4 things to remember about increasing values and low inventory

Let’s talk about increasing values and low inventory. ‘Tis the season for this conversation because the market is heating up right now as we are on the cusp of spring. Here are a few things that have been on my mind, and then a huge local market update after that (for those interested). I’d love to hear your take in the comments below. Any thoughts?

values in real estate - sacramento appraisal blog - image purchased and used with permission from 123rf

  1. Front Loaded Market: In a normal market prices tend to heat up in the spring and soften in the fall. While this isn’t true everywhere in the United States (or for every year or type of property), this general reality reminds us that value increases are often loaded into the front part of the year rather than throughout the entire year. For instance, if values increased by 6% last year, it doesn’t mean value went up by 0.5% each month. Instead, any increase in value might actually have occurred from February to June.
  2. Rapid Appreciation: I’ve been hearing lots of chatter about rapid appreciation lately. The idea is the market has increased substantially in value over the past couple months and appraisals are lagging behind the trend. I know low appraisals are a reality, and if appraisers aren’t giving upward adjustments for value increases (when warranted of course), it can lead to conservative appraisals that probably reflect the market two months ago rather than right now. Whatever the case, the Sacramento market has felt extremely competitive lately because of freakishly low inventory, though actual value increases seem more nominal for the spring rather than exponential. Yes, there are some properties that have been bid up 10% or so, but those properties were probably priced far too low since increases that large have not typified this market. Moreover, sometimes markets feel more aggressive than they actually are, so a market’s mantra might be: “Aggressive demand, modest appreciation.”
  3. Not Every Neighborhood: Some neighborhoods and price ranges are trending differently than others. I know that sounds obvious, but it’s worth mentioning because it’s easy to lump all areas and price ranges together. For instance, the median price in the regional market last month increased by 2.5%, but that doesn’t mean values increased by 2.5% in every single neighborhood or price range. When valuing a property, we can keep an eye on trends from the wider area, but at the end of the day we need to look at competitive sales and listings in the subject property’s particular neighborhood. What is the competitive market doing in the neighborhood? If we impose the notion that “values increased by 2.5% last month” on every neighborhood, we’re probably going to make some valuation mistakes.
  4. Less New Construction is Starting to Matter: When the economy collapsed, new home construction sloughed off and has not yet recovered anywhere close to where it was during the glory years from say 2003 to 2005. This might not seem like a big deal, but now imagine the population has grown over the past 10 years, which essentially means there are now less available housing units for a larger population. On top of this, institutional investors bought homes in recent years and are holding on to them instead of selling. Moreover, some owners purchased several years ago are sitting on a sweet 3.5% interest rate and a low mortgage payment. Why would they sell in today’s market unless they really had to? Not all areas in the country are struggling with low inventory, but a lack of new home construction in recent years is actually a big deal, and it’s certainly contributing to a lower housing supply in many markets including Sacramento. Lastly, when there are less housing units for the population, it tends to create an environment where rents increase. This is an important trend to watch.

Any thoughts? I’d love to hear your take below.

—————– For those interested, here is my big market update  —————–

Big monthly market update post - sacramento appraisal blog - image purchased from 123rfTwo ways to read the BIG POST:

  1. Scan the talking points and graphs quickly.
  2. Grab a cup of coffee and spend a few minutes digesting what is here.

DOWNLOAD 70 graphs HERE:
Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

Quick Sacramento Market Summary: The market in February was fairly normal in Sacramento. Values saw a modest seasonal uptick, sales volume increased, and inventory declined. This was all expected because it’s what we normally see at this time of year. But while market stats are more on the tame side, the market has felt anything but that in the trenches of house hunting. Multiple offers are commonplace and buyers are seeming to exude a 2004-ish frenzy to get into contract before values rise too quickly (does that concern anyone?). Despite housing inventory being extremely tight, properties that are priced too high are sitting instead of selling, and that reminds us how price sensitive buyers have become. The market is definitely a sellers’ market, though that doesn’t mean sellers can command any price they want. It’s interesting to note it took 12 less days to sell a house this February compared to last February, and only 3.4% of all sales in the region last month were short sales. One last thing. There is a big difference in the mood among buyers when mortgage interest rates are closer to 3.5% compared to even 4.0%, so watch rates and the market closely.

