How the Federal Reserve ‘broke’ the once hot Sacramento real estate market

A bubble in need of bursting. An overheated environment that had to be cooled. A correction for a real estate market out of balance.

Federal Reserve Chairman Jerome Powell has been upfront about the Fed’s motivation for months’ worth of interest rate hikes. Those increases, aimed at slowing inflation and cooling the housing market, have also influenced a prolonged climb in mortgage rates. The pandemic-era days of 3% mortgages have been replaced with rates that recently hit 8% — the highest they’ve been in more than two decades.

Powell said last year that the ultra-hot housing market was in need of a “reset” to slow down the historic price increases and wild demand that defined much of 2021 and 2022. But what’s happened nationally and in the Sacramento region is instead something far more dire, industry experts say: prices that remain elevated, historically low supply and a severe lack of affordability.

In other words, a punishing and unprecedented real estate market for buyers and sellers alike.

“The Fed broke volume but didn’t really break prices,” Sacramento market analyst and appraiser Ryan Lundquist said. “They were very clear about wanting to slow down the economy and wanting the housing market to correct. But they have broken volume. We basically have some of our worst volume ever this year.”

While the Federal Reserve does not set mortgage rates, its policy decisions — including setting the federal funds rate — have a heavy influence on mortgage rate increases and decreases. That has been the case since last year, when increases in the Federal Reserve rates have been followed by hikes in the typical 30-year mortgage.

And despite predictions from some industry observers that mortgage rates would stabilize this year, they just keep climbing. Now many experts think rates will remain elevated through at least the start of 2024.

“What I’ve been telling buyers is that they have to have a longer horizon,” said Scott Scoville, a Sacramento-based realtor.

The mortgage rate hikes have persuaded 40% fewer people in the Sacramento region to place their homes on the market than in a typical year and new home listings are at their lowest point since at least 2008, according to Lundquist’s data. That’s largely because many homeowners are locked into mortgages with favorable rates and are reluctant to sell their homes, only to buy a new home with an 8% mortgage rate.

“There is a big financial penalty for moving,” said Jordan Levine, the chief economist for the California Association of Realtors. “That has caused supply to remain very depressed, even more than demand.”

Scoville said he’s seeing many sellers “just waiting this out.”

“They’re holding onto their properties because they have a ton of equity (due to months of home value increases) and low rates,” he said.

Lundquist pointed out that a little more than 13,000 homes have sold in the region this year, a steep decline over recent years. But market experts and real estate agents say buyers and sellers have had to be creative.

Some buyers have opted for adjustable rate mortgages, hoping rates decline in the next few years in time for them to refinance. Sellers are more willing to offer financial concessions or cover the costs of repairs. About 22% of home sales are being completed with all cash, Lundquist said, a higher percentage than normal.

“You might get a better property and a better price if you’re able to navigate this time,” Scoville said, “and it’s not going to last forever.”

For many buyers, it may seem as though conditions will never improve.

Just 26% of Sacramento families and 29% of those in Placer County can afford the median-priced home, according to data from the California Association of Realtors. While the median home value in the Sacramento region is down slightly since the May 2022 peak, prices are still about 3.5% higher in the region than they were at this time last year, Lundquist said.

That dynamic, combined with the dismal inventory figures, has prompted experts across the nation to call for more stability in rates.

Last week, the National Association of Home Builders, the Mortgage Bankers Association and the National Association of Realtors sent Powell a letter pleading with him to pause the rate hikes, saying uncertainty about the Federal Reserve’s plans has “exacerbated housing affordability.” With rates at a 23-year high, housing industry leaders said, the number of new mortgage applications is the lowest it’s been since 1996.

Historically, most housing market corrections involve an increase in supply and lower demand, a dynamic that can drastically improve affordability. This time around both supply and demand are low, prices are still sky high and monthly mortgage payments are hundreds of dollars higher for new buyers today than they were just one year ago.

“We’ve never had a market like this before,” Lundquist said.