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The New Normal of Market, Mortgage, and Opportunity in Santa Cruz

As 2024 unfolds, California's housing market is a mixed bag of evolving opportunities and persistent challenges. With mortgage rates finally stabilizing, we're seeing a shift in the market dynamics - a shift that's opening doors for savvy buyers and sellers. In regions like Santa Cruz and beyond, the lingering low inventory plays a pivotal role. For sellers, this means potentially quicker sales and more competitive offers. On the other hand, buyers face a market where strategic moves and informed decisions are key to success.

This guide cuts through the noise to provide clear data and guidance tailored to the current Santa Cruz housing market. Whether you're looking to buy your first home, sell your property in a seller's market, or navigate the complexities of downsizing, this article is a great resource to help you make an educated decision.

The Impact of High-Interest Rates on the Real Estate Market

Over the past few years, interest rates climbed from historic lows to their highest in nearly four decades. As we've seen interest rates climb, their grip on the real estate market has tightened, bringing a slew of changes that buyers and sellers need to navigate.

The uptick in interest rates has a domino effect. It's not just the monthly payments that go up—higher rates squeeze overall affordability, cutting down on how much buyers can borrow. This translates to looking at less expensive homes, stretching the budget thinner, or being forced to put down larger deposits.

For sellers, higher interest rates cooled off a hot market. Homes in Santa Cruz that could have sold in days now take weeks or longer. Sellers need to anchor themselves in this new reality—gone are the days of instant sales at sky-high prices. With buyers becoming more cautious and selective, pricing homes competitively and market them effectively is essential.

California Responds to Stabilizing Mortgage Rates

At the end of 2023, the Federal Reserve announced that we could finally expect interest rate drops after nearly two years of increases. As a result, after experiencing a high of 7.79% in October 2023, consumer mortgage rates have stabilized and are starting to drop. The average 30-year fixed-rate mortgage has an interest rate of about 6.7%.

Those who embrace optimism expect to see rates in the 5-6% range by the end of the year. However, most reputable sources predict mortgage rates will stay above 6% throughout 2024. Fannie Mae expects rates to land at about 6.5% by Q4 of this year.

Following a period of high volatility, this recent stabilization has crucial implications for buyers and sellers. For buyers, especially those entering the market for the first time, the lower rates may enhance affordability, opening doors previously closed due to high costs. This change is likely to reinvigorate buyer interest and activity in the market.

For sellers, especially in smaller markets like Santa Cruz, stabilized mortgage rates may lead to increased buyer interest and more confidence in purchasing a home upon selling. This renewed confidence could translate into a more active market, with properties potentially attracting more offers and selling more quickly. Sellers who are hesitant to list their properties due to fluctuating rates might now find a more receptive market.

Low Inventory in Santa Cruz Persists

With interest rates high, the Santa Cruz real estate market has been impacted. Furthermore, as return-to-office policies increase, Santa Cruz is no longer attracting a large number of Bay Area residents. But demand remains strong. Low inventory has been a market inhibitor across most markets in the nation, ultimately damaging buyers and sellers.

What Low Inventory Means for Sellers

In Santa Cruz, as in much of California, sellers are currently experiencing a market characterized by low inventory levels, a trend that has been deepening annually since 2019. Santa Cruz County's active listing numbers peaked at 584 in July 2019. In the same month of 2023, that number was just 297.

This scarcity of available properties is benefiting sellers in several ways:

  1. Reduced Competition  With fewer homes on the market, sellers face less competition. This environment can lead to multiple offers, often driving sale prices above asking.
  2. Capitalizing on Demand  Properties in prime locations or with sought-after features are particularly well-positioned to attract higher interest and competitive bids.
  3. Pricing Strategies  Sellers can leverage the low inventory to their advantage but must also balance the desire for high returns with the reality of the market.

However, The reluctance of homeowners to list their properties stems from concerns about finding another property in a tight market, coupled with apprehensions about securing a new mortgage at potentially higher rates. These factors have contributed to the ongoing low inventory situation.

What Low Inventory Means for Buyers

Low inventory is even more frustrating for buyers than it is for sellers. Buyers have been strangled by high interest rates and real estate prices that don't respond to changing economic conditions. Despite a recent market correction, prices remain high, reflecting the ongoing demand outstripping the limited supply of homes.

Buyers in Santa Cruz are facing a challenging scenario:

  1.  Competitive Market  The strong demand and shortage of listings mean buyers often compete aggressively for available properties. When a premium property gets listed, buyers flock to the property.
  2. Price Trends  Despite the recent dip, which was to be expected, overall prices remain high compared to previous years. The median home price in Santa Cruz still sits at about $1,100,000. This sustained price level is primarily due to the ongoing low inventory.
  3. Strategies for Success  Buyers need to be well-prepared and quick to act when they find a home they want. While above asking sale prices are no longer the norm in Santa Cruz, it is important to submit compelling offers and have pre-approval for financing to secure a property.

