Where is the Sacramento real estate market headed in 2020? Our experts offer advice

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Is 2020 the year a recession finally dents Sacramento’s high-priced real estate market? Will millennials finally step up and buy houses? Will there even be enough homes on the market to give buyers a decent choice?

Those are some key questions heading into what could be a pivotal year for real estate in the Sacramento region.

To get answers, The Sacramento Bee consulted a group of local real estate experts and insiders: Analyst Dean Wehrli at John Burns Real Estate Consulting, Coldwell Banker agent Erin Stumpf, data guru Greg Paquin, Lyon Real Estate president Pat Shea, appraiser Ryan Lundquist, mortgage strategist Brent Wilson and Zillow economist Jeff Tucker.

On the upside, nobody in The Bee’s group is forecasting disaster. On the down side – though no one came right out and said it – 2020 may be a year in which fewer sellers put homes on the market. If retiree baby boomers, for instance, sit tight and don’t downsize, it’ll be harder for newcomers to find that first home.

Lyon Real Estate President Shea and others say that trend already is underway: There were 25 percent fewer houses on the market at the end of 2019 than 2018.

Shea put it this way: “The million-dollar question for 2020 is: Will enough homes enter the market ... to meet the fervent buyer demand?”

Overall, though, the group sees a calm and relatively normal year. Alarms continue to ring about an upcoming recession, though. More about that in a moment.

Sacramento home prices will rise

Home prices should rise again in the Sacramento region in 2020, just not as much as in recent years.

“We expect home prices to rise at a slower rate than in 2019, around 3.4 percent rather than 2019’s 4.7 percent,” Zillow economist Jeff Tucker wrote.

That should represent a small step toward making housing more affordable in Sacramento after double-digit percent price increases here and around the state in the past decade led to a historic decrease in affordability. By 2018, only four in 10 Sacramento residents could afford a median priced home, which at the time was $374,000.

The median sales price for a Sacramento County house hit $385,000 near the end of 2019, according to the California Association of Realtors. Based on Zillow’s estimates, that suggests the county’s median sales price would be $400,000 by the end of 2020.

Placer and El Dorado median prices already hover at about a half-million dollars. They could rise in 2020 as well as Bay Area residents cash out their more expensive coastal real estate and head for the hills.

Sacramento real estate is increasingly tied to what happens in the Bay Area. Call it a spillover effect. But the local market remains much less expensive. And while median sale prices dropped in the Bay in 2019, they increased in Sacramento.

“California is just plain expensive.” Shea of Lyon said. “Greater Sacramento, however, remains the most affordable, full amenity city in our state. New construction subdivisions are flourishing all around the perimeter of our market with some infill projects in play as well.”

When will a recession hit?

For several years now, economists have warned of an upcoming recession. Apparently, it’s still just around the corner. Economists at UCLA and the Public Policy Institute of California recently said that corner may be turned in late 2020.

Our panelists disagree. Dean Werhli of John Burns Real Estate Consulting says a recession is more likely to arrive no earlier than 2021. And, he and others point out, that doesn’t mean the economy or real estate market will crater like it did during the Great Recession of 2007.

“We have to be careful not to let the horror show that was the last downturn color our expectations when the norm is vastly milder.”

The Sacramento economy is more diversified than ever, so while some job sectors are affected, overall more Sacramentans will remain employed and could be willing to step up and buy a house.

“Employment and wage growth remain strong, and the (Federal Reserve board) has retreated from efforts to raise rates,” Zillow economist Tucker said. “So far, core inflation is low enough that they don’t have much reason to try to raise rates again.”

What that means is that if and when a recession hits, mortgage rates and home prices may be only mildly affected.

Will mortgage interest rates go up?

In 2017, mortgage rates hit all-time lows, fueling a hot, hot seller’s market. In 2018, rates ticked up, buyers backed away, and the market went quiet. Rates dropped again in 2019, and home sales came back to life.

