The Sonoma Valley reals estate market appeared to have a dramatic drop-off in December, but the numbers aren’t exactly as they seem, Realtors say.
Better Homes and Gardens Real Estate Wine Country Group shared data that showed the median price for sold homes in Sonoma dropped by over 12% in December, while nearly every other town in the North Bay increased, some as high as 18%.
Gerret Snedaker, a manager and broker at Better Homes and Gardens Real Estate Wine Country Group, said the number assigned to the median home sale price should never be taken as a serious market indicator in Sonoma.
“The median price in any market can fluctuate quite a bit and in our market where we have home prices ranging from the 500-thousands to the 5 millions, it can be really skewed from month to month,” Snedaker said.
Like the rest of the county, as interest rates rose, home sales slowed in Sonoma Valley. Average house prices, however, continued to rise in 2022 to $1,491,405 compared to $1,448,264 for 2021
While local real estate agents remain optimistic about market projections for 2023, it’s largely unpredictable after the roller coaster seen over the past few years.
‘Taking a Breather’
Snedaker said the recent drop in the market is more like a return to normal.
In 2021, the average home sale price across the Valley climbed 14% compared to 2020, when the market was flooded with people eager to buy outside of the city. In 2022, that number rose again, but this time just by 3%.
The total number home sales in the Valley also dropped in 2022 to 385, compared to 622 in 2021—a 38% drop.
Interest rate hikes caused by inflation are to blame in Snedaker’s eyes, and the local market remained hot until about midway through 2022 when inflation began to peak.
“The market shifted and softened quite a bit in the second part of the year, so sales slowed down, and prices moderated,” Snedaker said.
Historically, 3% annual growth is not considered low. However, with the market being so hot during the pandemic years of 2020 and 2021, people got comfortable with a seller’s market, when multiple offers over asking price became commonplace.
“We were accelerating higher for a while, and some of this is just a more moderate rate,” Snedaker said. “The market’s taking a breather because it’s been running very fast.”
Low Inventory
One major reason why December saw a drop in home sales in the Valley was because there weren’t as many houses on the market.
“What we’re seeing right now is low inventory of homes for sale, which really is the heart of everything that’s going on,” Christopher Oscar, a Realtor on the Oscar Koplelman Team at Engel and Völkers, said. “A lot of the sellers are taking their homes off the market during this wintertime, especially during the rains, and they’re going to be putting them back on in February, March — so we’re going to see an increase in inventory.”
According to Oscar, demand is still high, but sellers who were used to seeing a higher than average sale prices over the past two years could be waiting out the cold weather and high interest rates.
New Financing Trend
One way that buyers and sellers have managed interest rate hikes is through a 2-1 buydown—a type of financing that lowers the interest rate on a mortgage for the first two years before it reached its normal rate.
“That 2-1 buydown has been the best way for a buyer to get ahead in a higher interest rate market,” Matt Scott, a loan consultant at Intentional Financial Group, said.
According to Scott, the buydown is a credit the seller gives to the buyer in the deal, the same way that $3,000 credit might be given for wood rot found during an appraisal. But this credit is given to offset the buyer’s loan.
During their first year in the house, the buyer will pay 2% less than their agreed upon loan rate, the second year it drops to 1% less and the third year they pay the full rate.
The formula for determining the credit is 2.33% of the total loan.
According to Scott, about one in every three home loans he’s seen since the second half of 2022 has included 2-1 buydown credit. Most of those loans fall within the $600,000 to $700,000, so the average credit has recently been for around $15,000.
The Buyers
Oscar said he’s helped younger buyers in the Valley since he began selling real estate here in 2002, but he noted an increase in Millennial buyers during the pandemic years.
Remote work fueled a new wave in the market, allowing people to reconsider where they live and look for more spacious options outside the city limits. While Sonoma has always attracted retirees, in the pandemic, fewer people are waiting until their retirement to move to Sonoma Valley.
As always, buyers are investing in properties under the million dollar threshold, and those are the buyers most likely to capitalize on the 2-1 buydown. Those buyers have been able to get those credits because, as interest rates increased, the real estate market shifted from a sellers market to a much more balanced one.
According to Oscar, the one group that has challenges entering the Valley market is first-time buyers, who often require more creative financing.
Predictions for 2023
According to the California Association of Realtors 2023 California Housing Market forecast, “the California median home price is forecast to retreat 8.8% to $758,600 in 2023, following a projected 5.7% increase to $831,460 in 2022 from $786,700 in 2021. A less competitive housing market for homebuyers and a normalization in the mix of home sales will curb median price growth next year.”
Sonoma Valley exists in a bit of a bubble when it comes to California real estate, and even Bay Area real estate.
Snedaker said the Valley is comparable to Napa and St. Helena since they also have drastic differences in pricing across their market landscapes. He predicts that there will be an increase of 6% in the average home price—no match for the 14% seen in 2021, but on trend with normal levels.
“I have high hopes for it because we live is such a desirable area, I just keep coming back to that,” Oscar said. “We have such a large net of potential buyers for our community.”
While there seems to be an optimism for a return to normalcy, it’s difficult to define what that means.
“I don’t wanna say normal, because I don’t know what that is anymore,” Logan Adams, a broker associates at Coldwell Banker Residential, said.
Contact the reporter Rebecca Wolff at rebecca.wolff@sonomanews.com.