The question itself is misleading. In the greater Sacramento Region, home values have increased handsomely over the last four years. For the most part, it has been a sustainable increase. Few areas are back to 2005 highs. Most are still 10-20% below the high water mark in home values in the Sacramento area. This is a good thing in my opinion. The hosing inflation seen in 2002-2006 was unsustainable on so many levels. Let’s take a look to see if a buddle has formed. The question about a Real Estate buddle gets asked a lot, with good reason – experience. Experience is how we learn most lessons in life. If we are over thirty and have owned a home, we have experience with our home values fluctuating higher or lower. Most are familiar with the law of Supply and Demand. This law drives availability and price in most consumer products. If we only look at these two dynamics in determining home values, inventory and demand, they would be leading indicators. However, they do not tell the whole story.
In the illustration below, like this layered cake, there are many factors that drive our Real Estate market. When all these indicators are in balance, the market is steady, with modest appreciation in the 3-5% range. When the economy heats up, or inventory is low, prices rise. When interest rates spike too high, or homes are priced above the affordability of most to purchase, prices fall. In 2003-2005, when our financial institutions lent money with wild abandon, a real estate buddle was created. Demand fueled 40% price appreciation in a short period of time. In 2006 when those institutions were forced to tighten their approval process, the supply of money shrank, and took the economy and home values with it. Thus, when you hear news about the economy, interest rates, consumer demand, jobs, Housing Inventory, know that any one positive or negative indicator will not have much affect on your properties value. When we look at the whole cake, layer-by-layer, we get a sense of what drives the market and thus, our home value.
No one has a Crystal Ball, yet we do have a layered cake. The economy seems to be strengthening and Inventory levels are on the low side. Jobs are more plentiful, interest rates remain at historical lows, and the money supply is normal. I would say our 2016 cake is looking good and will most likely taste good for both buyers and sellers in 2016. Bottom line, our housing market should see modest appreciation and interest rates and job should keep supply and demand in balance this year.
Happy New Year Everyone!