Spring ‘frenzy’: How to navigate Sacramento’s record home prices, climbing mortgage rates

Frenzy. Volatile. Freakish.

We’re running out of adjectives to describe the Sacramento region’s real estate market.

Prices continue to skyrocket. A majority of homes are being sold for well above the listing price in many corners of the region. Mortgage rates are climbing.

In other words, 2022 is shaping up to be even wilder than 2021.

“I don’t think we’re going to slow down anytime soon,” said Sacramento-area real estate agent Kelly Pleasant.

It seems that each passing month brings a new high bar for the real estate market.

The median sale price for a home in the Sacramento region increased by $31,000 between January and February, a remarkable one-month jump that has driven prices to what is likely a new record, even adjusted for inflation, according to new data from local market analyst and appraiser Ryan Lundquist.

What made the monthly increase even more incredible, Lundquist said, was that “prices are already so high – it’s not like we were starting from a low level.”

The median sale price in the region in February was $591,000, according to Lundquist’s data. The most expensive county in the area is still Placer, where the median price has reached $675,000. If you’re looking for cheaper options, you’ll have to do some digging: just seven ZIP codes in the region have median home values of less than $400,000, according to data from Zillow.

“At some point we should hit an inflection point where buyers do resist or back off,” Lundquist said. “But at this very moment, we’re still in frenzy mode.”

Experts say, remaining calm is important. And we’ve got you covered with data and advice to help you navigate the wild market as the spring buying season is upon us. That’s not to say there won’t be challenges: It’s unlikely we’ll see a major increase in inventory or a sudden plateau in the price increases.

Mortgage rates going up

This subject requires some context.

When the Federal Reserve raised interest rates last week, a common reaction was that it also meant mortgage rates would suddenly shoot up.

But the Fed’s rate and mortgage rates are not always directly tied to one another. Instead, the recent increases we’re seeing in mortgage rates is more a result of other factors: inflation and economic uncertainty stemming from the war in Ukraine.

In recent weeks, mortgage rates on a typical 30-year loan have gone up from around 3.75% to around 4.5%. That’s an increase of nearly $200 per month for a traditional loan on the median-priced Sacramento region home.

Brandon Haefele, CEO and president of Catalyst Mortgage in Roseville, said he expects rates to increase more this year. Higher mortgage rates could help cool off the historic price increases we’re seeing (higher monthly costs could chip away at demand). However, Haefele thinks we have a ways to go before that starts happening.

“I don’t think we would see rates have an effect on a housing slowdown until rates are more in the 5% or 5.5% range for a consistent period of time,” he said.

Sacramento “is still one of the more affordable regions in California,” he said. And with a limited housing stock, the lack of supply combined with intense demand will continue to drive up costs.

“I think no matter what rates do, we’re going to continue to see strong demand and we’re going to continue to see people going above the list price,” Haefele said.

Pleasant said some buyers who have been waiting on the sidelines might want to become more aggressive with their plans due to expected rate increases. “I think buyers, if they’re on the cusp, they might be losing their buying power because rates are going up,” he said.

When it comes to mortgage rates – and getting ahead of the competition – Haefele offered advice to those in the homebuying market.

He said it’s important to get pre-approved for a loan before making an offer. And if you’ve been pre-approved, but it’s been a few months, do it again since rates have changed so much.

“You want to check where your purchasing power is today,” he said. “You might not be able to afford the same house today as you could have last month or six months ago.”

Buyers may also want to explore going an additional step and getting what’s called a TBD credit approval. That’s where an underwriter completes a thorough analysis of a homebuyer’s income, assets and credit to determine whether they are truly a credit-worthy borrower.

With a TBD approval in hand, buyers can close loans in as little as 14 days, Haefele said, making those offers competitive with cash offers. And in February, more than 16% of home transactions in the region were cash sales, including 21.6% of sales in Placer County, according to Lundquist’s data.

Price hikes, competition, multiple offers

March is typically when homebuying heats up as the weather improves and more homes hit the market. Slightly more homes were available in the region in February than during the same time last year, but not nearly enough to keep up with the demand, Lundquist’s data show.

“There’s a little bit of hope for buyers as we’re getting into the rhythm of the spring season,” Lundquist said, “but we’re not anywhere close to normal numbers.”

The intense demand and rising prices – combined with higher mortgage rates and the spiking cost of many goods and services such as gas – may mean more and more potential homebuyers are being priced out of the market.

The California Association of Realtors reported just 39% of households in both Sacramento and Placer counties could afford the median priced home at the end of 2021. That was higher than the statewide rate, but far lower than the national average.

Just over half of households in the region could afford what is considered an “entry-level home,” the CAR data found. Last month, just 10% of homes sold in the region cost under $400,000, Lundquist said.

Even homes listed above the median price are attracting competition.

‘Where we are in the market’

Pleasant helped a client close on a home in Orangevale last week. It’s a four-bedroom home with a renovated kitchen, close to Sundance Park and businesses on Greenback Lane. It was on the market for well under a month and sold for $35,000 above the asking price of $625,000, with seven offers on the table, he said.

“When you have a home that’s ready to go, that is move-in ready,” he said, “I think buyers are willing to spend a little more.”

According to Lundquist’s analysis, in February, buyers paid an average of $16,000 above the asking price in the region. Historically, sale prices average closer to $10,000 below the asking price in February.

About one in three homes sold in the region in February sold at or below the list price, according to Lundquist. In December, about 45% of homes sold in that range.

Pleasant has another home he’s getting ready to list that sold in the low $800,000s in September. It’s in the 95757 ZIP code of Elk Grove, between Highway 99 and Interstate 5, one of the hottest real estate destinations in the region.

Six months after it last sold, Pleasant said he “will list it with a ‘nine’ in front of it,” meaning the $900,000s.

“That’s insane” he said, “ but it’s where we are in the market.”

This story was originally published March 23, 2022 at 5:00 AM with the headline "Spring ‘frenzy’: How to navigate Sacramento’s record home prices, climbing mortgage rates."