10 things to know about low housing inventory

Inventory is low. Really low. That’s one of the big stories right now in real estate, so I wanted to spend some time kicking around some thoughts. Let’s take a look at ten things to know about housing supply in Sacramento. If you aren’t local, I hope you can still find some value. Do you see any parallels to your market? Any thoughts? 

DOWNLOAD 50 graphs HERE: Please download new market graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

10 THINGS TO KNOW ABOUT LOW HOUSING INVENTORY

1) Housing inventory is clearly on a declining trend.

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

Housing supply has been vanishing over the past few years in light of greater buyer demand, sellers sitting instead of selling, less new construction, increasing sales volume, and other reasons.

2) Housing supply is really sparse (except at the top).

inventory - March 2017 - by home appraiser blog

Housing supply was low last year, but this year it’s 15-20% lower. Having less listings means it’s really competitive for buyers – especially under $400,000. However, inventory is not low at every price range as there are far more listings at the top. Before freaking out though, this is actually a normal trend we see almost every single month. But the disparity between under $500,000 and above $1,000,000 is striking. As an FYI, it’s worth noting the top of the market does feel a bit soft.

3) Inventory is still not as low as the Blackstone days.

inventory in sacramento county Since 2011 - by sacramento appraisal blog

It’s true that inventory is anemic, but we have to remember during 2012 and 2013 it was at one month for nearly an entire year when Blackstone and other investors were gutting the market. I mention this because while the market has an aggressive feel, it’s still not what it was. If inventory persists in declining though it will be a bloodbath in terms of competition for buyers (good for sellers though as a developer mentioned to me on Twitter). 

4) Inventory was 1400% higher ten years ago during the “bubble”.

inventory in sacramento county Since 2007 - by sacramento appraisal blog

Ten years ago during the worst of the real estate “bubble” popping we had a 14-month supply of homes for sale (as opposed to one month now).

5) Bank-owned inventory is not a driving factor today.

REOs and Short Sales Sacramento County - by Sac Appraisal Blog

Eight years ago over 70% of all sales in Sacramento County were REOs, but that number is now about 3%. Some folks promise a new “foreclosure wave”, but it’s definitely not here right now.

6) Low inventory is putting pressure on values to increase.

Median price since 2013 in sacramento county

Declining inventory over the past few years is a big factor in rising prices. Right now values are about where they were at the height of last summer (or slightly higher) after a lull in the fall in many neighborhoods in Sacramento County. But let’s not make the mistake to think the market is doing the same thing everywhere. The truth is in some areas increases have been modest at best over the past year while some price ranges feel flat, but the bottom of the market is hands-down experiencing the largest increases. Remember, in some price ranges the market feels more aggressive than actual value increases too, so it’s really important to sift through emotions, look at actual numbers, and not overprice because the market is “hot”. A good mantra for some areas is “Aggressive Demand, Modest Appreciation.”

7) Strong demand is a huge reason why inventory is declining:

price metrics since 2014 in sacramento county

Demand is strong right now for both buying and renting, and buyers and tenants are simply gobbling up almost anything out there (I say “almost” because buyers are still sensitive about adverse locations and overpriced homes). Thus it’s not surprising to see the median price is 7% higher than last year, the average sales price is 9% higher, and the average price per sq ft is about 9% higher. Prices increases from February to March were anywhere from 1-3% depending on the metric (this doesn’t mean values went up by 1-3% though). 

8) Increasing sales volume is one reason for lower inventory.

Cash in Q1 - by Sacramento Regional Appraisal Blog

Housing inventory is the relationship between sales and listings, so if there are more sales and no real change in the number of listings it will naturally mean inventory as a metric will show a decline. Look at the graph above to see all sales since 2013 for the first quarter of the year. Can you see how sales volume is increasing? At the same time we see cash volume declining. This reminds us the market is trying to figure out what normal looks like. It’s healthy to see sales volume growing.

9) Low interest rates have helped take homes off the market.

Interest Rates Since 2008

Historically low interest rates have played a big role in shaping inventory in that some owners are sitting on a 3.5% interest rate from years ago and they are simply not going to move unless necessary. Why would they anyway if their replacement home would come with a much higher mortgage? This means there are fewer homes hitting the market that might otherwise sell.

10) Low inventory is causing homes to sell faster.

CDOM in Sacramento County - by Sacramento Regional Appraisal Blog

Last year it was taking 5 days longer to sell a home and two years ago in March 2015 it was taking 15 days longer to sell a home. Can you see how low inventory makes a difference in how long it takes to sell? By the way, here is CDOM by price range. As you can see, the higher the price the longer it takes to sell. Just because it is a “hot” market does not mean every property is selling in 3 days.

