Sacramento County housing indicators

Sacramento County, encompassing California’s capitol and cities like Elk Grove, Citrus Heights and Folsom, is home to the California Department of Real Estate (DRE). This region is suffering through an elongated economic recovery following the 2008 recession. Home sales volume and construction have stalled, still waiting for the jobs recovery to arrive.

Sacramento was one of the last counties in California to reach an initial 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 were 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 in 2019, fueling wallets and in turn household formations. However, this recovery will soon be followed by the next recession, forecasted to arrive in 2020. Therefore, expect the next construction boom to be delayed as builders meet rising demand in the years following the recession, likely around 2021-2023.

Get to know Sacramento’s local housing fundamentals in the charts that follow.

Updated November 28, 2018. Original copy posted October, 2015.

Home sales volume

Chart update 11/28/18

Home sales volume in Sacramento County has steadily increased in recent years, bucking the statewide trend of flat sales volume.

Total 2017 sales volume was nearly 10% higher than 2016, amounting to an increase of 2,200 sales. In 2018, sales volume year-to-date is 1.5% below 2017 as of September. This is about the same level of decrease as the state average, though most of this decrease has taken place in the second half of the year, indicating a continuing, slowing trend.

One reason why home sales volume has performed better here in Sacramento compared to other parts of the state (for example, Los Angeles, which is 8% below a year earlier as of September 2018) is the consistent addition to the for-sale inventory, in the form of residential construction. In California’s expensive and desirable coastal cities, new construction has been held back significantly by outdated zoning laws and not-in-my-backyard (NIMBY) advocates. Not so in Sacramento, where construction is welcome and allows sales volume to keep pace with homebuyer demand.

Even so, home sales volume will continue to slow going into 2019, primarily due to homebuyers discouraged by rising interest rates.

Has homeownership reached its bottom?

Chart update 11/28/18

The homeownership rate in Sacramento County varies greatly each quarter, though the general trend has been flat-to-down 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.

The homeownership rate rebounded sharply in mid-2018, currently at 69.5%, an almost unheard of rate of homeownership in most parts of the state. For comparison, the statewide average was 55% in Q3 2018.

The homeownership rate ‘s previous peak was 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. Many buyer-occupants have returned to the market since then.

The relatively good news for this area is that Sacramento’s average homeownership rate is usually well above the state average. However, expect Sacramento’s homeownership rate to fall back in 2019, as rising interest rates and shaky economic conditions discourage homebuyers. Owner-occupants won’t return in solid numbers until Sacramento’s jobs market has a chance to fully recover from the coming recession, likely in the post-recession years of 2021-2023.

Turnover flat to down

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 has recently increased to 9.0%, 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 8% each year, until rising in 2017.

On the other hand, the general trend for renter turnover is down, though more renters moved in 2017 than 2016. 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 20% in 2016.

Like the homeownership rate, expect homeowner turnover to decrease in 2019-2020. Then, with the support of a healthy jobs market in the years following the next recession, renters will be financially willing and able to become homeowners.

Construction has stalled

Chart update 11/28/18

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 yet the level Sacramento needs since construction has stalled well below the levels experienced during the Millennium Boom. In fact, the peak year of 2003 saw more than three times more SFR construction starts than the 3,160 SFR starts experienced in 2017.

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. 2017’s performance of 1,300 multi-family units started is a vast improvement over the 25 units started in 2016. However, more 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 healthy, 1.6% in 2016. However, the rental vacancy rate was well below normal, averaging 3.3% in Q3 2018, the likely reason for so few multi-family construction starts.

Thus, expect SFR and multi-family construction to continue to pick up in the coming years.

Employment plays catch up

Chart update 11/28/18

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 50,000 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 in 2019.

Real estate jobs lacking

Chart update 11/28/18

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 1,600 jobs below the pre-recession peak, construction jobs have much more to regain, at 15,400 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 in 2019, filling wallets and in turn fueling household formations. However, this recovery will be just in time for the next economic recession to set in. Therefore, expect the next construction boom to be slightly delayed as builders rise to that demand, likely around 2021-2023.

Income on the rise

Chart update 11/28/18

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.

However, Sacramento County’s average income remains over $9,000 below the state average in 2017, 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 finally surpassed the pre-recession pace of around 3% a year in 2015, only to fall back to a meager 2.8% increase in 2017. This is about level with the target rate for consumer inflation. Thus, incomes were able to match the ever-increasing price of goods and services in 2017, granting residents an equal 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;
• jobs;
• 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 2021-2023.