Sacramento County, encompassing California’s capitol and cities like Elk Grove, Citrus Heights and Folsom, is home to the California Bureau of Real Estate (CalBRE). This region is suffering through an elongated economic recovery following the 2008 recession. Homeownership and construction have stalled, waiting for the jobs recovery to arrive.
Sacramento was one of the last counties in California to reach a pre-recession jobs recovery, and has a long way to go to catch up with population gain. Its lagging recovery can be attributed partially to Sacramento’s dependence on state and local government jobs, which are slow to return.
Many, but not all, of these jobs will be restored when homebuyers return in full force. Jobs will rise to meet the region’s population increase by 2019, fueling wallets and in turn household formations. Expect to see a mini-construction boom as builders rise to that demand, likely around 2019-2021.
Get to know Sacramento’s local housing fundamentals in the charts that follow.
Updated March 22, 2017. Original copy posted October, 2015.
Has homeownership reached its bottom?
Chart update 03/22/17
|Q4 2016||Q3 2016||Q4 2015|
|Sacramento County homeownership||61.9%||61.5%||62.6%|
The homeownership rate in Sacramento County varies greatly each quarter, though the general trend has been downward over the past decade. 2014 was a particularly volatile year, peaking at 64% mid-year and falling to 58% by the year’s end. This is a typical annual cycle for this part of California, which tends to peak mid-year and fall off in the fourth quarter (Q4) of each year.
This trend has now begun to level off, with similar peaks and lows over the past two years. The homeownership rate is 61.9% as of Q4 2016.
The homeownership rate peaked at 67% in 2005. Following the conclusion of the housing bubble, many homeowners lost their homes to foreclosure. This is pictured in the swift decline in Sacramento County’s homeownership rate experienced in 2010, bottoming at 57% in 2011. Some buyer-occupants have returned to the market since then.
The relatively good news for this area is that Sacramento’s average homeownership rate is consistently well above the state average, which is at 54% as of Q4 2016. Don’t expect Sacramento’s homeownership rate to increase much in 2017, as the job market is still on shaky ground. Owner-occupants won’t return in solid numbers until Sacramento’s jobs market has a chance to fully recover, as discussed below.
Turnover flat to down
|Sacramento County homeowner turnover rate||8.4%||8.0%||8.9%|
Sacramento County renter turnover rate
A real estate agent’s living is contingent on residential turnover. Without it, property doesn’t sell, tenants stay put and mortgage originations go nowhere.
The good news is owner-occupant turnover is relatively stable, according to the most recent U.S. Census Bureau (Census) data. Owner-occupant turnover (the percentage of homeowners who moved within the last 12 months) bottomed in 2007 just as the Millennium Boom began to explode. Homeowners found the courage to move a bit more in 2008-2009 (due partially to the government stimulus that encouraged homebuying), only to fall back by mid-2010 when the stimulus ended. Since then, turnover by owner-occupants has remained steady at around 9% each year.
On the other hand, renters are moving less and less each year. Renter turnover peaked in 2009 at a massive 40%. For perspective, that means four out of ten renters moved in 2009 — a significant sum for California. A lot of this turnover was due to former homeowners selling (often by short sale or foreclosure) to buyers who were tenants or to investors who rented to relocating tenants. Renter turnover has fallen each year since, at less than 25% in 2015.
Like the homeownership rate, expect homeowner turnover to rise once jobs fully recover to the 2007 level in Sacramento (expected by 2019). With the support of a healthy jobs market, renters will be financially willing and able to become homeowners — whether it is their first time buying or returning to homeownership after being burnt in the recession.
Construction has stalled
|Sacramento County single family residential (SFR) starts||2,700||2,300||1,600|
Sacramento County multi-family starts
Construction in Sacramento County is struggling. In the past couple years, there have been several months where builders started zero new multi-family or single family residential (SFR) construction projects. Just how dormant has the situation become — and when will things look up?
The good news is SFR construction has gradually increased in recent years, having bottomed in 2011 and rising slowly thereafter. However, this stability isn’t the kind Sacramento needs, since construction has stalled well below the levels experienced during the Millennium Boom. In fact, the peak year of 2003 saw seven times more SFR construction starts than the 1,580 SFR starts experienced in 2014.