BIG MONTHLY POST NOTE: Once a month I do a big market update (and it’s long purpose). Normally I talk about Placer County and the Sac Region too, but I tore my MCL a few weeks back, so I only had time to focus on Sacramento County in today’s post. Next month I’ll likely be back to normal (but I may change it up too).

DOWNLOAD 50 graphs HERE: Please download new market graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: Did I miss anything? Any other thoughts as to why inventory is low? How would you describe the market right now? I’d love to hear your take.

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What’s your housing shtick?

It’s easy to fall into the trap of saying one thing about the housing market. Just as a comedian has a shtick, or regular performance, we can get into the routine of talking about real estate based on one big idea about what the market is doing or will do. Let’s consider some examples. Which one(s) are you? Any thoughts?

37841087 - overhead of office table with notebook, computer keyboard and mouse, tablet pc and smartphone. copy space

Doom & Gloom:  The market is going to crash like it did 10 years ago.

Corrector:  Values will correct but not implode.  

One-Metric Wonder: The market will turn as soon as this one thing happens.

Normal: The market is normal and not in a “bubble”.

Mr. Buzzword: The market is headed toward a “shift” in the future.

Polly Pollyanna: It’s always a good time to buy and sell. Everything is always good.

Specific Year Guy: This year is going to be the one where values turn.

Mrs. Cyclepants: The market has a 7 year cycle and it’s about up.

Foreclosure Prophet: Another foreclosure wave is coming. Just wait.

Headline Regurgitator: This person says whatever the latest headlines say.

Spinster: Any negative aspect of housing is spun into something positive.

The Feeler: I feel like the market is strong and will be in the future.

Crystal Ball: This is exactly what the market is going to do.

Broken Crystal Ball: Nobody knows the future including me.

If we’re honest we might identify with several shticks above. That’s okay. I’m not saying there’s something wrong with that, but let’s be challenged to consider what we say and not get locked into conveying only one thing about the complex housing market. Moreover, let’s be cautious about imposing clichés and ideas on the market because it’s easy to miss trends that way. At the same time let’s not be naive by refusing to consider the future. My advice? Pay attention to the numbers and know them well enough to quote, know what is normal and not for the time of year, remember that values might be moving differently in various price ranges and neighborhoods, and find ways to talk about current values in specific terms while keeping an eye on the future (instead of focusing entirely on the future).

My knee & market update post: Some of you may know I hurt my knee in a snow tubing accident 10 days ago. I have an MRI next week, but for now the doctor thinks I may have torn my meniscus. Anyway, I normally do my big market update between the 10th and 15th of the month, but I can’t swing it this week since I took last week off and I’m basically playing catch-up with all my reports this week. I’m just grateful to be at my desk again. Anyway, I will be 100% up and running (not literally) next week, and I’ll get to my big update then. Thanks for your understanding.

Questions: Which shtick stands out to you most? Any others to add? Did I miss something? I’d love to hear your take.

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Is it okay to share a previous appraisal with the appraiser?

I was asked a great question recently. Is it okay to share a previous appraisal with the appraiser? I would say YES and NO. Here are a few thoughts. Anything to add?

Sacramento Appraisal Blog- sharing a previous appraisal

1) Data: It can be valuable at times for an appraiser to see what a previous appraiser did, especially if the property is complex. After looking at a colleague’s work, an appraiser might pick up on some insight or glean ideas for how to approach valuing the property. This happened to me a few years ago as I found out about an important easement and an illegal structure after an attorney gave me a copy of a previous appraisal. I still had to make sure the appraiser was correct, but it was nice to get a heads-up by someone who did a great job a couple of years prior.

2) The only appraisal that matters: We have to realize the only appraisal that really matters is the one the current client is going to rely on. A previous appraisal might not cut the mustard so to speak, so sharing something that isn’t any good doesn’t mean much for the current appraiser. For example, I was asked to appraise something for a private loan and the owner shared a previous appraisal with me at $1.2M. Yet this appraisal done during a conventional refinance was definitely inflated by a good 20% unfortunately. Keep in mind a previous appraiser might have included a detached structure’s square footage within the square footage of the main house, but just because it played out that way before does not mean it should happen now (I have a blog post on that here). Also, just because it appraised at a certain level before does not mean a new appraiser is going to think that is anywhere near acceptable. 

