Sagging stats and increasing values (and a market update)

January stats are down, but the market feels up. That’s normal at this time of year, but it can be confusing. Let’s focus on three things to keep in mind about the beginning of the year in real estate, and then let’s unpack the market. This post is long on purpose. You can scan it quickly or pour a cup of coffee and spend some time here. If you aren’t in Sacramento, I hope you can still find some value. Do you see any parallels to your market? Any thoughts? 

39613867 - close up of weathered and textured boards on an old wooden farm door

3 things to keep in mind about the beginning of the year in real estate

1) Recent sales lag the real trend: At this time of year it’s important to remember that the most recent sales don’t necessarily tell us about the current market. It’s like a pregnancy test. You might be pregnant, but an over-the-counter test won’t tell you that for two weeks even though there has been a change in your body. Similarly, the market may have changed, but we may not see the price change in the stats for a month or two.

2) Insane appreciation: We are seeing multiple offers, but in many cases it seems the market is trying to get back to prices from the peak of summer rather than showing rapid value increases like we saw in 2013. I recently heard about a property getting into contract 5% above sales from December, but that doesn’t mean the market actually increased in value by 5% over the past month. It could simply be the market is pulling itself out of the fall seasonal lull and getting back to prices from the summer (where they were 5% higher).

3) We see the market in the pendings: If we want to see the current market we have to look at the pendings and listings. Let’s obviously give strong weight to properties that have actually sold, but we cannot ignore pendings to help us gauge the direction of prices for the current market. If we rely too heavily on sales from December and January alone, we might essentially undervalue properties because the market usually ticks up during the early part of the year (which we would see in the pendings). In other words, today’s higher pendings will close over the next 30-60 days and then show value increases on paper for March and April. But the truth is the value increases are actually happening right now. It just takes skill to be able to see the market before the change shows up in the stats. This is why have to give way more respect to pendings. I realize we don’t know the exact price of pending sales though, and that’s why we have to look at many examples of pendings rather than just one. In some markets pendings get into contract at ridiculous levels too, so we have to sift if the prices are realistic (that makes it even more tricky). If there are few listings in a neighborhood, we can look at competitive neighborhoods for more data because we don’t want to base the entire market on just one listing or pending. Let’s not forget to be in tune with where sales left off at the end of summer too.

Appraisal class: I’m teaching a 3-hour class next week on Feb 22 at SAR called How to Think Like an Appraiser. I’d love to have you come. Details here.

DOWNLOAD 77 graphs HERE: Please download all graphs in this post (and more) here as a zip file (including a one-page quick stat sheet). See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

A Market Summary: The market is always interesting in the early part of the year because we are in a place where values have changed, but we don’t see the change in the sales stats yet. So there is a disconnect between reporting slow January data and how the market feels right now. What I mean is the median price softened last month by 3%, sales volume declined by 27% from December, and it took 3 days longer to sell a house than the previous month. If we didn’t know any better we’d say the market was tanking. But let’s back up and think through this.

January sales stats aren’t often very sexy because they represent properties that went into contract in November and December. Do you remember Thanksgiving and Christmas? Yeah, you probably weren’t looking for a house, so it’s not a surprise to see sales stats sag from those months. At times the real estate community doesn’t like to admit the market shows a price lull during the fall, but a lull happens nearly every single year. So if we’re not careful we can focus on sales volume declining last month by 27% without realizing that’s normal to see every January (see graphs below). The irony is it’s easy to say we are in trouble because sales volume declined, but this January actually had its strongest month of volume in 4 years. We might also be concerned about sales showing a good 5% or so decline from the height of summer, but that’s not unusual (see graphs). Or we can freak out about sales taking longer to sell, but over the next month or two we are bound to see this stat change as it will begin to take less time to sell during the spring.

The truth is the market is beginning to heat up. Right now we have an atmosphere of multiple offers in many price ranges. Let’s remember though the market feels more aggressive than actual value increases at times. Moreover, it’s easy to let news of a “hot” real estate market or anemic housing inventory trump actual market data. Thus I would caution sellers to price according to the market instead of the headlines. Just because inventory is spare does not mean you can get whatever price you want too. I would also remind buyers that the bulk of listings don’t usually come on the market for a few months (April through August tends to be the peak).

