It feels like a Sacramento housing boom, but is it?

Published: Monday, Mar. 11, 2013 - 12:00 am | Page 1A
Last Modified: Wednesday, Mar. 13, 2013 - 6:32 pm

It feels a lot like a housing boom in Sacramento, with median home prices jumping by thousands of dollars each month.

And with memories of the last boom and subsequent bust still fresh, the hot topic among real estate professionals is whether such large price increases are sustainable or if another bubble is developing.

Sacramento home prices rose twice as fast as the national average last year, faster even than the pace set during much of the last housing boom. The median home price in Sacramento County grew 22.4 percent from January 2012 to January 2013, jumping from $152,750 to $187,000, according to tracking firm DataQuick.

Only once in the last two decades have prices increased so much from one January to the next: 2005, the peak of the last housing boom.

"It goes up and up and up," said Patrick Hake, a real estate broker at Re/Max Gold in Auburn.

Big, sudden home price increases tend not to end well. The Sacramento region has, for the last few decades, cycled through successive real estate booms and busts, each larger than the preceding one.

This cycle might be different – more of a short-term correction than the start of unhealthy growth, several real estate experts said.

Much of that optimism stems from a change in the type of Sacramento homes for sale. A year ago, foreclosures and distressed sales dominated the market. Today, they don't.

Under a settlement with the state last year, banks can't foreclose on a home while discussing a loan modification with the owner. Also, with home prices rising, fewer homeowners are walking away from their mortgages. And the days of subprime, adjustable-rate loans snapping to unrealistic payment levels are mostly over.

Because of such factors, Sacramento County foreclosure notices and repossessions have fallen 80 percent in the past year, according to the tracking firm ForeclosureRadar.com.

"They basically cut off the flow of foreclosures," Hake said.

The shift from a market dominated by cheap, distressed properties to one dominated by conventional sales has fueled the rise in median home prices, said Andrew LePage, an analyst with DataQuick.

"It's not a boom," LePage said. "It's a change in the mix."

Besides, LePage said, most Sacramento County homes still sell for at least $100,000 less than they would have during the height of the last housing boom.

"C'mon, we're still 30 to 50 percent below peak levels," LePage said. "I understand why people are scared. These numbers are surprising to many people. They remind people of what we see in a housing market bubble. That's not the case today."

Sacramento real estate appraiser Ryan Lundquist agrees with much of that assessment, but he's not convinced that home prices haven't risen too much, too fast.

Large price increases driven by something other than strong economic growth could be a harbinger of impending price declines, he said. And the Sacramento economy, while doing better than its was a few years ago, isn't booming.

"It certainly is looking bubbly to me," Lundquist said of the home-price jump, which he called, "artificial in some sense."

Buyers have cash, but …

Real estate investors flush with cash and a low inventory of homes for sale top the list of the artificial factors Lundquist said may be inflating Sacramento's housing market.

The past year has seen a slew of investor activity. Rents were high but home prices low – a formula that creates quick cash flow for investors willing to become landlords.

Most homes that sold for under $200,000 in Sacramento County last month went to buyers paying cash, Lundquist said, citing market data. Most cash buyers are investors.

The international hedge fund Blackstone alone bought about 1,200 homes through a subsidiary in the Sacramento region during the last six months.

"You are seeing a lot of these houses – a majority – selling above asking price," said local broker Warren Adams, who specializes in selling distressed properties.

But as prices rise quicker than market rents, investors may be less keen to buy. If that happens, prices could fall along with demand.

Several real estate professionals said they also worry that speculators may keep buying homes even after the math doesn't pencil out. Such investors, prevalent during the last boom, play a high-stakes game of hot potato, holding a property just long enough to make a profit before passing it on, driving prices higher.

In addition, home inventory in the Sacramento region is very low. Tracking firm Zillow.com said last week that the number of homes for sale in Sacramento had fallen almost 50 percent from the preceding year, the largest decrease among major metropolitan areas in the nation.

The low inventory is largely a reflection of three converging trends: the decline in foreclosures as banks work with customers; investors buying distressed properties at auction before they hit the open market; and a substantial number of homeowners who can't sell because they still owe more than their homes are worth.

If anything happens to quickly increase inventory – a new wave of foreclosures or a large, sudden influx of homes for sale – it could destabilize prices.

Less worry than in '04?

Still, many real estate experts noted that there is not a tide of Sacramento residents taking out home equity loans or using high-interest subprime mortgages to purchase houses – two hallmarks of the last housing boom.

"The people who are buying now are getting fully qualified," said Mary Assadi, a Keller Williams agent based in Fair Oaks. "They are putting money down. We don't have inflated values just because people can't afford the homes they buy."

Like many others, Assadi said home price increases will probably slow down but that prices won't decline – a return to normalcy rather than a bust. The main driver for that soft landing would likely be more people putting their homes up for sale as they no longer find themselves underwater on their mortgages.

"I'm not worried so much as I was in 2004," she said.

Home construction will likely ease some of the supply problems facing the region, several real estate experts said, bringing price increases to more sustainable levels.

Already, new-home sales increased by 67 percent in the greater Sacramento region last year compared with 2011, going from 1,668 to 2,782, according to the Gregory Group, a Folsom-based firm that advises the new-home industry.

Home sellers are enjoying the current trends. Almost three-quarters of homes sell within 30 days of entering the market, according to the Sacramento Association of Realtors

"On some properties, we have 40 offers," Assadi said.

Still, those looking to refinance or sell should be careful, Lundquist said. Some neighborhoods see prices rising faster than others, and median price increases due to fewer distressed properties on the market may not translate to huge changes in home value.

"Just be realistic," he said. "You can't just look at the 22 percent (median price increase) and say, 'Boom!' "

While sellers consider multiple offers, buyers – particularly at the low end of the market – who don't have a couple hundred thousands dollars in cash are spending months finding a home to buy.

"Anyone on the front lines like I am knows that it's really tough to get the attention of the seller," said real estate agent Ted DeFazio, of Ellington Properties.

Call The Bee's Phillip Reese, (916) 321-1137.

© Copyright The Sacramento Bee. All rights reserved.

Read more articles by Phillip Reese



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