3) Sharing a specific number: I was recently hired to appraise a property for a cash buyer and there was an appraisal done already from a prior buyer’s loan. The Listing Agent told me, “We had an appraisal done at $425,000 two weeks ago”, though I was not provided the appraisal. This to me seemed like more than anything the agent was trying to influence my value. I’m not saying the agent was slimy or unethical at all. I’m just saying had the agent said, “We had a previous appraisal done. You are welcome to see it if you want,” it would have felt much more like the agent was making data available rather than subtly suggesting the contract price was a reachable target for value. This might sound like I’m playing semantics or being anal about words, but the words we choose matter, and how we say things can be interpreted as influencing an appraiser or not.

4) Difference among appraisers: Some appraisers will not accept a previous appraisal because they feel like it might impact their objectivity, but others will. I don’t think there is a right or wrong answer here as everyone needs to walk out their own sense of morality. Personally I tend to accept previous appraisals in most cases because I like to see how a colleague handled a valuation and I like to double-check my sketch measurements. Moreover, sometimes it helps me prepare my report because the client might be expecting a wildly different value than what is able to be supported. Yet if an appraisal was presented to me in such a way as to influence my value or pressure me to “hit the number”, I would definitely decline and simply say “No thanks. I don’t want to see it.”

Recommendation: In short, in my opinion it’s okay to share a previous appraisal with an appraiser, but it really matters how it is done. If you have a previous appraisal, I might suggest you use my Appraiser Info Sheet to share information appraisers tend to ask about, and then say nothing more than, “I have a previous appraisal if you want to see it.” If the appraiser doesn’t want it, that’s fine. If the appraiser does, that’s fine too.

Questions: What is #5? Which point stands out to you most? Did I miss anything? I’d love to hear your take.

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5 things to keep in mind about rising rates and values

Rising interest rates is one of the big topics right now in real estate. I don’t know about you, but I find myself having rate conversations all the time, so I thought we could maybe kick around some thoughts. Anything to add?

rates and value - sacramento appraisal group

5 things to consider about rising rates and values:

1) Duh, values will soften: Rising interest rates can affect the ability of buyers to afford higher prices because mortgages become more expensive (thanks Captain Obvious). Unless there is another factor to help prop values up, rising rates can naturally lead to softer values. To be fair though, let’s remember rates are not the only driving factor to make value go up or down in real estate.

2) Demand is strong enough: Rising rates can certainly impact affordability, but the interesting part to consider is we have a shortage of housing inventory. This means there is actually room for some buyers to completely leave the market (or be priced out) because there would still be enough buyers left to afford higher prices. On one hand I am very skeptical of articles that say rising rates will not impact buyers at all because that sounds like spin. Yet we do have to entertain the reality of demand being strong enough to a certain extent to deal with some rate increases without much value change (assuming modest increases of course).

3) The squeeze on lower-end buyers: In a market with rising rates, it’s buyers with less money that will be impacted the most because some buyers are on the brink of struggling to afford the market already. Thus an increase in interest rates that makes a $100 or $200 difference in a mortgage payment can be a very big deal for someone on a tight budget. Moreover, buyers with larger down payments simply have more power when making offers, negotiating, paying beyond appraised value, etc…. But before we start saying buyers putting less money down cannot play the real estate game, let’s look at actual stats. If you didn’t know, 25% of all sales last month in Sacramento County were FHA (very low down payment required) and nearly 29% of all sales under $400,000 went FHA. It’s easy to say things like, “Buyers without real money down are not winning in this market,” but the stats say otherwise.

4) Lenders getting creative: When rates rise it can put pressure on lenders to get more “creative” in their financing so more buyers can keep playing the market. In other words, lenders can help buyers artificially afford higher prices with newer and looser loan programs that compensate for higher rates. Part of me hopes lenders put movies like The Big Short and Inside Job in their Netflix queue just to remember how much power they truly have when it comes to making markets move. On a realistic level though, the lending market probably could loosen up a bit in a healthy sense since the regulation pendulum swung very far after the “bubble” burst. For anyone who has tried to get a loan recently, you know how rigorous and stressful it is. Simply put, getting a loan is not as easy as pushing a “rocket” button on a smart phone app.

5) Pressure to buy “before it’s too late”: Many buyers feel pressure to get into the market before rates get too much higher, and that’s a dynamic likely to persist throughout this year as discussions about rate increases ensue. It’s as if buyers feel like they have a small window of time to act before they are forever doomed and shut out of the housing market. What do you think of that? What advice or wisdom would you share with buyers feeling this way?

Questions: What is #6? How do you think rising rates will impact the market? Did I miss anything? I’d love to hear your take.

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