Will Sacramento-area home prices level off in 2021? Experts offer a real estate forecast

Will this year be a confusing, roller coaster ride for home buyers and sellers in the Sacramento region’s real estate market amid a continued COVID-19 health scare and ongoing economic shutdowns?

Or will it be like 2020, when the local housing market defied predictions?

The local market stalled only briefly in March and April before hitting a solid stride, surprising industry experts. More new homes were built and there were more sales of both new and older homes than there had been in a decade as buyers, sellers and home builders adapted to the pandemic by switching to online virtual home tours before making a final in-person visit.

Fueled in part by an increase of Bay Area residents fleeing for Sacramento, buyers were plenty in 2020. There weren’t very many sellers though, a problem that persists. That lead to competition among buyers for resale homes, which drove home prices up by double digits in many parts of the region.

Yes, it’s educated guesswork at best to predict where the housing market is headed. Nevertheless, The Sacramento Bee convened a group of housing industry experts to offer their thoughts for 2021.

Our experts: Dean Wehrli, principal at John Burns Real Estate Consulting; Ryan Lundquist, analyst-appraiser-blogger; Stephen T. Webb, Keller Williams Realty; Erin Stumpf, Coldwell Banker; Aren Bazzocco, division president for TaylorMorrison home builders; and Pat Shea, president of Lyon Real Estate.

Comments have been edited for length.

What surprised you about the housing market in 2020?

Lundquist: Many figured a pandemic would lead to the market tanking, but the exact opposite happened. For me 2020 reinforced the importance of relying on data instead of people’s ideas or perceptions about what the market is doing or might do.

Wehrli: The resiliency of home buyers in the face of COVID-19 has been remarkable. Even in late March and April, for instance, sales at new home communities started to grow to near normal levels. For existing homes, days on market stayed low while agents and buyers quickly adapted to a more virtual sales environment. This all presaged the better times that came faster than anyone expected.

Shea: A significant segment of first-time and move-up buyers pivoted quickly to seek larger homes, larger lots, high speed internet and other amenities that would better facilitate both remote work and (home-based schooling).

Webb: A lot of folks did not want to put their homes on the market. There was the uncertainty. We couldn’t do open houses. You had to explain to sellers what to do to sell. So you had fewer houses, but more demand because interest rates were so low.

Bazzocco: That so many people would want to buy a new home in the middle of a worldwide pandemic. The pandemic has caused a consumer shift to the suburbs, where buyers are seeking more space. That Sacramento is an even more desirable market than perhaps we knew. The sudden move to long-term telecommuting has really shown how many people from outside the area see the advantages of living here.

Stumpf: People very abruptly reevaluated their priorities as they were spending so much more time at home. Certain features and amenities became way more desirable. Couples in one-bedroom apartments did not like working from home across the kitchen table from each other. Many of my first time buyers cited this very reason for finally getting off the fence to purchase a home (with yards, pets, pools).

Will homes prices rise in 2021? Any signs of a bubble burst?

Webb: With vaccinations, if we have normalcy toward June, I think the market is going to see a boom. Sacramento is becoming a big-time city. We are attracting more folks. You are going to see prices rise ... if nothing else happens. That’s saying a lot!

Lundquist: Prices are poised to continue to rise at the beginning of the year. We have a market with profoundly low inventory, heightened demand, and the steroid of mortgage rates below 3%. But in the background we have red flags lurking with high unemployment, economic uncertainty, and foreclosure and eviction moratoriums that have yet to lapse. In short, we’re still at the beginning of understanding the true effects of the pandemic.

Ultimately at some point what goes up must come down. We are now entering our 10th year of price growth and last year the median price grew by nearly 9% in the region. We have a market that went way beyond where it would have had mortgage rates not gone below 3%. This type of growth is not sustainable.

Wehrli: We see prices rising pretty robustly ... in the upper single-digit range year-over-year. Though everyone should be cautious and ready for change, vaccinations should allow for economic recovery to accelerate and there is no sign of supply getting out of hand.

Shea: Elevated migration from the congested coastal areas, a solid job market for the home-buying and selling public and the Federal Reserve’s commitment to bargain basement interest rates will continue to fuel red-hot buyer demand in 2021. Consequently, the region is likely to see double-digit price appreciation.

There will not be a bubble. (Mortgage) underwriting criteria has been stringent and low. Fixed-rate loan programs are the norm. Seventy-seven percent of all mortgages have interest rates below 5% (half below 4%). People have more home equity than ever and very manageable monthly mortgage payments.