Sacramento County:

  1. The median price softened to $305,000 (down 7% from summer).
  2. The median price is currently 8.9% above January 2016.
  3. Sales volume was stronger in January than it’s been in 4 years. We could focus on sales volume declining by 27% from December, but volume always declines from December. See the graphs below.
  4. Sales volume in January 2017 was 14% higher than last year.
  5. One year ago in January it was taking 4 days longer to sell.
  6. FHA sales volume is down 6% this year compared to 2016 (but 27% of all sales were FHA last month).
  7. Only 3% of all sales were bank-owned last month and 2.4% were short sales.
  8. The average price per sq ft was about $202 last month (about the same as December, but 8% higher than last year).
  9. The average sales price softened 1% last month and is currently $339,028. This is down 5% from the height of summer (but is 9% higher than last year).
  10. Cash sales were 15% of all sales last month.

Some of my favorite images this month:

Median price since 2013 in sacramento county

january and december

january seasonal market in sacramento

inventory in sacramento county Since 2013 - part 2 - by sacramento appraisal blog

price metrics since 2015 in sacramento county - look at all

CDOM in Sacramento County - by Sacramento Regional Appraisal Blog

inventory - January 2017 - by home appraiser blog

SACRAMENTO REGIONAL MARKET:

  1. The median price softened to $339,000 (down 8% from summer).
  2. The median price is currently 5% above January 2016.
  3. Sales volume in the region is up about 2% over the past year.
  4. Sales volume in January 2017 was 7.6% higher than last year.
  5. One year ago in January it was taking 3 days longer to sell.
  6. It took an average of 47 days to sell a home last month.
  7. FHA sales volume is down almost 7% over the past year (but still 23% of all sales were FHA last month).
  8. The average price per sq ft was about $208 last month. This is down about 1.5% from summer, but 5.7% higher than last year.
  9. The average sales price softened 2% last month and is currently $380,151. This is down about 6.5% from summer (but is 5.9% higher than last year).
  10. Cash sales were 16% of all sales last month.

Some of my favorite images this month:

median price sacramento placer yolo el dorado county

Regional Inventory - by Sacramento regional appraisal blog

days on market in placer sac el dorado yolo county by sacramento appraisal blog

inventory in sacramento regional market

sacramento region volume - FHA and conventional - by appraiser blog

PLACER COUNTY:

  1. The median price is $424,500 (down 3% from the height of summer).
  2. The median price is currently 4.8% above January 2016.
  3. Sales volume in Placer County was down almost 13% this January compared to last January. 
  4. Sales volume in January was nearly identical in volume to January 2014 and January 2015.
  5. Housing supply is down 4% from last year.
  6. It took an avg of 52 days to sell a home last month (same as Jan 2016).
  7. The average price per sq ft was about $211 last month. This is down about 2.5% from summer, but about 5% higher than last year.
  8. The average sales price softened 1% last month and is currently $467,276. This is down about 3% from summer (but is 3% higher than last year).
  9. Bank-owned sales were 2.4% of all sales last month (short sales were 1.3%).
  10. Cash sales were 19.5% of all sales last month.

Some of my favorite images this month:

Placer County price and inventory - by sacramento appraisal blog

Placer County sales volume - by sacramento appraisal blog

months of housing inventory in placer county by sacramento appraisal blog 2

days on market in placer county by sacramento appraisal blog

Placer County housing inventory - by home appraiser blog

DOWNLOAD 77 graphs HERE: Please download all graphs in this post (and more) here as a zip file (including a one-page quick stat sheet). See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

Questions: Did I miss anything? What are you seeing out there? How would you describe the market? I’d love to hear your take.

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Some advice for sellers in an aggressive market

Dear Sellers,

The market feels aggressive out there and you’re probably going to get multiple offers, but let’s have some real talk. Last week I wrote an open letter to buyers, but today I want to share some perspective to help your end of the transaction. Whether you are in Sacramento or elsewhere, I hope this is useful. Any thoughts?

