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The housing market feels like chaos

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It feels like chaos out there. The housing market is on steroids and it’s mind-blowing to see such rapid growth lately. Today I want to unpack ten things I’m watching in today’s market. For my out-of-area readers, I’m guessing you are probably seeing the same trends. But please let me know. What is similar or different in your area?

MARKET UPDATE PRESENTATION: I’m giving a big presentation next week by Zoom for SAFE Credit Union. It’s free and you are invited to sign up here. It could be useful for background noise while working. Hope to see you there.

10 THINGS TO KNOW ABOUT THE MARKET

Skim or read in depth. The following post is organized around ten points.

1) PRICES ARE INSANE:

We’ve seen enormous price increases lately. It’s mind-blowing to see 20% increases because the market really was slowing down in recent years. Also, the median price in the region is up nearly 9% from two months ago in January.

Here’s a different way to look at prices. The orange line represents 2021. It’s an outlier market, right?

2) BUYERS MADE TWICE AS MANY OFFERS LAST MONTH:

Buyers made twice as many offers last month compared to the previous year. These figures are based on closed sales and MLS data.

3) MORE BUYERS ARE OFFERING 5-10% ABOVE THE ORIGINAL PRICE:

Here’s a look at what buyers are paying right now in relation to the original list price. One of the glowing stats is we’ve seen about five times as many buyers paying 5-10% above the original list price this year. Wild times, right? Of course only six percent of sales sold below the original list price last month too, which reminds us very few properties are overpriced. Yet nearly one in five sales sold at the original list price. I know, that almost seems like an error, but it’s really not because take a look at last year which represents what should be happening. As you can see if we were having a normal year we’d probably be seeing about half of all sales selling at the original list price. 

Takeaway: Be cautious about saying everything is selling 20% above the list price. The stats don’t support that claim.

4) HOUSING SUPPLY HAS BEEN CHOPPED IN HALF:

I feel like a broken record. Housing supply is about half of what it was last year. The truth is we have weeks of listings and months of buyers.

5) SALES VOLUME HAS BEEN UP FOR TEN MONTHS IN A ROW:

There aren’t enough listings out there to satisfy demand, but for ten months in a row buyers have been buying basically everything, which means we’ve been able to surpass numbers from last year. Some people don’t believe it when I tell them this, but it’s the truth. In short, it is not easy out there, but buyers are getting it done.

NOTE: I have images like these for Placer, El Dorado, and Sacramento County too. Send me an email if you need something.

6) MORE LISTINGS ARE FINALLY COMING:

We are starting to see more listings hit the market. It really is a normal seasonal amount so far, so it’s nothing to write home over, BUT during a pandemic anything that feels close to normal is something we covet. Granted, there are not enough listings to satisfy crazy demand yet or slow down the market, but at the least we’ve seen more lately.

Mortgage applications drop: Speaking of shopping for homes, for three weeks in a row we’ve seen mortgage applications drop. This seems to be a reflection of rising rates and prices lately and it’s one small metric to watch to get a sense of demand in the market. 

7) THE REST OF THE COUNTRY FEELS LIKE SACRAMENTO:

I love this image from Altos Research because it helps show depleted inventory is something happening across the entire country. This is a good reminder because it’s tempting for locals to blame the aggressive market on Bay Area buyers when in fact many markets feel just like this. I’m not diminishing the reality of what seems like increased Bay Area migration, but let’s not forget we’re seeing an ultra-competitive market almost everywhere due to crazy low rates and anemic housing supply during the pandemic.

8) IT’S NOT A DISTRESSED MARKET:

There is so much talk about a coming foreclosure wave, but for now it doesn’t look like there is one on the horizon as forbearance rates are heading in the right direction. We are still in the thick of the pandemic of course, so we are certainly not out of the woods. All I’m saying is I’d recommend being cautious about embracing a doom and gloom narrative because so far the stats don’t support this idea. Let’s stay tuned though. And for the record I will be the first to change my narrative if the stats change… In terms of distressed sales at the moment, we really have bottomed out. It’s hard to get too much lower than 0.39% of sales being bank-owned and 0.30% of sales being short sales.

9) HUGE GROWTH AT THE TOP:

The market is very much top heavy right now. What I mean is we’ve seen explosive growth at higher prices – especially above $1M. This is a dynamic being mirrored in many markets across the country too.

BIG TAKEAWAY: When talking about price stats being 20% higher it’s important to realize some of that growth has to do with the types of homes selling. In short, less at the bottom and more at the top naturally elevates price stats.