SACRAMENTO COUNTY:

  1. It took an average of 46 days to sell in both February and January.
  2. It took 12 less days to sell this February compared to last February.
  3. Sales volume was nearly identical in February 2016 compared to last February.
  4. FHA sales were 24% of all sales last month.
  5. Housing inventory is 25% lower than it was last year at the same time.
  6. The median price increased by 6.7% last month (take that w/ a grain of salt).
  7. The median price is 6.7% higher than the same time last year.
  8. The avg price per sq ft increased by about 1% last month.
  9. The avg price per sq ft is 6% higher than the same time last year.
  10. Sales volume in 2016 is roughly the same as the same time last year.

Some of my Favorite Graphs this Month:

Median price since 2013 in sacramento county

inventory - February 2016 - by home appraiser blog

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

CDOM in Sacramento County - by Sacramento Appraisal Blog

Median price and inventory since 2001 by sacramento appraisal blog

market in sacramento - sacramento appraisal group

SACRAMENTO REGIONAL MARKET:

  1. It took 1 day longer to sell a house last month than January.
  2. It took 12 less days to sell this February compared to last February.
  3. Sales volume was 2% lower in February 2016 compared to last February.
  4. FHA sales were 22% of all sales last month.
  5. Short sales were 3.4% and REOs were 4.8% of sales last month.
  6. Housing inventory is 20% lower than it was last year at the same time.
  7. The median price increased 2.5% last month from the previous month.
  8. The median price is 3% higher than the same time last year.
  9. The avg price per sq ft declined slightly last month (less than 1%).
  10. The avg price per sq ft is 7.9% higher than the same time last year.

Some of my Favorite Regional Graphs:

sales volume 2015 vs 2016 in sacramento placer yolo el dorado county

sacramento region volume - FHA and conventional - by appraiser blog

months of housing inventory in region by sacramento appraisal blog

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

median price and inventory in sacramento regional market 2013

number of listings in sacramento regional market

PLACER COUNTY:

  1. It took 7 more days to sell a house last month than January.
  2. It took 6 less days to sell this February compared to last February.
  3. Sales volume was 4% lower in February 2016 compared to last February.
  4. FHA sales were 20% of all sales last month.
  5. Cash sales were 19% of all sales last month.
  6. Housing inventory is 17% lower than it was last year at the same time.
  7. Sales volume is up 2.5% this Jan/Feb compared to last Jan/Feb.
  8. The median price increased 2.5% from the previous month.
  9. The median price is up nearly 11% from February 2015.
  10. Short sales were 1.5% and REOs were 4.3% of sales last month.

Some of my Favorite Placer County Graphs:

days on market in placer county by sacramento appraisal blog months of housing inventory in placer county by sacramento appraisal blog number of listings in PLACER county - January 2016 Placer County housing inventory - by home appraiser blog Placer County price and inventory - by sacramento appraisal blog Placer County sales volume - by sacramento appraisal blog

I hope this was helpful and interesting.

DOWNLOAD 70 graphs HERE:
Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

Questions: Any other points to add about increasing values or low inventory? What stands out to you about the latest stats in Sacramento? I’d love to hear your take and what you are seeing in the trenches.

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Comments

  1. says

    I like the you wrote about the market being front loaded. Many people do not understand that when we come out of the winter, prices often jump because of the normal seasonal decline plus the spring appreciation starts to accumulate. That can make for a big jump in price (in relation to annual price increases) over only the first few months of the spring. Convincing a skeptical lender of this rapid appreciation (need for a large adjustment) in an appraisal can be difficult as well because the data lags behind the market by a few months.