In 2020, eyes will be on rates again. “If rates rise, we’re likely to see a market that becomes dull,” Lundquist said, “but if rates go low, it’s like injecting a steroid into the market.”

Mortgage strategist Wilson, who is based in Folsom for Finance of America, offered these comparisons: On a $300,000 loan, there is a $2,100 difference in annual payments between a 4 percent and 5 percent rate. That’s $64,000 over the life of the loan.

The current federal trade wars with China and other countries may be a determining factor this year, as much as government economic data releases, he said. Lately, Wilson said, “any perceived escalation of trade tension has been lowering rates. Stay tuned.”

The Baby Boomer bottleneck

Two large demographic trends are affecting the market, but not in ways that real estate watchers say is historically expected.

Baby boomers are hitting the age when some typically sell their bigger houses to younger families, then move to smaller residences to be near their adult children. That creates a healthy market turnover. But boomers are not doing it lately in the numbers expected.

Why? California experts point out several reasons. Boomers have been able to take advantage of lower interest rates to refinance and lower their monthly bills at their existing houses. That makes them less likely to want to take on the higher property taxes many would get hit with if they were to buy a new home out of county.

“Why bother moving if you’re sitting on a low monthly payment with a 3.5 percent rate?” Lundquist said.

Stumpf, who does home sales throughout the metro area, says that could change if the California Association of Realtors succeeds in getting legislation passed giving older sellers a property tax break when they buy a new home.

“I talk to many other boomers who would love to downsize,” she said, “but they face a steep increase in property taxes if they sell their homes and move into another county ... If there are reforms in 2020 that allow more boomers to transfer their property tax base I would expect a significant increase in the number of boomers who sell and downsize.”

Will retirees leave California?

Grumbling from retirees about high California costs is not new. But in Sacramento, given escalating home prices, growing congestion and urban woes, Lundquist says more boomers may consider cashing out and buying cheaper out-of-state real estate.

“It’s always the dream to sell high and buy low, and in today’s climate we’re likely to see more baby boomers exit California to places like Texas, Nevada, Arizona, Idaho, Oregon, and Tennessee,” he wrote. “This is especially true for locals who have a pension because a California pension can go much further in other states.”

In the last decade, though, Sacramento has seen less movement, according to the U.S. Census. About 15 percent of the area’s residents lived in a different home in 2018 than they did a year prior. By comparison, about 21 percent of the area’s residents lived in a different home in 2009 than they did a year prior.

Will millennials finally buy houses?

So, where does this leave millennials? That question is important for anyone interested in selling in 2020, because the millennial generation is now by far the largest population group and is at the prime age to buy that first home.

We saw early indications two years ago that millennials were about to move into the home-buying market, but that trend has been slow in developing. The high cost of housing and millennials’ slower start in the workplace post-recession are key reasons. In fact, more Sacramento millennials than ever are still living with their parents, a recent Bee analysis found.

But Stumpf says about one-third of her buyers recently have been millennials, a possible harbinger for 2020.

Generational “post traumatic stress” from the Great Recession, when millennials saw their parents lose their houses, is waning, according to Paquin. Millennials are getting married and having kids, he said. “They are beginning to feel more secure about the purchase of a home, especially as memories of the recession fade and the economy is doing so well right now.”

That said, surveys show that millennials still are less inclined to believe that home ownership is the American Dream, especially if they look around and see a lack of affordable entry-level housing on the market. Many millennials also carry a fair amount of debt, including student loans, and lack the money for a down payment.

Shea is optimistic, though: “Low interest rates, higher wages and help from mom and dad will surely empower a growing number of millennials to purchase homes this year and each year in the coming decade.”

Granny flats, in-law units, ADUs

Lack of affordable housing in Sacramento and California is perhaps the biggest roadblock to home purchases in the new year.