10) CONVENTIONAL IS MORE DOMINANT THAN CASH:

The narrative is that cash buyers are gutting the market, but it’s not technically true. Cash really isn’t king these days because it’s so cheap to borrow money. Locally we’re seeing 7 out of 10 sales go conventional. BUT cash is absolutely winning when conventional buyers can bridge the appraisal gap and offer other incentives to the seller. It’s not so easy to get an FHA offer accepted either, but at least 1 out of 10 sales were FHA last quarter.

BONUS: Here are two visuals to show what the median price looks like over the past few decades. In one visual I adjusted for inflation too (which can be an important consideration when comparing today with 2005). Here are some thoughts on how long this market can keep going.

Other visuals: Not that you needed more, but check out my social media in coming days and weeks for extra visuals and commentary. I am posting daily stuff on Facebook, Twitter, and LinkedIn. Oh, and sometimes Instagram.

Thanks for being here.

Questions: What stands out to you about the market lately? I’d love to hear your take.

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An explosion of appraisal waivers. Is that good or bad?

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Appraisal waivers have really exploded in recent years – especially during the pandemic. But how many are there exactly? Let’s look at actual numbers to walk away with some perspective. These stats are from January 2021 from AEI.

QUICK SUMMARY:

  • 47.4% of all Freddie Mac loans had a waiver
  • 44.5% of all Fannie Mae loans had a waiver
  • Waivers are far more common during refinances
  • Only 10-12% of purchases had an appraisal waiver in January
  • Non cash-out refinances have the most waivers (67-69%)
  • The higher your loan-to-value, the lower your chance of a waiver
  • Waivers have seen a dramatic increase during the pandemic

NOTE: This post is not about buyers removing the appraisal contingency. That is in a sense a “waiver”, but the topic here is Fannie Mae and Freddie Mac not requiring an appraisal.

What else do you see?

CLOSING THOUGHTS:

1) Crazy growth: It’s astounding to see nearly half of all loans getting an appraisal waiver, though for now most of these are refinances instead of purchases. Honestly, I would have guessed the purchase numbers were a little higher than reported.

2) Seeing numbers: What real estate professionals experience with appraisal waivers with their clients can really vary. For instance, if you work with FHA borrowers putting very little down, you probably don’t see many waivers, but if you work with conventional buyers putting 30-40% down, you’re going to see more. This is why seeing actual stats is so important.

3) There is place & danger: I’ll be the first to admit there is a place for appraisal waivers in today’s market. That may not sit well with some colleagues, but I don’t have a problem seeing them occur with no cash-out refinances where owners have massive equity. That’s a no-brainer. The danger comes when we start seeing too many appraisal waivers happen in the purchase market especially. The concern is waivers can essentially artificially inflate prices by helping some properties close higher than they should.

4) Big data favoring people with more money: Appraisal waivers are being given to people bringing more money to the table. That’s what the stats show and I get it from a risk standpoint. But with so much conversation about equality in real estate, I guess I find it ironic to see a waiver system implemented that is clearly giving more advantage to people who already have more wealth.

Thanks for being here.

SPEAKING GIGS CLARITY: Lately I’ve been getting asked to give in-person presentations, but I’m not there yet. I’m not vaccinated, so my answer will be NO until that happens. But then I’ll have to see how comfortable I feel too. For now I’m glad to speak by Zoom. Just a heads-up.

Questions: What stands out to you above? What are the positives and negatives of appraisal waivers? I’d love to hear your take.

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Skyrocketing prices aren’t happening everywhere

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The market is ultra hot, but it’s NOT the same speed everywhere. It’s tempting to impose the idea of a blazing market on every single neighborhood and property type, but that’s a quick way to get into value trouble. Let me share exactly what I mean by looking at the condo market. If you are not local, are you seeing something similar in your area? 

BIG POINT: The condo market is NOT showing skyrocketing prices like the rest of the single family market this year.

1) Slower price growth The median price for single family detached homes in 2021 is up a whopping 18.3% so far in the Sacramento region. In contrast, condos are only up 9.7% so far. Yes, I just said they’re only up 9.7%. I know how that sounds, but that’s about half the growth we’ve seen in the rest of the market. In short, condos have definitely been increasing, but the speed is WAY slower.

2) Condos are still moving quickly though: Even though condo prices aren’t rising as quickly, they are still selling about as fast as single family detached homes. This reminds us the market moving quickly doesn’t always mean we’re seeing rapid price growth.