Stumpf: Psychologically, a lot of people see that our home values surpassed where they were in 2005 and fear we must be in a bubble. The reality is that the value of money changes and, when adjusted for CPI inflation (today’s prices are still lower than in 2005).

There is also a lot of economic stimulus supporting homeowners. When the market does eventually decline – because prices cannot go up forever – we will not have the same financial hyper-extension, and many of those homeowners will have regained employment or sought alternatives that allow them to keep their homes.

While some may eventually go into foreclosure or need to sell ... I believe there is enough demand to gobble up an influx of listings. There is a super high level of buyer demand.

Bazzocco: Sales continued at a brisk pace in December despite the holidays. With that in mind and of course mortgage interest rates at historic lows, it’s reasonable to assume that demand will continue to outpace supply and housing prices will adjust accordingly. I’m increasingly confident this strong market will continue for the next year at least.

As for a bubble, I don’t see one. While prices are rising in Sacramento, they’re still very affordable by Bay Area standards, and lenders are making sure that buyers are really qualified.

Will 2021 be a buyers’ or sellers’ market?

Wehrli: Sellers. Supply is still constrained, mortgage rates are low, vaccinations – once they are up to speed – will allow the economy to fully open. Pricing has to be a concern, though, and the economy will likely need additional stimulus. For Sacramento, federal help for state and local governments is particularly needed and it is at best unclear if that is forthcoming.

Lundquist: It will be a sellers’ market. Our market is starving for listings. Sellers have put the brakes on listing their homes. To see more listings it’s hands-down going to take an effective vaccine as well as people feeling more comfortable about resuming normal life.

Stumpf: Sellers’ market.

How does new home construction look in 2021?

Bazzocco: The strong interest in buying “new” is expected to continue for a variety of reasons. Current designs that meet today’s needs of working and schooling at home, along with high functioning outdoor space will continue to be in high demand. The last year has clearly displayed the value of developing an entire community. Parks, trails, porches and common living areas are sought after more than ever.

Werhli: What people want and expect in their home has changed rapidly. The clearly COVID-related features – learning centers (for home schooling), drop zones (for touch-less package deliveries) – will likely fade. But health and wellness features and “home officing” are here to stay. So flexible spaces will be critical.

Stumpf: I wish there were more new construction homes in the first-time buyer price point. Sub-$400,000 new construction single family homes that I have seen tend to have waiting lists a mile long and are not being built fast or abundantly enough. I have heard of a few supply-chain issues that have caused delays in sourcing some construction materials. Do not make any firm plans too far in advance when it comes to being able to move in.

What are you watching in 2021?

Wehrli: Post-vaccine, some of the folks who have moved to places far from their job will get clawed back to their office. Bay Area buyers have augmented the Sacramento housing market tremendously these last several months. When some of them are pushed back to commuting, even if only part of the week, that will diminish this out-of-area demand and force some hard decisions for those who already bought. Will they put their homes on the market? Will they try to find a job here? Will they grind it out on the freeway?

Lundquist: This year we saw an increased desire for more space in the backyard, a huge need for home office space, more sales with built-in pools, people started gardens, fewer condos sales, and buyers tended to gravitate toward larger homes. Some of these things might be more temporary during the pandemic, but others could be longer lasting.

Webb: You are going to see more people combining incomes to buy a home. (But) how are we going to help those who don’t have the income to go conventional (loan)? What are the vet programs, the FHA programs and the banks going to do to assist to keep that market growing?

Stumpf: What will employers do with their newly distributed remote workforce once it is finally deemed safe to return to brick-and-mortar offices? Will they downsize office space and allow staff to permanently work from home? Will they open small office hubs in other metro areas where their remote staff can spend some time collaborating in person? Will office and commercial space get repurposed to residential space? Will they require their remote workforce to commute into the office? These questions ... all have implications for our real estate market.

Bazzocco: The movement to all electric and home buyers response to the future regulations, is a big issue. State and local regulations will be penned in 2021 for future implementation – and we have to ask if these changes are aligned with the consumer’s preferences?(Also,) to what extent will the Bay Area migration continue and to what degree does it continue to impact our market?

Shea: The various stimulus strategies and packages are bound to have economic consequences for our country that will take years to reconcile. Will we have a long slow adjustment to improving the nation’s financial health or will there be economic disruptions of a new nature in our future?

This story was originally published January 7, 2021 at 5:00 AM.