On the other hand, the situation is worse for multi-family construction. Multi-family starts peaked in 2004 with just over 2,800 units built that year. 2014’s performance of 750 multi-family units started is a vast improvement over the 25 units started in 2014. However, some progress needs to be made before reaching a stable multi-family recovery.
So when will construction definitively recover? For a hint, check out local vacancy rates.
A healthy vacancy rate is just above 1% for owned homes (for new construction, this generally refers to SFRs) and 5% to 6% for rentals (multi-family construction). In Sacramento, vacancies of owned homes were relatively low, below 1% in 2016. However, the rental vacancy rate was higher than normal, averaging 8.2% in mid-2016, the likely reason for so few multi-family construction starts.
Thus, expect SFR construction to continue to pick up slightly in 2017. Multi-family construction will continue at a slow pace, not to pick up significantly until later this decade as rents increase dramatically in the wake of strong regional job creation and personal income growth.
Employment plays catch up
|Jan 2017||Jan 2016||Annual change|
|Sacramento County jobs||947,800||929,700||+1.9%|
Sacramento was one of the last counties in California to reach a pre-recession jobs recovery. Its lagging recovery can be attributed partially to Sacramento’s dependence on state and local government jobs, which are slow to return.
Further, Sacramento’s population has grown about 1% each year since the 2008 recession. With working-aged individuals making up some 60% of this added population, Sacramento will need an additional 65,000 jobs for adequate employment following 2015’s initial recovery for total employment to match population levels. At the current pace of job additions, this will occur by 2019.
Real estate jobs lacking
|Jan 2017||Jan 2016||Annual change|
State & local government
Trade, transportation & utilities
Professional & business services
Chart update 03/22/17
|Jan 2017||Jan 2016||Annual change|
Real Estate Rentals & Leasing
State and local government is the largest employer in the area, as Sacramento is the seat of California’s government. Significantly, the decline in government jobs actually took place a year later than other industries, peaking in 2008 compared to 2007. The recovery in this sector is similarly behind.
The recovery in jobs for those in the real estate and construction industries has been slow. Keep in mind that while the chart above shows a steady rise in both real estate and construction jobs, the actual number of construction jobs is displayed at seven times that of real estate jobs on the chart (the chart is displayed in this manner to make the change in real estate jobs perceptible). Thus, while Sacramento real estate professionals are 1,900 jobs below the pre-recession peak, construction jobs have much more to regain, at 16,300 below the pre-recession peak.
Many, but not all, of these jobs will be restored when homebuyers return in full force. Jobs will rise to meet the region’s population increase by 2019, filling wallets and in turn fueling household formations. Expect to see a mini-construction boom as builders rise to that demand, likely around 2019-2020.
Income on the rise
Chart update 12/19/16
|Sacramento County per capita income||$46,539||$44,139||+5.4%|
|California per capita income||$53,741||$50,988||+5.4%|
Sacramento County surpassed its 2008 (pre-recession) peak of $39,671 in per capita income just three years after the recession in 2011. In contrast, most of the state didn’t catch up with pre-recession income until 2012.
Sacramento County’s average income remains nearly $7,000 below the state average in 2015, an adjustment typical to the region. Government employee compensation is less than state averages but more long-term in duration than the private employment turnover throughout the state.
Income has finally surpassed the pre-recession pace of around 3% a year, increasing 5.4% in 2015. This is above the target rate for consumer inflation. Thus, incomes were able to exceed the ever-increasing price of goods and services in 2015, granting residents a higher standard of living.
For housing, incomes are keeping pace with the annual rise in the historic mean price trendline: the home price anchor and point at which prices invariably return. But annual home price movement during a business cycle is another matter. Property prices often rise or fall dramatically from year to year without regard to the annual rate of consumer inflation and wage increases before returning to the mean price trendline. In any given year, home pricing is controlled by factors such as:
- mortgage rates;
- personal savings;
- housing starts; and
- individual confidence in the future.
Expect incomes to rise beyond the rate of inflation once jobs rise to meet Sacramento’s growing population, around 2019. Then, employers will begin to pay more to answer competition for new employees. This boost in income will add support to a burgeoning housing market, expected to rise to a cyclical peak around 2020.