Price drops? Rate hikes? Foreclosures? The 2023 Sacramento real estate market forecast

The Sacramento real estate market will enter 2023 in a much different state than it was one year ago.

Median prices in the region are falling. The inventory of available homes on the market is on the rise, primarily because homes just aren’t selling. Buyers have most of the leverage, but they’re also facing mortgage rates that are roughly twice what they were 12 months ago.

What will 2023 bring?

Most real estate experts will tell you they get a little squeamish when asked to predict the future. The California and Sacramento markets have been difficult to handle; who would have thought we were going to see history-making demand and price increases during a global pandemic?

Still, there are projections that can be made and advice offered. We asked local and state experts for their thoughts on what the new year will bring, while helping buyers and sellers navigate the turbulent, up-and-down real estate market.

What will prices, rates and demand do?

Experts are largely unanimous in their thoughts on prices and sales: They’re going to keep going down.

Jordan Levine, vice president and chief economist at the California Association of Realtors, said his projections show the median sale price for a home in California will drop 8.8% in 2023 after falling slightly in 2022. The number of sales will decline by an estimated 7%, according to CAR’s analysis.

If mortgage rates stabilize or go down, we could approach a buyers’ market. But if rates go back up, “we think that will keep the market relatively soft,” Levine said.

The last few months have been particularly slow. Sacramento has seen one of the steepest drops in median sale price in the nation since May. The number of sales in the county is down more than 40% since the spring, according to data from Sacramento appraiser and market analyst Ryan Lundquist.

“I’m thinking the market is going to continue to be like the last part of this year,” said Sacramento realtor Yuri Ramirez-Villanueva. “If it continues on this trend like it’s been, it could be a good scenario for buyers who are looking to move.”

Lundquist thinks the competition for real estate will remain soft at the start of 2023.

“We’re going to start the year with fewer buyers participating,” he said. “We’re at a place where we’re missing 40% of the buyers. Mortgage rates are going down lately and that can make a difference in demand, but I don’t think we’re in a place where we’ll see 40% of buyers come back with modest rate declines.”

A slowing in the mortgage rate hikes, or at least a stabilization, would help bring many buyers back to the market. After eclipsing 7%, the average rate on a 30-year fixed mortgage has fallen for six straight weeks and now stands around 6.3%.

Erin Stumpf, president of the Sacramento Association of Realtors, said she would be surprised if rates go over 7% in 2023.

“I’m cautiously optimistic we could see rates in the 5s next year,” she said. “I don’t think it will be nearly as volatile (as it was in 2022).”

Advice for buyers

If you think you have a good idea of where things stand in the Sacramento real estate market, just wait a week and you’ll be wrong. With that in mind, it’s vital for potential homebuyers to stay in touch with the experts.

“My advice is to stay in communication with your loan officer and realtor because rates have gone up and down and up and down,” Stumpf said. “Just know that it’s a dynamic situation and when the right house and the right opportunity pops up, be ready to go.”

Patience is key. So is your ability to negotiate. “Don’t overpay,” Lundquist said. “Get the best deal the market will allow you to get.”

Lundquist expects more listings to be available in the spring, when the market typically picks up.

“I expect a better quality market,” he said.

For renters debating whether to buy – and waiting for that perfect moment when rates have declined and prices are still going down – Ramirez-Villanueva had this to offer: “If you’re paying rent, you’re making someone else’s mortgage payment.”

Advice for sellers

Whether they’re planning to sell or not, homeowners are likely watching the recent price dips with some concern. The experts’ advice?

“Don’t worry about what the market is doing if you’re not planning to sell tomorrow,” Ramirez-Villanueva said. “You’re going to be OK if you can afford those monthly payments.”

Now, if you’re planning to list your home soon, keep in mind that the market is vastly different than it was seven months ago. Homes are spending three times as long on the market as they were in May and demand is down significantly.

“We’re no longer in a market where you can look at what your neighbors’ home sold for six months ago and expect the same,” Ramirez-Villanueva said. “You need to look at this month. You want to price your house so that it will actually sell.”

Sellers should also be prepared to make concessions, in some cases rather significant concessions, to close deals. That includes chipping in 2% to 3% of the sale price to help a potential buyer buy down their interest rate.

A year ago, some buyers were agreeing to purchases without requiring a home inspection. Those days are gone, too. And sellers should expect to handle the cost of major repairs if issues come up, including electrical and structural fixes.

“We’re not talking little stuff like paint,” Ramirez-Villanueva said. “If it’s going to be costly, the buyer is going to want you to take care of it. If it’s a major issue I would take care of it before the home goes on the market.”

Perhaps the biggest concession – and the one that some sellers might have the toughest time swallowing – will be on prices. A majority of homes were selling above the list price in early 2022. In November, just 17% sold above asking, according to Lundquist’s data.

“It’s a market where listening is required,” Lundquist said.

Are foreclosures back?

There are more distressed sales on the market. But as Lundquist points out, the number of foreclosures and short sales had “bottomed out” locally and makes up just 0.29% of sales (that figure was around 80% in 2009).

“It’s hard to get lower than we were,” he said.

Lundquist and other experts believe the nation could see an increase in foreclosures now that COVID-era moratoriums have expired. Adding to the concern are the rapid price decreases the market has seen over the past seven months. Many owners who bought a home in the past year or two may suddenly be underwater and if they need to sell today, a short sale might be their only option. Those who used an FHA loan – and therefore used small down payments – are likely at greatest risk.

However, experts don’t think we’ll see anything close to what happened during the Great Recession.

“Buyers need to be careful about salivating over this statistic,” Lundquist said. “It’s a really small portion of the market. It’s not an avalanche.”

Even if bank-owned sales increase dramatically, Ramirez-Villanueva said deep-pocketed investors “who have the cash will be the first to pick them up.” In other words, buyers won’t be able to compete. Plus, she said, given the conditions in the market and the concessions sellers are willing to make these days, you’re likely to have more luck with a traditional sale.

“I would want to buy when sellers are willing to work with me,” she said.

This story was originally published December 30, 2022 at 5:00 AM.