18744389 - old paper on the wood background

Advice for sellers in an aggressive market:

1) Don’t get high on the headlines: It’s easy to read articles that say “the market is hot” and then ignore data in the neighborhood. It’s as if we see something in print and price according to the headline instead of actual sales and listings. Right now there are no shortage of articles saying “Sacramento is one of the hottest markets in the nation”, so be careful about getting distracted by the headlines.

2) Don’t aim for the unicorn: It’s easy to price for that one magical unicorn buyer who is going to pay more than anyone else for some reason, but I would advise you to price based on recent similar sales and similar listings that are actually getting into contract. I find some sellers say things like, “A cash investor from San Francisco is going to swoop in and pay top dollar for my property.” Yeah, maybe. But what might also happen is you sit on the market instead of sell because you priced for a mythical buyer instead of a real one.

3) Be careful to not treat the contract price as holy: We like to think there is something holy about a contract price as if price negotiation is finished when a contract is written, but that’s simply not true. If a buyer finds repairs are needed or if an appraisal rightly comes in lower than an inflated contract price, it may be prudent to reduce the price.

4) Remember the difference between “comps” and sales: We like to think all sales are “comps”, but there is a difference between properties that are actually comparable and ones that are simply sales. It’s easy to get distracted by a few high sales in the neighborhood, but if they are nothing like your property, then don’t give them much weight and pay the most attention to homes that are actually similar to yours. In simple terms, if your home was an apple, what have other apples sold for in the neighborhood? Don’t price your apple according to orange or banana sales.

5) Be aware of appraisals being scrutinized: If you haven’t sold a home in years, know the lending world has changed from what it used to be over ten years ago. These days lenders scrutinize appraisals like never before, so be careful about accepting an offer that is incredibly high if there is no way it is going to appraise that high. Of course if the buyer has cash to make up the difference, then you are fine. But if the buyer is strapped for cash, then the highest offer probably isn’t your best option. This is why many agents tell sellers to look for the strongest offer instead of the highest one.

6) Don’t hijack price per sq ft: One of the biggest pricing mistakes sellers make is to take a per sq ft figure from another sale down the street and use that figure to price their property. Here’s the thing though. There isn’t just one price per sq ft figure that applies to every single property in a neighborhood. For example, in East Sacramento the price per sq ft range for all sales last year was $169 to $552. So when a seller says, “Let’s use $552 to price my property,” my question would be, why not $551? Or why not $525? What about $436? Or maybe $278? We can quickly get a price that is far from reasonable if we are only looking at price per sq ft. Keep in mind smaller homes tend to have a much higher price per sq ft too (which I explain with my Starbucks cup analogy). My advice is to pay attention to price per sq ft, but don’t forget to look at actual similar sales in the neighborhood.

east sacramento price per sq ft range - sacramento appraisal blog

7) Try to be objective about your house: Buyers are going to look at your home with a microscope, which means they’ll see the wonderful things as well as the faults. Remember, it’s easy to get sentimental about your property because you have a history there, but memories can also be a mask for not seeing flaws. A seller recently told me, “My house is the most well-built one on the block” (the same builder built the entire tract). Another seller said, “My house is really unique for the neighborhood, which is why it’s worth so much more” (it was totally outdated though). Agents are trying to tell these sellers to price lower because that’s where the market is, but both these homes are likely going to be overpriced because the sellers cannot get past their own subjective views.

8) Be FHA-ready: One in four homes in Sacramento county sold with an FHA loan last year, so it’s a good idea to have your home ready for an FHA appraiser if you think your home might go FHA. Your agent can most likely bring you up to speed on some repairs that might be required or maybe look over an FHA list. Keep in mind 34% of all homes under $300,000 went FHA in 2016 in Sacramento County and the current FHA loan limit is $474,950. This is also a reminder that financed offers are closing escrow and actually far outweighing cash transactions.

9) The market isn’t the same at every price range: We like to think the market is doing the same thing in every price range and neighborhood, but that’s not true. For instance, the market under $300,000 is more aggressive than the market above $1.5M. Thus the market could be “hot” in one price range or neighborhood and cool in another. This is important to remember because all day long we read about how hot the market is in Midtown and how rents are rising there, but that same dynamic might not be present in your neighborhood.