    • says

      Well said, Gary. I’m glad you made this comment. Thank you. You are so right about how spring tends to unfold. At times on paper it looks like the market has increased exponentially in the early spring, but sometimes prices are simply getting back to their peak from the summer (plus some) after prices faded during the fall. Like you said, there can be a real lag in the data. The market might be higher, but on paper the most recent sales don’t yet reflect that because these properties got into contract in the fall during a lull. This is where it’s critical to look closely at pendings and listings to help diagnose where the market is at. The tricky part is that sometimes the market might increase rapidly as I mentioned above. I don’t believe that is the current market in my area at least, but in 2013 values were increasing exponentially during the first few months of the year. It was not easy for appraisers or agents to figure out the market during that time.

  2. says

    Great observation and comments Ryan on the value trends in the front loaded market. Your #3 point on the neighborhood analysis is spot on. Nice job on the market update graphing !

    • says

      Thank you so much Wendell. #3 is a big reality. This reminds me of Tom Ferry’s question when someone asks him how the market is doing. He says something to the effect of, “Which market? Are you interested in buying, selling, renting, or investing?” His question is obviously tactical, but for me it evokes the reality there is no one market answer that will apply to every single property in a given market. I appreciate the kind words since you are a Jedi of graphing. I’ve been enjoying hearing about Florida trends on your blog. 🙂

  3. says

    Great info. Ryan. While it is obvious, I like what you said about appreciation rates not being the same for all areas. One thing I don’t like about national news of the real estate market is that local real estate agents use that info to gen up business by transferring what is happening on the national level to the local market, which just doesn’t work. You do a great job of providing local market info. to people in your area. Keep up the good work.

    • says

      Thank you so much Tom. Excellent point and example of how easy it is to apply larger trends to a different context. I agree that can be dangerous for value. This conversation reminds me how Jonathan Miller is always saying there is no such thing as the national housing market because the “national” market is really thousands of local markets. While there is value in seeing the “national” trend, it really might not reflect one’s local trends at all. After all, what is happening here in Sacramento might be far different from your neck of the woods in Birmingham. As always, thanks Tom.

    • says

      Hi Matt. Thanks for the comment. There are many new construction projects all throughout Sacramento, but many of them tend to be infill projects or builds from projects that were meant to be built in say 2007, but the economy collapsed. It’s a good sign that building permits have been higher recently based on the articles I’ve read, but they’re nowhere near where they were. For instance, from 2003 to 2005, there was explosive growth in the building industry, but we just don’t see that type of market right now. I don’t have stats in front of me, but our market seems to follow this piece from Calculated Risk. You can see new housing starts are up from say the past few years, but they are down very significantly compared to where they were about 10 years ago. This post has some great graphs for any onlookers who want to see some perspective. http://www.calculatedriskblog.com/2016/03/housing-starts-increased-to-1178.html.

      It’s hard to say what will happen in coming years. We’ve been seeing modest growth. There is certainly a need for more housing units, though the cost to build has increased in recent years too, and that doesn’t help. I’d love for any builders or building organization to pitch in their two cents.

  4. TJ Vargas says

    What would you say might be major differences between the front loaded growth of spring 2016 and the spring of 2013 when the growth continued into the next year? Do you think the scare of interest rate increases are fueling this?

    • says

      Hi TJ. Great question. Thanks for asking. First, I think you might mean 2012 instead of 2013 since that’s the year when there wasn’t really a seasonal market. When values bottomed out and investors began gutting the market in 2012, values kept increasing through the second quarter of 2013. After about June though, the market got very stale and had a definitive dullness in the latter part of the year since cash investors (a steroid for the market) backed off. We did see some incredible value increases though in the Sacramento area in early 2013. So what is the difference between 2013 and right now? A few things:

      1) Inventory was at one month of supply in 2013 for multiple months in a row and it’s now closer to 1.5 months. This might not sound like a big deal, but it makes a big difference in the feel of the market.

