It’s that time of year when we take a look back at the 2023 housing market. You only need to ask any realtor how it was and most will say it was a tough year. Not necessarily because it was a bad market with house prices falling but because sales dropped 22% year-over-year to just 3,253 across Sonoma County marking a 30 year low not seen since 1990. Unlike Marin where median prices fell 7.3%, and San Francisco where median prices fell 12%, median prices in Sonoma County continued to increase albeit by just 1.2% to $835,000.
In this blog post, we will cover the key factors that impacted the Sonoma County real estate market in 2023 and look at the differences in five of the key sub-markets including Sonoma, Healdsburg, Sebastopol, Santa Rosa, and Windsor. First, let's analyze key factors deciding local real estate fortunes right now.
Rising mortgage rates above 6% for much of 2023 priced many first-time buyers out of the market before stabilizing later in the year. On the supply side, with 86% of existing mortgage holders having a mortgage under 5 percent coupled with the fact that homeowners are staying in homes longer than ever, now 12 years compared to 5.8 in 2000-2010, meaning that there were very few people either in a position to move or motivated to move in 2020. If you are looking to buy a bigger house, the monthly mortgage cost would be just too high and if are looking to downsize, why would you when a smaller home will likely cost you more money? Despite this tight supply, the continued popularity of Sonoma County as a place to move to and live in meant that, unlike many other markets in the US and the Bay Area, the median price actually continued to increase.
The luxury market over $2 million reflects the general market in microcosm. Its median sale price rose to $2.747 million which was a fraction above the 2022 level. However, annual sales declined 24% with just 215 closings countywide. Days on market stretched longer to 77 days up fractionally from the 66 days the year prior and the sale price to list price continued to be squeezed with the average home selling for 6 percent below the original asking price. While inventory levels were tight, there were an average of 180 homes for sale and yet there were typically just 18 deals every month over $2m. In other words 90% of all homes would not sell in any given month.
Drilling down further reveals a stark split in submarket fortunes across Sonoma County.
In Healdsburg, while there was a 15% drop in sales this was actually a smaller fall than in other other key markets in the county. Across Healdsburg, which includes both properties within the city limits and in the broader 95448 zip code, median house prices increased by 9.3% to $1.23m out performing the rest of the county by quite some margin. When it comes to cash, Healdsburg is also at the top of the pack with 48% of all homes being purchased with cash compared to the average across the county of 27%. For a more detailed analysis of the Healdsburg market please see my article in the Healdsburg Tribune)
Contrast that to Sonoma’s experience where median prices fell 13% to $956k which means that Sonoma has now fallen some way behind Healdsburg when it comes to median prices and now also trails Sebastopol where prices dipped just 2.3% but still remains over $1m at $1.075m. It's hard to really understand why Sonoma prices have fallen disproportionately although it does seem that Healdsburg continues to be the darling of the Sonoma County cities with all the investment that has come into the town, closely followed by Sebastopol which is also seeing some significant investment in new developments such as hotels and the continued success of the Barlow.
Sebastopol’s sales volume fell 20% and while prices fell back just over two percent, homes are still selling at pretty much the asking price (99% of the list price), this compares to 2022 when the average selling price was one percent over the asking price. If you are looking to purchase a property in the Sebastopol area then you can expect it to get the asking price or very close if you are realistic with the pricing. Consistent with a lot of the other markets, Sebastopol homes were selling in 53 days which is fractionally up in 2022 but still indicating 2023 was still very much a sellers' market because the number of buyers outstripping the number of sellers.
Windsor, a market that is very much a family market with first time home buyers and move up buyers, experienced a similar fall in sales of 20% and a slight fall in median home prices, although, like Sebastopol, homes are still selling for pretty much asking price (99% of list price).
With Sonoma County such a popular market for second homes and investors (short timer rental and long-term) it is interesting to note that in a market like Healdsburg, which is probably one of the more popular second home markets, along with Sonoma, 64% of deals went to non-primary home buyers - purchases aimed mostly at second homes or investment properties. This figure climbed notably from 37% back in 2019, highlighting the continuing growth of Healdsburg as a popular city for both second home purchases and investors.
And investors aren't just coming from elsewhere in California or urban hubs like San Francisco because 39% of this buying segment came from Sonoma County with Healdsburg investors representing 25% of this number. That being said over 30% still flowed from deeper Bay Area pockets like Marin and Silicon Valley.
It’s hard to imagine there being less sales than 2023 given that was a 30 year low. The market this year all depends on whether enough sellers will choose to sell. There is no question that, even with interest rates still only improving marginally to the 5-6% range, there are enough buyers either with cash or enough buying power to be motivated to purchase a home.
I think a lot of buyers think that if they sit on the sidelines then prices might fall. I’m afraid I have bad news for those people. I just don’t think prices will fall. When you look at the fundamentals of the Sonoma County market, particularly in the $1m+ category, where houses are being purchased with Bay Area money or by Sonoma County investors, combined with the fact that the number of buyers far outweighs the number of sellers, when interest rates come down, it will continue to be an incredibly competitive market. The big question for 2024 is whether enough sellers will decide to sell to meet the demand for the number of buyers out there.
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