Realtor Stumpf says one answer to that could be the new state law in 2020 that will make it much easier for homeowners to build accessory dwelling units, also known as granny flats, on their property and rent them out.

“I am optimistic that 2020 becomes the year of the Accessory Dwelling Unit,” she said. “There are many parcels in greater Sacramento that could easily accommodate ADUs, whether that means converting existing space like a garage or basement to an ADU, or constructing a freestanding ADU in the backyard. We could have thousands of mini-infill projects all over our region adding more housing with affordable rents.”

The same may be the case for a new style of single-family housing developments called “build-to-rent” single family dwellings. Wehrli and others say builders will respond to the lack of affordable housing by starting to construct clusters of small detached residents for rent, not for sale.

Suburban homes get smaller

Paquin says he expects to see plenty of suburban subdivisions built this year with a twist that will make them a bit more affordable: More of them will be smaller and on smaller lots.

In the last two years, new home sizes have dropped from nearly 2,600 square feet in the Sacramento area to 2,350 square feet, and lot sizes have dropped equally, he said. “Sacramento is maturing and the result is a more diverse, eclectic and interesting housing market with product that is available to a wide range of buyer desires and incomes.”

Wehrli agrees. Home buyers will want amenities in the house, but won’t want to pay for more house than they need. “Builders will try to be more efficient ,” he said.

The bad news is that with construction costs high, the prices of those homes likely will be no lower than they have been in previous years, thus out of reach for many would-be first-time buyers.

Will you sell to Zillow?

Online real estate iBuying companies have entered the Sacramento market in the last two years, notably Opendoor and Zillow, each offering sellers cash for their home with the push of a few computer buttons online.

Zillow says it plans on doing more online buying and selling in the Sacramento area in 2020. But, because the Sacramento market won’t be booming, a spokesman says, “We need to be careful – and right – about how much we think a house will sell for and how long it will take to sell.”

Opendoor says it may expand its buying criteria in 2020. Currently, Opendoor limits its home purchases to structures that were built after 1960 and that cost between $200,000 and $600,000.

Old-school real estate industry members say the new online companies are unlikely to gain a lot of ground in 2020.

“I expect technology companies to gain a bigger share of the market, though they’ll still be vastly outweighed by the traditional real estate model,” Lundquist said. “By the end of next year I expect multiple tech companies to gain a few more percent.“

Picky home buyers

Several of our experts say they’ve seen a trend in the last year that will continue in 2020: Picky buyers.

With California’s high but plateauing home prices, buyers will keep their wallet in their pocket if they don’t like what they see, or if a seller makes the mistake of over-pricing his or her house in hopes of selling to that mythical unicorn buyer from the Bay Area. (Some buyers from the Bay Area are in fact cash rich, but most of them study the Sacramento market and aren’t inclined to over pay.)

“I would expect consumers to become even pickier about what they buy and how much they spend,” Lundquist said. “This is important for sellers to embrace because even now buyers are picky about getting into contract at the right price and staying in contract.”

Lundquist has crunched recent sales numbers that back that up: Though there are fewer homes on the market, fewer of them are getting multiple offers.

Need for more affordable housing

Wehrli speaks for many in the real estate industry who believe government still makes it too hard to build housing at an affordable price, and needs to be more creative in 2020.

“I am obligated to say buyers should encourage their elected officials to make the development process as painless as possible,” he said. “I am not saying to go back to the bad old days of little neighborhood input and concern for the environment, but the burdens are very arbitrary, duplicative, pointless, idiosyncratic, and out of all proportion to real impacts.

“Each hurdle adds costs and that is pushed immediately to price. That is not politics, that is math.”

Sacramento Bee reporter Phillip Reese contributed to this report.

This story was originally published December 12, 2019 at 5:00 AM.

Tony Bizjak

The Sacramento Bee

916-321-1020

Tony Bizjak is a former reporter for The Bee, and retired in 2021. In his 30-year career at The Bee, he covered transportation, housing and development and City Hall.