      2) Investors are no longer driving the market like they were doing in 2013.

      3) Interest rates were slightly lower in 2013 than they are now. They’re obviously still low though in today’s market, but the difference from 3.5 to 4.0 is noticeable. And yes, I think the fear of rate increases is fueling buyers as well as the fear of being priced out of the market. Anyone in the market now knows too it’s not easy to get into contract at some price ranges, so experiencing that is also a factor.

      4) The market in 2013 saw multiple offers on about everything. We are seeing something similar in today’s market, though it seems more tame so far. The value increases were very aggressive in 2013. In fact, I would say we saw nothing short of rapid appreciation during that time. So far I’m not willing to commit to saying we are seeing the same thing right now, though it is feeling very aggressive at certain price levels. The lower end of the price spectrum is very “hot” so to speak since it has the least amount of inventory and probably a larger percentage of buyers. Not all price ranges are like that though.

      We’ll see how the market unfolds later this year. What we are saying in 30 to 60 days could be different than what we are saying today. That’s always the interesting part. Any other questions or insight? I’d love to hear your take.

      • says

        One more thing I forgot to mention. A big difference between Q1 2013 and Q1 2016 is the sales to list price ratio. In 2013 it was consistently between 100 to 101, but right now it’s been closer to 98. This again might not seem like a big deal, but it’s an important indicator that the current market as not as aggressive as it was then (so far).

      • TJ Vargas says

        Ryan I really appreciate the clarity that you are trying to provide to people through this blog. I am not a real estate person by any means. i am just starting to get interested in homes as a first time home buyer at the age of 30. I do come from a forecasting background though. I have some experience in energy markets, which has a lot less variables then the housing market, but it is still driven by underlying principles. You were correct by referencing 2012 vs 2013 to 2016.

        I agree with everything that you are mentioning, but what really strikes me is #4.)
        My wife and I have been interested in homes of the more “hot” Sacramento area (Tahoe Park, Elm Hurst, Midtown, East Sacramento, Etc). Since watching the market since November while trying the building savings, I thought that the homes in those area hadn’t really fully recovered from the all time peak. But every eligible property in the 300k – 425k range is extremely competitive. Our realtor took us around to 5 homes that I picked out, and they all pretty much were gone after being on the market a couple of days.

        The reason why I asked my question is: I am not sure if those core areas won’t return to more favorable prices of fall/winter, or am I getting caught up the the seasonal up swing.

        The realtor that we were working with believed that now now was really the time to buy because the market was hot. I think to think back the the freakeconomics movie and try to relate how people are driven by incentives. Our realtor makes more money by selling more homes per year, so he would naturally say things that make us want to buy now. A realtor keeps their own homes on the market a average of 10 days longer then they would keep a clients home on the market to hold out for a better price. At the same time he also says, I would never want to push you into a deal that doesn’t make sense because I work off of repeat business, and I don’t require contracts with customers when i am helping them buy homes.

        So I very much like your response that competition is not the same in all the same price ranges and areas. Since we are trying to start a family and we like being downtown, I going to hunt for house in college greens and Arden. It’s a quick hop onto the freeway to get to midtown, it has decent schools, we can get more house for our money, and we can feel at ease to not spend 400k for a 2 bed 2 bath in Elmhurst.

        • says

          Thanks for the response. It sounds like you have a really interesting work background and skill set.

          You mentioned the range of $300k – $425k in Elmhurst and some surrounding areas. The thing is each neighborhood market is different, and my guess is $325,000 is on the lower side of the current market in say Elmhurst. One of the things we are seeing in most neighborhoods is more aggressive upward pressure at the bottom of the price market (no matter what the bottom of prices looks like for that community). Buyers are feeling frenzied about getting into the market and being able to afford it before prices and rates get too high. Part of the aggressiveness is simply the spring market, and that is a reality that many struggle to be objective about. Yet there is lower than usual inventory as well as a funky feel out there among buyers. Those things make a difference.

