Why The Sonoma Housing Market Isn't About To Fall?

As the old adage goes, “the harder you work the luckier you get.” Given a real estate sale or purchase is one of the biggest financial decisions of your life, it is important to work with professionals who are deeply immersed in the business all day, every day. As we all try to make sense of the current market, I sat down with co-founder and broker of W Real Estate, Randy Waller, to chat about the market, the impact of Bay Area buyers on the Sonoma County market and get his thoughts on pricing a home for sale in a fast-rising market. Having founded W Real Estate in 2007, along with Tony Shira, when everyone around them was telling them they were mad, Randy has seen the good and the bad in the Sonoma County housing market. As the largest locally founded and independently owned brokerage in not only Sonoma County but the North Bay, W Real Estate did $1.4 billion in transactions in Sonoma County in 2021 with over 1791 deals.

Is The Current Hot Market Coming to An End? 

The numbers don’t lie. Regardless of whether you look at the sub $1 market or the $6m+ market, we are breaking a lot of records right now. With interest rates going up, stock markets falling and war in Ukraine, it would be easy to think everything is about to come crashing down but perhaps it isn’t that simple, explains Randy, “Every time there is a major event such as the fires or Covid, there has been an inverse positive reaction in the Sonoma County housing market, albeit for different reasons. It may be that we will get a similar reaction with people continuing to migrate from the big cities.”

There is no doubt that a lot of the house price growth over the past year has been a result of money from the Bay Area flowing into Sonoma County. “I have had a number of listings over the past year over $6m, all purchased by tech entrepreneurs as second homes but through the course of the year they have enjoyed being out of the city and enjoyed a better quality of life so are spending a lot more time there than they imagined when they first purchased the home.”

I ask Randy if he thinks that the $6m+ market soften any time soon. “The reality is that the $6m+ market will not be affected because of the amount of wealth that has been generated in the tech industry over the past 10 years. There are enough people out there where a purchase up to $6m+ does not make a material impact on their wealth. They can almost write a check out of their current account,” added Randy.

One of the hottest markets last year was in the $2m to $3m range. For people living in San Francisco, where $2m will only buy a modest apartment, seeing that they can buy a nice rural property or a place in downtown Sonoma or Healdsburg, is an exciting option. With the increasing interest rates, one of the questions in the back of everyone’s mind is whether the current house price appreciation is about to run out of steam.

The health of the housing market is typically measured by the house affordability index which measures whether or not the typical family earns enough to qualify for a mortgage which is a function of median income levels, the cost of mortgages, and median house prices.

“The biggest challenge right now, with interest expected to hit 4.5%, is that it may well tip the house affordability index to a point where the housing market stalls. However, perhaps we are in uncharted territory? If we look at this index through the lens of Sonoma County median income levels then we almost certainly would see things slowing down. However, if we look at the home affordability index taking into account the fact the market is being sustained by Bay Area salaries, it puts a very different perspective on the future health of the market,” explains Randy. 

“For many people in the Bay Area, with proportionately higher salaries, homes in Sonoma County still look very affordable when compared to homes on the peninsula or in Marin for example,” added Randy.

In this blog post, I highlight the most popular places people have moved to from Sonoma County. As you can see from the graphic below, people are leaving Sonoma County into the surrounding counties such as Marin, Contra Costa, San Mateo but Sonoma County is number six on the list. Even though the worst of the pandemic seems to be over, blue-chip companies are not requiring their employees to return to the days of full-time office work. For example, Facebook has moved a significant number of employees into a fully remote role. This has to be good news for the Sonoma County housing market.

One of the hottest markets over the past year has been in the $2m to $3m range because that is a price point that seems to be the sweet spot for people coming out of the city. As well as the frantic bidding on properties we have seen, there is also a change in people’s purchase behavior which hasn’t been seen before in Sonoma County. 

“I don’t remember a market like this before. We set up W Real Estate in 2007 just as the property market was coming crashing down. That collapse was driven by lending practices that lacked scrutiny such as some of the stated income loan products. This is different. For the first time, we are seeing overbidding as we have never seen before. The difference this time is that a lot of these offers are cash offers or at the very least, with significant down payments. There are numerous examples over the past few weeks where homes have sold for $300k or $400k more than asking. This is something that has come from the city where buyers are used to seeing a property they like for $1.5m and bidding $1.9m to make sure they secure it,” explains Randy.

The other practice that has been inherited from San Francisco is the removal of all contingencies with the offer. Again, this is something that is new to Sonoma County. If you are buying a condo building it makes sense but if you are dealing with a rural property with a well and septic system it is important to make sure at the very least you have a copy of the inspections prior to making an offer of that type.

How Do You Value A Home?

In a market that is rising as fast as the current market, it makes pricing conversations even more important. It’s easy to get carried away and leave money on the table because a seller got too greedy, priced that bit too high and miss the buyer frenzy that would be created if it was priced a bit more realistically.

“My approach to pricing is fairly straightforward. I have the advantage that I do business across a wide cross-section of Sonoma County so have a deep understanding of the different markets. My first priority is always to find the best comps, if I can’t find recent comps, I will look at older comps and adjust based on the median price gains over the period,” explains Randy. For those of you who read this blog, you will know I am a big believer in an analytical approach using data wherever we can to inform pricing decisions.

“If someone from out of the area is buying a place in wine country, we can look at comps from different areas that have a similar cache. For example, if we are looking for a comp in Healdsburg, we can look at a similar property in Kenwood, Sonoma, or Glen Ellen. To the buyer from the Bay Area, it’s all wine country. They are buying a lifestyle so it’s a myth that a comp needs to be geographically proximate. It just needs to offer a comparable lifestyle,” continued Randy.

“It is interesting looking at what people value in a wine country home. If we look at the most popular search terms for people looking for a home in wine county the most popular term is ‘view’, followed by ‘second unit’ and then ‘chef’s kitchen’,” added Randy. “They also don’t want something too big so that it feels like it would be a lot of work. A home that is 3500 to 4500 sq ft is perfect for most people. One of the impacts of Covid has been an increase in the demand for more square footage as people make sure they have room for one or two parents to have an office. The other amenity that has increased in popularity is a pool. Searches for homes with pools have increased by 300 percent through Covid.

The typical buyer also values infrastructure. If you think about someone from the Bay Area buying a rural property for the first time, they want everything to be seamless. They want good internet, resiliency against power cuts, land that does not require much effort to maintain. If they want vineyards, they certainly don’t want anything to do with farming them, so they need a vineyard to be under a good contract so that they are fully managed.”

As well as finding the best comps, and where necessary adjusting for market price rises, the other important factor to look at when pricing is what is the competition for other similar houses? In the current market, the competition is often pretty scarce given the low inventory levels. Inevitably, a low supply has a direct impact on pricing. When we price a property, we need to make sure that it compares well with the current competition. As a seller, we need to put ourselves in the shoes of buyers. If they are going to look at five homes we need to make sure ours compares well.

In Conclusion

There is no question that if you are thinking of selling your home in the next couple of years, now is the time. There hasn’t been a better market for sellers with a perfect storm of shortage of inventory, some frothy comps to justify pricing premiums and the spring selling season. The only blot on the landscape is the uncertainty in interest rates being driven by high inflation and the current instabilities in Europe. With the unique circumstances of the Sonoma County market being driven by Bay Area salaries in a market with traditionally lower house prices, even if there is a wider property market price adjustment, it’s likely that we might just be able to ride it out without being hit too hard.