemic. At the same time, fewer local homeowners are choosing to sell their properties and move, in part because rising interest rates have made the cost of new mortgages more expensive.

The region saw influx of buyers and a slight uptick in inventory during the pandemic. In 2020 and 2021, buyers with cash on hand had strong control over the market, with the COVID-19 pandemic making the county a high-priority destination for many looking to relocate to a new area.

County sales volume and new listings since 2007.
(Via Compass)

“[During the pandemic] everyone wanted space, and they realized they didn’t have to go into the office every day,” said Santa Cruz County Association of Realtors President Jennifer Watson.

She added that it’s no secret that Santa Cruz has long been a desirable landing spot: “People started to look at where they really wanted to be, and that’s what drove this frenzy.”

Now, many of those buyers are choosing to stay put even as pandemic restrictions lift, putting even more pressure on inventory.

“We haven’t seen that big return that we thought might happen,” said Watson, explaining that many who moved to Santa Cruz from areas closer to their work have decided to stay. “As far as sales go, people aren’t saying, ‘We’re going back to the city.’”

At the same time, the number of buyers has not declined significantly.

“If you look at even just the past 10 years, we’ve been complaining about low inventory,” she said. “Even in the pandemic, there was a lot of inventory trading hands, but it went so quickly that there still weren’t enough homes to satisfy the buyer buildup.”

Seabright Mortgage Branch Manager Brent Edwards said that what little inventory makes it to market is quickly snapped up, sometimes by investors looking for rental properties or by people buying second homes.

“A lot of folks buy rental properties and put a bunch of [college] kids in there, so that takes up single-family residences, too,” he said. “Even if our inventory does increase, there’s always enough demand to snap it up and still have another supply problem.”

Another factor driving inventory levels lower is that mortgage rates have risen sharply over the past year as the Federal Reserve has steadily hiked interest rates. Borrowers could get a 30-year mortgage rate of less than 4% in early 2022, compared to 6-7% today.

Many of the buyers who took advantage of low rates during the pandemic are now reluctant to sell because of higher rates, what the real estate industry refers to as a “mortgage lock-in effect.” Buyers typically take out 15- and 30-year loans, with rates locked in for the duration of the mortgage. But most borrowers aren’t able to take a mortgage with them to a new property, so existing homeowners will almost certainly have to get a new mortgage at a higher rate if they want to move, Edwards said.

“People sit on those low rates because they don’t want to give that up,” he said. “And also, where are they going to go? They’ll end up paying more for a new purchase and take on a higher interest rate.”

It’s unlikely that rates will fall to pre-pandemic levels anytime soon — making a move into Santa Cruz County more difficult for those who missed the pandemic levels.

“I tell folks in my pre-approval pipeline to not count on [rates coming down], if they do, that’s a gift,” Edwards said. “But there would have to be something kind of catastrophic to send them back down.”