3) The pandemic x-factor: Everyone wants that perfect backyard paradise to quarantine in style (especially with a pool). This sounds like a rosy made-up narrative, but the stats actually back it up. If you didn’t know, condo sales volume dropped 10% from 2019 to 2020 in the Sacramento region, so clearly buyers turned their gaze away from condos. 

4) BUT condos represent affordability today: So far in 2021 condo volume has been up slightly for the first two months compared to last year. Remember, condos represent one of the most affordable products in the market, so with skyrocketing prices in the single family detached world, a condo may represent a more viable option for some buyers today. Keep in mind there aren’t many condo sales each month, so we need a few more months to see if this is a solid trend or just a fluke for the first two months. In other words, don’t write home over this, but let’s stay tuned because this could be interesting. 

APPLICATION STEP: When valuing properties in today’s lopsided market, be sure to look at actual comps and pendings in the neighborhood rather than imposing a hot headline on the market. 

By the way, here’s a YouTube Live conversation I had with Matt the Mortgage Guy yesterday. Enjoy if you wish (it’s an hour).

Thanks for being here.

Questions: What stands out to you about the points above? What are you seeing out there right now? I’d love to hear your take.

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The housing market feels like a crazy auction

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This market is just crazy. Today I have two quick things on my mind and then for anyone interested I have lots of visuals to highlight the Sacramento market.

TWO THINGS:

1) This market feels like an auction: The market feels like an auction where buyers are making really aggressive bids with the hope of winning due to being the highest. Throughout the country we are seeing offers in many markets that are totally disconnected from a reasonable value. On that note someone asked if appraisals need to change so buyers have a better chance of getting deals done in this crazy environment. Nope. The appraiser’s role is to reflect the market, which very likely might not be the highest bidder. Don’t get me wrong, there are many things that need changing in the appraisal profession, but it’s not the appraiser’s job to fix an irrational dynamic in today’s market.

2) Do higher rates matter? I’ve heard the sentiment quite a bit that rising rates really don’t matter. The idea is the market is so hot and nothing can cool it. But I feel like the housing market could say, “Hold my beer.”

Here are a few considerations:

A) No difference yet: Higher rates haven’t slowed down buyers. If anything locally the market has become more aggressive. For reference, purchase mortgage applications increased from the previous week nationally.

B) Still too low: Rates around 3% are freakishly low and that’s just not high enough to alter the market. But what about 3.5%? Or 4.0%? Can you imagine a time when higher rates would matter?

C) Watch mortgage applications: The MBA reported a 43% dip in refinance application volume last week, so clearly borrowers have pumped the brakes a bit. The purchase market is up 2% from last year, but it looks like mortgage applications decelerated last week per Freddie Mac economist Len Kiefer.

D) Rosy narratives & sensitive to rate changes: Over the years the real estate market has become very sensitive to rate changes. I think of 2018 when rates shot up closer to 4.5% and buyers backed off the market. Do you remember the headlines about how dark real estate felt? I share this because recent history reminds us rate changes can make a difference in whether buyers engage or not. My advice? Don’t embrace a rosy narrative to think higher rates cannot change things. They can. Maybe not yet. But let’s not downplay how meaningful low rates have been in creating the market we have right now. Know what I’m saying?

NOTE: Props to a conversation with Ann O’Rourke last week that influenced the auction analogy above.

———————- (skim or digest slowly) ———————–

BIG MARKET UPDATE

For those interested, here’s a big Sacramento market update:

THE SHORT VERSION:

Here is a highlight reel to talk through some of the bigger themes right now. In short, the stats are stunning and this is likely the most competitive market we’ve ever had. Demand is simply excessive while supply is anemic.

QUICK RECAPS:

I’m thinking about doing these charts every month. Do you like them?

NOTE: I’m not going to do Yolo or El Dorado County charts because there aren’t enough sales. Stats would be ALL over the place year over year.

THE LONGER VERSION (organized by county):

1) Sacramento Region
2) Sacramento County
3) Placer County
4) El Dorado County

I welcome you to share some of these images on your social or in a newsletter. Please use this stuff. In case it helps, here are 5 ways to share my content (not copy verbatim). Thanks.

1) SACRAMENTO REGION:

2) SACRAMENTO COUNTY:

3) PLACER COUNTY:

4) EL DORADO COUNTY:

Other visuals: Not that you needed more, but check out my social media in coming days and weeks for extra visuals. I am posting daily stuff on Facebook, Twitter, and LinkedIn. Oh, and sometimes Instagram.

Thanks for being here.

Questions: What else would you add about my two quick topics above? What stands out to you about the market lately? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.