10) Listen to your agent: In a market that feels aggressive it’s easy to ignore pricing advice from agents, so some sellers price at completely unrealistic levels. Despite values showing upward pressure in many price ranges, we are not in a market where you can command whatever price you want (even with anemic inventory). So if your agent is telling you where the market is and showing you similar sales and listings, ask yourself why you are not listening.

I hope this was helpful.

Sincerely,

Ryan

Questions: What piece of advice resonates with you? What is #11? Did I miss something? I’d love to hear your take.

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An open letter to buyers in an aggressive market

Dear Buyers,

Yesterday I talked with a few buyers who are in the trenches of the market. One is feeling frustrated at not getting offers accepted, and the other is starting to feel like affordability is beginning to vanish. I was actually taken aback with the sense of hopelessness felt by the latter individual, so I wanted to share some perspective as an appraiser when it comes to making offers in an aggressive-feeling market. Whether you are in Sacramento or elsewhere, I hope this helps. Any thoughts?

40519811 - empty notebook and pen on table

Advice for buyers in an aggressive market:

1. Shop below your price range: We are in a market where multiple offers are commonplace in many price ranges and neighborhoods. This means if you are qualified up to $300,000 and money is tight, you might want to consider homes that are priced $270,000 to $300,000 instead of just $299,000. This allows you some space in case there is a bidding war.

2. Expect to get beat: Sorry to be a downer, but you probably aren’t going to get into contract on the first home you offer on. Remember, real estate is a bit like dating. You often don’t marry the first person you go out with. So take heart and expect you’ll submit many offers until something sticks.

3. Know when listings usually hit the market: There is a season in real estate, just like there is a season for baseball, weather, or elections. It’s true inventory is sparse, but it’s also true listings don’t start to hit their stride until March through August. Sometimes February will be a stronger than usual month, but we still don’t see the bulk of what’s going to hit the market until May through July / August. If you don’t believe me, look at the light green listings below over the past few years. In short, don’t freak out in February if there isn’t much on the market. 

listings in sacramento - sacramento appraisal blog

4. Don’t let sensational headlines stress you out: Headlines these days often talk about how hot the market is, but my advice would be to read stories carefully and ask a few real estate professionals what they think too. For instance, one headline says “Sacramento will be one of the hottest markets in the nation” as values are projected to increase by 7% in 2017. This one story has seriously saturated the market and I’m hearing this sentence about everywhere I go. The irony though is a 7% price increase is about what happened in 2016, which means the headline could have just as easily said, “The market looks like it’ll do about the same thing this year.” I don’t say this to gloss over how competitive the market is, but only to highlight we need to read articles carefully and think critically rather than immediately stress out.

5. Don’t mistake low-ball pricing for the market: Some properties are attracting 15-20 offers, but my sense is when that happens it’s usually more about low pricing than the actual market. This week I saw a property listed at $290,000 that probably should have been listed at $350,000. We can look at the 15 offers and bemoan how intense it is out there or we can realize this one was priced ridiculously low.

6. Be careful of bidding up to “no man’s land”: While it’s plausible to think the contract price might get pushed up a bit with multiple offers, don’t forget to be realistic about what the home is actually worth. If you know you don’t have cash to pay for the difference between a realistic appraised value and the contract price, you might not want to offer that high then. Somehow you’re going to need to stand out as a buyer to the seller, but an unrealistic offer well beyond a reasonable value probably isn’t going to help you in the long run.

7. Realize cash doesn’t always win: There is a false idea that cash investors from the Bay Area are beating out financed buyers all the time – especially those bringing very little money to the table. The truth is 1 in 4 sales last year in Sacramento County were FHA buyers who put down 3.5% (or less if they used down-payment assistance). Keep in mind only 14% of all sales were cash during this same time. Moreover, 27.4% of all sales under $500,000 had FHA loans in 2016 in Sacramento County.

