The head of the Federal Reserve says the housing market is likely destined for a “correction.” Some analysts describe what’s happening as a cool down. Others note we have entered a time of uncertainty, as spiking mortgage rates wreak havoc on both buyers and sellers.

Just months ago, the Sacramento real estate market was defined by intense bidding wars. Homes were selling for well above the asking price – in some cases by hundreds of thousands of dollars. Buyers seemed helpless to keep up.

Fast forward to today. The median sale price in the region is down 7% since May. It’s taking nearly 40 days for the typical home to go under contract. Roughly half the houses on the market have had a price reduction. The stories of homes selling for $1 million above the asking price have been replaced by tales of homes selling after price cuts of more than $500,000.

“It all shows the market has done a 180,” said Sacramento market analyst and appraiser Ryan Lundquist.

The primary culprit for the shifting environment is the meteoric rise in mortgage rates. The Federal Reserve has increased its benchmark lending rate multiple times this year in an attempt to reign in inflation. That’s contributed to mortgage rates climbing to well above 6%, adding hundreds of dollars to monthly payments and leading to suggestions that it’s part of a broader plan to slow the once-blistering market.

“There was a big imbalance ... housing prices were going up at an unsustainably fast level,” Federal Reserve Chairman Jerome Powell told reporters last week. “For the longer term what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place.”

So what should you make of the latest ride on Sacramento’s roller coaster real estate market? Here’s some expert advice for buyers and sellers.

Tips for selling a home in Sacramento

First thing’s first: the conditions sellers were experiencing earlier this year – heck, even in April – are gone. Sales are down across the region, in some ZIP codes by huge margins.

In Rocklin, there were 41% fewer sales between May 1 and Sept. 26 this year compared to the same time period last year, according to Lundquist’s data. El Dorado Hills saw a 37% drop, Elk Grove a 32% decline and Roseville a 23% dip.

Sacramento realtor Tim Collom said he tells sellers they may need to price their homes 15% below what they would have expected to sell it for last year.

“The last couple of years, we all got accustomed to the amount of sales and what they were going for,” Collom said. “Now you have to be ahead of the market and be proactive with your pricing.”

Erin Stumpf, a real estate broker with Coldwell Banker Realty and president of the Sacramento Association of Realtors, said more sellers are being forced to make a choice: “Reduce the price, pull it off the market or let it sit a while longer.”

“If a seller wants to overprice from the get-go, that’s going to be a fatal mistake,” she said. “There is still a good market of buyers out there, but they’re getting pickier and sellers have to come to that realization.”

That means sellers may have to agree to things they wouldn’t have imagined earlier this year, such as paying for repairs or agreeing to cover the cost of a mortgage rate buy down, where a one-time fee is paid to lower the interest rate.

“Sellers were in charge of the market for so long and they’re not in that place anymore,” Lundquist said.

Small price reductions don’t seem to be working. Lundquist said just 1% of homes with a price cut of $1,000 are selling. He said a home in El Dorado Hills recently sold after a price cut of $701,000 and a few other sellers in the region have slashed prices by more than $500,000.

For those debating whether now is a good time to sell, Collom noted that prices are still higher than what they were a few years ago.

“Sellers have an opportunity to gain the equity they’ve earned over the last couple of years,” he said, “but they’ve got to do it soon.”

Buying a home in the Sacramento region

Yes, the median price for a home in the region is dropping. But those dips have been offset entirely by the rise in mortgage rates, which have added hundreds of dollars to monthly payments.

That might be encouraging some buyers to search for more affordable options in areas they hadn’t considered. While sales are down significantly in pricier suburbs and neighborhoods, the sale volume is declining at a far smaller rate in some areas that might be attractive to entry-level buyers.

Sales are down 6% in Meadowview and 8.6% in Galt, Lundquist said. The decline is about 12% in Del Paso Heights and 14% in Oak Park.

“Generally, at the lower end of the price spectrum, as buyers’ monthly payments go up, they’re going to naturally spill over into other areas that maybe weren’t on their radar,” Stumpf said.

In other neighborhoods, Collom said he’s hearing about buyers getting “creative,” if not downright brave. “They’re not afraid to offer $60,000 or $75,000 less than asking,” he said.

The Federal Reserve is expected to maintain its aggressive stance on interest rates, meaning mortgage rates should keep going up (they’re already the highest they’ve been since 2008).

“I’m having the same conversation with some of my buyers who say they want to buy now so let’s push forward and we’ll deal with the rates and we’ll refinance in the future,” Stumpf said. “The other 50% of buyers want to see what rates do and are willing to hold off into the new year.”

Lundquist said the market has created an odd time warp-style dichotomy. Many sellers still expect the Bay Area millionaire to swoop in and overbid on their home. Meanwhile, many buyers have retreated, waiting for rates and prices to drop.

“Sellers are stuck in the past,” he said, “and buyers are stuck in the future.”

This story was originally published September 29, 2022 at 5:30 AM.