          When someone’s commission is connected to the outcome of a transaction, you have to wonder if you are getting solid advice or not. I am not ragging on your agent or any real estate agent for that matter. I’m only saying your agent has skin in the game. Yet to be fair that doesn’t mean your agent is not speaking the truth either. I guess my follow-up question would be: “why is now a good time to buy as opposed to June or July or November”? Sometimes we speak in cliches in real estate without considering market trends or logic. I’m not saying that is what is happening here though at all. The thing I always come back to is buying is a good idea when it makes sense for a person’s lifestyle and wallet. Markets go up and down all the time. That’s normal, though we tend to buy into this fallacy that real estate should always be positive and increasing. People like to buy at the low end, but most who do simply just get lucky that they did that. Values haven’t yet increased to where they were in 2005 in most areas of Sacramento, but they are getting close in some for sure.

          Let me know if you have any follow-up questions or insight.

  5. patrice powe says

    Hi Ryan,

    Your article was very informative. Right now I’m at a point of, I don’t know if I should buy or stay renting. It’s becoming such a stressful situation everyday. The home buying process should be something you’re happy about not stressed, because there are either not enough houses or you’re price out.

    • says

      Hi Patrice. Thanks for the comment. I’m so sorry to hear you’ve been stressed. I can pick up on that and I feel your pain. It does honestly feel stressful because it’s a big decision. Then when you enter the market, the stress has only begun – especially in light of low inventory. My wife and I actually moved last year after looking around for almost one year. It took us that long to find something we liked in the location we wanted (and within our price range). Some buyers might start the hunt and find something right away, but in many cases it simply takes longer. Because it’s so stressful, that’s why real estate agents end up being therapists to buyers to a certain extent. I used one of my best friends as an agent, and even I played into stereotypical buyer habits (despite telling him I’d be the exception to the rule). 🙂

      If you end up having any market-related questions, feel free to reach out. Next week I’ll have another big monthly market update to explain how the market has unfolded more since this post. Whatever you decide, I hope you are filled with peace.

      Best wishes.

  6. Sue says

    So my question is if the appraisal data lag by two months because the appraisals need closed comps to determine value, how does the market (especially the Spring price increases after the lag in the fall) ever increase. I have a low appraisal because it’s based on fall sales which were on the market for an average 155 days. The Spring market has brought a jump in prices with days on market of less than a week and yet the appraiser has not adjusted value based on the market because those comps have not closed. Seems like a chicken and egg problem and not sure how to get around it.

    • says

      Hi Sue. I’m so glad you checked in, and I’m sorry to hear about your situation. Let me clarify. There is a lag in sales data, but the market is readily seen in the listings, pendings, and other data in the marketplace. In other words, we don’t have to wait for the new sales to close before we can see the market. On a practical level though, it is certainly easier to see a market once the sales are there, but just because they have not closed yet does not mean we are unable to see the market. As an example, an appraiser can use a sale that closed last month, though the appraiser must consider if the market has changed since the property actually got into contract (probably 60-90 days ago). The same holds true for using sales from the Fall. Appraisers can certainly use those sales, but if the market has changed since then, a market conditions or “Date of Sale” adjustment should be given in the report. If the market is increasing and this adjustment is not given, then the appraised value based on the sales alone might simply reflect what the market was like when the recent sales got into contract probably 60-90 days ago instead of reflecting today’s market. There is a misnomer out there that appraisals are based on the past, but that is simply not accurate because appraisers can readily see the current market by looking at the past (sales) and weighing current trends (listings, pendings, other data) very carefully. Many times the real estate community touts how important sales are while discounting pendings. Yes, sales are crucial because we all know a property can be listed for anything and not sell at that level. But we still see the temperature of the current market in the competitive listings / pendings more than sales sometimes. It is not a chicken and egg problem. It’s more like an adjustment issue. If the market has changed since the sales went into contract, appraisers will need to account for that – most likely with an up or down adjustment. I hope that makes sense. To add an extra layer of complexity though, sometimes in a frenzied market, properties really can get into contract higher than they are actually worth. I just had a situation where a property I appraised ended up 4% above the list price after the seller countered the buyer up that high. The question becomes, is a value 4% above list price reasonable? The proof is in the market – that is, in both sales and listings.