With stabilizing interest rates, the hope is that more sellers might be incentivized to list their properties, potentially easing the low inventory situation as we move into 2024.

What Will 2024 Bring to the 2024 Housing Market?

While interest rates are coming down, their impact isn't in our rear-view mirror just yet. While mortgage rates have improved from their 2023 highs, they remain high, and they aren't going to come back at the rate most would hope. High rates pose challenges for affordability, especially for first-time buyers. The convergence of still-high rates, price levels, and a historically low housing stock maintains the pressure on homeownership accessibility.

Experts predict a more animated home-buying season than the previous year, albeit with persistent inventory struggles and steady price growth, according to Freddie Mac's chief economist. This situation is compounded by the fact that many homeowners benefiting from sub-4% mortgage rates are choosing to stay put, further straining the available housing stock.

The Federal Reserve suggests potential rate cuts ahead. However, even with these cuts, low inventory and high demand are expected to continue bolstering home prices, leading to a "flat stretch" in the market as it searches for equilibrium between the 2020-2021 surge and the cooling of 2023.

Santa Cruz Housing Market Trends

While house prices in Santa Cruz have dropped as much as 20% year-over-year, the story when it comes to price-per-square-foot in the market tells a different story. The price-per-square-foot of home sales has actually increased 6% over the past years, hitting a high of $848. These statistics are conflicting and should be paid close attention to. This tells us that while achieved sale prices in Santa Cruz have declined, it's likely due to a shift in the types of homes being sold.

When the median sale price declines but the price per-square-foot increases, it indicates that the homes being sold are smaller than those in previous markets. Therefore, it's reasonable to conclude that the impact of interest rates on the Santa Cruz housing market hasn't been as dire as it appears. On the contrary, the market remains robust, and demand is strong.

As interest rates become increasingly affordable, it will positively impact the Santa Cruz market in that it should spark more transactions. Lower interest rates free up sellers as much as buyers. According to Director of Surveys and University of Michigan economist Joanne Hsu, consumer sentiment climbed a cumulative 29% over the past two months. This increase represents the largest two-month increase since 1991. Consumers feel confident in their jobs, and the stock market expectations are the strongest in two years.

While some might expect further decline in the Santa Cruz Housing market, macroeconomic trends don't support their forecasts. What could be damaging to our local market is continued return-to-office policies forcing new residents to move closer to their employers. Only time will tell.

It's a Good Time to Buy - How Much Can You Afford?

Affordability remains an issue despite the recent decline in mortgage rates. With the median price point of Santa Cruz homes at $1.1M, homebuyers would need an approximate mortgage of $900k (assuming a 20% down payment). Therefore, with a market competitive interest rate of 6.8%, a buyer would need an annual income of roughly $250,000 to afford the average Santa Cruz home.

Now, with rates slowly coming down, buying is becoming more attainable. Every step down in rate counts. To afford the same mortgage with a 6.2% interest rate, you need to have a household income of $240,000.

If purchasing a home is your goal for 2024, whether you're selling or a first-time buyer, it's important to start your search by talking to a mortgage broker. Getting pre-approved will help you understand exactly how much you can spend and will define your budget. But as the months pass by and interest rates continue to soften, touch base with your broker. You might find that what you can afford improves throughout the year.

But here's the catch: as you can afford higher mortgage amounts, so will your competition.

Buying Real Estate in Santa Cruz in 2024?

The Santa Cruz market, emblematic of broader state trends, suggests that while the climb in interest rates has moderated, the journey to normalcy is gradual and ongoing.

For sellers, the current climate indicates a potential resurgence in buyer interest, with the caveat that strategic pricing and marketing remain crucial. Furthermore, the pressure to "stay in a good mortgage" is starting to lighten up. Buyers, conversely, are advised to navigate this market with a blend of optimism and prudence. Affordability, though improving, is still tight. The importance of mortgage pre-approval and financial readiness cannot be overstated, as these elements will define buying power.

Looking ahead, we cautiously expect the market to reawaken, with industry experts anticipating a modest uptick in activity despite the lingering challenges. Stakeholders are encouraged to stay astute and leverage available data and expert insights to make decisions that align with both their personal circumstances and the evolving market conditions.


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by Kelsey Heath

Kelsey Heath is a real estate content specialist with an extensive background in residential, industrial, and commercial property. She has been involved in the industry for a decade as a professional and personal investor, gaining a deep understanding of the market and trends. With a passion for written communication, Kelsey loves helping people understand the sometimes-complicated concepts behind real estate.

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