Everybody knows that the demand for new houses far outweighs the current supply, which has caused a flux in people searching for properties in Sacramento County and other parts of the nation.
Demand has historically outstripped supply in Sacramento, which is especially true now. While many families feel the financial impact of COVID-19, more affluent households with more money to spend are taking advantage of the low-interest rates, which pushes prices further higher.
The Housing Crisis’ Impact on the Economy
Sacramento’s real estate market has struggled to keep pace with demand since the 2010s, when the number of new dwellings built was slashed in half compared to the previous decade.
As a result, the lack of homes for sale has created a supply-side bottleneck while demand for residential real estate has grown.
As millennials are getting married and starting families, many are searching for their first or second house. Unfortunately, because there are so many interested buyers in the market, numerous people bid on the same home, causing price hikes.
Since around 1970, Sacramento real estate market has had an ongoing and worsening housing shortage to the point where, by 2018, Sacramento ranked 49th in the United States in terms of housing units per resident.
In fact, as of 2017, the shortage was estimated to be 3-4 million housing units.
The supply-demand imbalance results from strong economic growth, which has resulted in the creation of hundreds of thousands of new jobs (increasing housing demand), and insufficient construction of new housing units to meet demand.
This has raised home prices and rents to the point where the median price of a Sacramento real estate property was over 2.5 times the national median.
At the same time, Sacramento’s real estate rent increases are the highest in the country among metropolitan cities. According to Colliers International data, the average rent in downtown and midtown Sacramento is currently $1,786 for an 848-square-foot apartment.
What’s Stopping New Construction of Housing?
Density restrictions (for example, single-family zoning) and high land costs conspire to keep housing and land prices high.
Community participation in the approval process enables existing tenants who oppose new construction (often called NIMBYs) to lobby their local council to deny new development.
Residents and others frequently abuse environmental laws to block or gain concessions from new development (making it more expensive to be profitable)
Municipal Tax Revenues
More significant municipal tax revenues from the hotel, commercial, and retail development than residential development encourage communities to allow fewer residential units; building costs are higher due to hefty impact fees.
Many developments are only authorized if union labor is involved.
New Sacramento Law
A new Sacramento law aimed at alleviating the state’s housing problem is unlikely to result in many additional apartments being built in Sacramento. Senate Bill 9, passed by Governor Gavin Newsom recently, permits certain single-family landowners to divide their property and build a duplex on either side.
According to research by the Terner Center for Housing Innovation at UC Berkeley, the new law might result in 9,500 more units in Sacramento, depending on what is financially possible. That’s around 4.7 percent of the city’s total housing units.
Federal Affordable Housing Guidelines
According to federal “Affordable Housing” guidelines, a Sacramento resident earning $33,660 per month can typically afford to rent a one-bedroom apartment for around $900 per month.
Students, retail, restaurant, and service sector workers, some health care professionals, and state personnel are among those having an income of that amount or below.
Builders argue that they can’t afford to develop projects with such cheap rents without a government subsidy, tax, or fee cuts.
Is There Going to be Another Housing Boom?
The Mortgage Bankers Association (MBA) predicts 1.134 million single-family homes will start at the end of 2021. And this may just be the beginning, with forecasts predicting 1.165 million single-family homes in 2022 and 1.210 million in 2023.
Many people have an itch to go out and buy a new home after being locked down in a tiny apartment over the past few years. What does this mean for the housing market? You can probably expect the newly built homes to be at the forefront in the upcoming years.
There is also an expectation that some builders will shift their focus towards building cheaper homes since the demand is there, and they can be constructed much faster than other types of housing that require a lot of details.
Obstacles in Construction
Even with more new homes under development, the building industry’s troubles will likely persist in 2022 and beyond. According to Robert Dietz, senior vice president and chief economist at the National Association of Homebuilders, “Inventories will continue below essential levels until the government and the building sector make significant changes.”
Increased lumber prices, restricted lot supplies, supply-chain concerns, tight zoning rules, pricey permits, and a skilled labor shortage are all issues that construction is facing. These issues make it considerably hard for homebuilders to earn a profit on entry-level houses, which is the segment of the market that is now suffering the most.
“Various regulatory constraints, notably concerning land, have tightened and tightened over the last 20 or 30 years,” adds Dietz. “There are greenspace restrictions, as well as restrictive zoning rules that essentially divide people based on their income. As a result, these inventory difficulties will endure without a significant policy adjustment.”
Sacramento, on average, has the highest developer fees in the country, making it even more difficult to construct new homes. According to experts, Sacramento needs to quadruple its current rate of housing production (85,000 units per year) within the next seven years to keep up with expected population growth and prevent further price increases.
California Treasurer Fiona Ma believes that the state’s backlog will take another two to four years to clear. In the meanwhile, many of those housing developments, as well as the individuals who need them, will be stalled.
We will have to wait and see if the home construction companies can increase the number of properties being built this year and in the future. For the moment, if you are looking to buy a new house, you may need to wait a bit before getting the home of your dreams.