8. Find a way to stand out: There could be multiple offers, so you need to figure out a way to stand out and make a positive impression on the seller. Of course the strength of your offer is the first place to start, but beyond that find a way to make an emotional connection with the seller too if possible. I might recommend brainstorming ideas with your agent. When my wife and I bought a house a couple of years ago there was actually a higher offer on the property, but the seller accepted our offer instead. When touring the home we were fortunate to meet the seller and we hit it off a bit. During the conversation the seller mentioned her son was going to start at a new private school. Anyway, when we submitted the offer we wrote a personal letter complimenting the house and reminding the seller who we were. We also looked up the school and found it was $1400 per month. We then wrote in our offer we were going to give the seller an extra $1400 at the close of escrow to help pay for her son’s school (The underwriter actually freaked out because she’d never seen a buyer do that). I’m not saying you need to do something like this, but in our case it definitely made a huge impression. It showed that we listened, we truly cared, and we were very serious about the home. 

9. Listen to your agent: You probably know the market pretty well by now because you’re scouring listings in an obsessive compulsive way on Redfin, Zillow, and MLS. This also means you are most likely going to find your eventual home before your agent does. That’s how it works these days. Just remember finding the home is the easy part, but the most important thing your agent can do for you is negotiate on your behalf and offer professional guidance and advice along the way. Will you listen?

I hope this was helpful.

Sincerely,

Ryan

Questions: What piece of advice resonates with you? What is #10? Did I miss something? I’d love to hear your take.

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An appraiser’s take on that $250,000,000 house

Have you seen that house for sale at $250,000,000 in Bel Air? After checking it out I’m certainly taken aback with its features, but I also have some things on my mind as an appraiser. Let’s kick around some ideas together. Any thoughts?

Bruce Makowsky BAM Luxury Development

Image Source: Bruce Makowsky/BAM Luxury Development

1) Listings vs Sales: Let’s be real. This listing isn’t a big deal unless it sells. If it only sits on the market at $250M, then it wasn’t a $250M house. We say things like, “This is the most expensive house in the United States,” but it really might only be one of the most expensive listings unless it sells.

2) Fat Concessions: This house comes with enormous concessions. According to Bloomberg, the listing comes with “150 pieces of original artwork, $30 million worth of classic cars (owner’s estimate), a dozen high-performance motorcycles, and a deactivated helicopter.” At the very least the owner is giving the buyer $30M in personal property, so it starts to sound like we might be dealing with a $220M house instead. This is exactly why appraisers ask agents if there were any concessions or credits in the contract price. Would the house have sold at the same price if the personal property was not included? In other words, did the sale at $500,000 only close that high because there was a $50,000 car included in the sale? If all the comps are around $450,000 and there is one “Lone Ranger” at $500,000 (with a car), then we probably have to subtract that car out of the purchase price if we’re going to use it as a comp. Here’s more information on concessions.

3) Publicity & Overpricing: For the sake of conversation let’s assume this house is overpriced. On one hand the benefit of the sensational figure of $250M is the property has generated an incredible amount of publicity. That’s huge in real estate because it can help find the right buyer. But on the other hand, if publicity doesn’t lead to contracts, then it’s really just temporary attention. It’s like Eddie Murphy’s former house in Granite Bay that was listed for $12M in January 2014. The property got some air time and print for sure, but guess what? After 954 days it is still on the market for $12M. Thus we remember the importance of being priced realistically according to the market. Does the price line up with other competitive sales and current pendings / listings? Or is the property priced far differently than anything else that is similar? Whether values are increasing or declining, we have to ask these questions and pay close attention to realistic comps (that’s what an appraiser is going to do). In this case I really don’t know if the property is overpriced, but the inclusion of personal property  at $30M+ is a tell that it might be.

4) Bathroom Adjustment: This home has 38,000 sq ft and a whopping 21 bathrooms, so if we see a comp with 20 bathrooms, we should make a value adjustment, right? I mean, we were taught by our mentors to give a standard $5,000 or $10,000 adjustment any time there is an extra bathroom, so there has to be one. Okay, hopefully you get I’m being facetious. This example reminds us to not give token made-up adjustments for differences in bedroom count and bathroom count unless it’s really reasonable to do so (and there is support to do so in the market). In this case I would be shocked to see someone adjust such a petty amount because it’s not like billionaires walk in there and say, “Shoot, I would’ve paid $10,000 more if there were at least 22 bathrooms.” More on adjustments here.

I hope that was helpful or interesting.

Questions: What else stands out to you? What is #5? I’d love to hear your take.

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