Real Estate News

Average earners getting squeezed out of Sacramento region’s tight housing market

Sacramento has long been a place where a family of relatively modest means could own a home, unusual in pricey California. Now that affordability is disappearing, and some housing experts say it may not be coming back.

The area’s median home prices remain well below those in many coastal markets. But in recent years, buyers in the region’s most popular and affordable price ranges have been pushed out – first by cash-paying investors who scooped up homes by the thousands, and now by higher prices, a shortage of resale listings and a lack of new starter homes.

Stagnant wages and the strictest lending standards in years have made the situation worse for those without higher incomes or top credit scores.

Some housing experts see the changes as part of a long-term shift. They say Sacramento is growing up as a city and heading the same direction the Bay Area went decades ago: becoming a place where homeownership is available to a smaller portion of the population.

“We’re squeezing out the entry-level buyer in Sacramento real estate, but we’re not the trend setters,” said Pat Shea, president of Lyon Real Estate, the region’s largest residential brokerage. “This has happened from San Francisco to San Jose many moons ago.”

In 2000, before the housing boom and bust, about 58 percent of Sacramento County households owned their homes, according to U.S. census figures. By 2012, even as the economy improved, that figure had dropped to 56 percent. It fell again in 2013 to 54 percent.

Just a few years ago, in the depths of the housing crash, a family earning the region’s median income could have afforded the majority of homes on the Sacramento market.

But many of those houses were snatched up and turned into rentals by investors, including Wall Street hedge fund Blackstone, which pounced when prices were low. Demand outstripped supply, and houses affordable to median-income buyers, roughly in the $200,000 to $300,000 price range, are now scarce commodities.

These days, there’s a two-month supply of homes on the market in that price range, indicating it would take about 60 days to sell all the homes. Anything less than a three-month supply is considered a strong sellers’ market.

At the end of August, there were 39 listings in Elk Grove priced under $250,000, out of a total of 425 homes on the market, Shea noted. In Roseville, out of 454 listings, there were 21 priced under $250,000. Both are sizable suburban cities, popular with families, that just two years ago had twice as many listings for under $250,000.

In Sacramento County at the end of August, about 33 percent of homes for sale were listed for under $250,000. As recently as August 2012, that figure was more than 50 percent.

Shea and others said the squeeze will be around for years to come – until the region’s incomes catch up or another downturn reduces prices.

The low supply of entry-level resale homes will continue in large part, he said, because many homeowners have refinanced into ultra-low mortgage rates of around 3 percent to 4 percent that they are reluctant to leave.

“They may not love their house, but they love that mortgage,” Shea said.

Stagnant wages

Home construction used to provide a relief valve for middle-income buyers. In the early 2000s – when average incomes were actually higher than they are now when adjusted for inflation – developers built thousands of houses priced from $200,000 to $300,000 across the region.

Today, the small number of homes being built are priced for a more affluent “move-up” demographic. The median price of new homes in Sacramento County has gone from about $200,000 in 2000 to nearly $400,000 this year, real estate information service CoreLogic DataQuick reported. A similar pattern has played out in suburban El Dorado, Placer and Yolo counties, where median prices for new homes are even higher.

Kevin Carson, Northern California president of The New Home Company, said the rising prices reflect the higher costs of materials, labor, building sites and developer fees. Construction costs are up from about $40 per square foot in 2001 to $60 per square foot today, and the price of ready-to-build lots is double what it used to be – about $60,000 to $80,000 compared with $30,000 to $40,000 in the early 2000s, he said.

“I’d be very surprised, given today’s building costs, if you could (make a new house) pencil out at $250,000,” Carson said.

As housing costs have risen, the area’s average incomes have flattened, leaving many families only in a position to rent from Blackstone and other investors that bought homes in the downturn.

The median household income for the region was just over $57,000 in 2013, down from about $57,500 in 2012 after adjusting for inflation, according to census figures. Median incomes have fallen nearly every year since 2008, when the typical Sacramento household earned about $66,000, the census data show.

“Stagnant wages are a huge part of the story,” Carson said. “If you look at other regions (such as the Bay Area) income levels are rising. It makes sense that they can keep up with housing costs.”

Even if average-income buyers can find a house to purchase, the chances that they can qualify for credit has diminished because of new lending laws and increased nervousness among lenders that they could end up financially liable if borrowers default.

“If you can find a property, then the qualification is much more difficult, and the banks are really risk-averse,” said Ken Giebel, director of single-family lending for the California Housing Finance Agency, which provides down-payment assistance to moderate-income buyers. “Pretty much without a 680 credit score, you’re going to have a tough time getting a loan.”

The number of working- and middle-class families that borrowed money to buy a house last year was among the lowest in 15 years, according to the Federal Financial Institutions Examination Council, a body that monitors lending practices. At 9,200 households, it was down 24 percent from 2012.

Meanwhile, mortgage borrowing is on the rise among those earning more than the area’s median income, increasing from 11,500 home purchase loans in 2011 to almost 16,000 in 2013, according to the latest federal data. Giebel said a major reason for the difference is that more affluent families have an easier time getting credit.

Flippers out in force

One good piece of news for entry-level buyers is that rental investors have curtailed their buying as median prices spiked by double-digit percentages in the past two years.

Home flippers, however, are still out in force, said Paula Swayne, a veteran agent and president of the Sacramento Association of Realtors. Many homes for sale in the $200,000 to $300,000 range are being offered by sellers who recently bought the homes for much less and made inexpensive cosmetic upgrades.

“Investors are gone. Flippers are not. They’re more than ever as far as I’m concerned,” Swayne said.

Her clients Joe and Jaime Dempsey found that out the hard way. Both are employed – Joe as an information-technology salesman, and Jaime at a pension fund – but they had limited money for a down payment. They looked at house after house priced from $250,000 to $300,000, many of them being flipped.

“They buy for $150,000, and do cosmetic work, and are trying to make 150 grand,” Joe Dempsey said. “You can almost spot them from the moment you walk in. They are staged. They’re trying to hide the flaws. You don’t know what kind of shoddy workmanship has been done.”

Some homes they toured were in high-demand neighborhoods, such as midtown Sacramento, but had awkward layouts or too little space. Others were nicely fixed up but in crime-ridden areas. While they were looking at one listing, a troop of federal drug-enforcement agents pulled up in a black SUV and stormed a nearby home, Dempsey said.

Eventually, with Swayne’s help, the Dempseys found a three-bedroom, two-bathroom house that worked for them. It was in Hollywood Park, traditionally a favorite area for starter homes, with its leafy streets and a well-regarded neighborhood school. The couple, who are in their 30s, have a first baby on the way.

The house they bought in July needed updating. They tore out the green shag carpets, replaced cracked linoleum and upgraded the bathrooms.

They also offered $310,000, more than the $299,000 asking price and more than what they intended to spend. “I felt like we ended up paying a bit of a premium,” Dempsey said.

Swayne said the couple’s experience was fairly typical. “If I’m going to buy in the $200,000 to $300,000 price range, I’m going to have to concede something – location, condition, price,” she said.

Swayne’s colleague, Beth Sherman, said buyers competing for homes in the median price bracket should come armed with a preapproved mortgage, a good loan officer and a hardworking real estate agent.

She also recommended prospective buyers write a personal letter to sellers, saying why they want the house, and think carefully about what repairs they might be willing to make themselves.

“This way, when the right home is found,” Sherman said, “they can act quickly, which can mean the difference of getting the home they want or not.”