      Keep me posted if you have any questions.

      • Sue says

        Ryan,

        Thanks so much for such a quick and thorough reply. My problem is that the appraiser did not take the market increase in the last month into consideration and has appraised the property as the market was last fall. I put together a spreadsheet of the appraisal comps that shows how the market had changed (comparing closed comps with those under contract) and even compared two properties around the corner from each other (again one from last fall and one under contract) and made all the same adjusts she used in our appraisal and the comparable sales prices were significantly different. All my work was sent from the lender to the appraisal management company who just came back and said “In order for the appraisal to be able re-evaluate the appraisal, we have to provide comps that have closed. They cannot use the comps from sales that have not been settled.” Our settlement is quicker than the others so they will not close before we are scheduled to close. I talked to the agents and provided that information (number of offers, sale prices) but management company doesn’t seem to care. I plan to email your information about needing to do a market adjustment but not feeling confident they will listen.

        • says

          Hi Sue. This is a problem that is common throughout the real estate community. The higher “comps” might not exist, but that does not mean the market is not there yet until they actually close in a few weeks. The same would be true for the first house built in a new city. Just because there are not any sales does not mean there is not a market or value for the property yet. Or imagine a complex river property. Just because there are not recent sales over the past 2 years does not mean the market is at the same level it was 2 years ago. It takes tremendous skill to see the market and make these adjustments (to be fair, it’s not easy for agents either). If the adjustments are not made, we might miss the market. Right now I actually have an appraisal on my desk for a private party (not a lender), and I’ll be using comps that are literally four years old. Thankfully not all my sales are that old, but most of them will be in this case since they are the best available comparisons. The thing is though I have to make an adjustment for how the market has changed over time. I cannot just use the old sales and call it a day. I haven’t done my job if I haven’t considered the market change.

          I get why the AMC may want sales alone because I can only imagine what type of value “disputes” they get. I’m not saying your situation is not legitimate, but they probably have this rule because of the type of stuff they get from others that is baseless and emotional rather than logical, market-based, and factual. Still though, the truth is the appraiser might not need to reconsider comp selection at all, but rather adjustments that were made or not made. Value is found in comp selection and adjustments, so sometimes part of a value dispute isn’t choosing different comps, but considering the adjustments. I’m not talking about trivial items that don’t sway value as I don’t advocate picking apart an appraisal.

          I might recommend you find some sales out there somewhere so you can jump through the hoops of what the AMC is asking, but include other information to help show the direction of the market and/or any relevant value context for the subject property.

          When appraisers start comparing pendings vs. sales, sometimes it becomes clear the market has changed. As a side note, here are some of the signs that tend to be common in an increasing market (http://sacramentoappraisalblog.com/2015/03/24/how-do-you-know-when-a-real-estate-market-is-increasing/). So once appraisers collecting a few solid pendings, and we see the market moving upward in other ways too (maybe even in different models in the neighborhood, in competitive neighborhoods, etc…), then we can take all of that into consideration and make adjustments.

          You may consider using a format like this for challenging a low appraisal. I wrote this post a couple weeks ago, and the goal is to open up intelligent market-based conversation between lenders and appraisers. Often the person who fills out the form may be an agent, but ultimately it is the lender who needs to have conversations with the appraiser about a reconsideration of value (or an AMC most likely). http://sacramentoappraisalblog.com/2016/03/28/how-to-challenge-a-low-appraisal-and-tips-for-agents-and-appraisers/

          I hope that was helpful.

          Best wishes.

          • Sue says

            Ryan,

            Thanks so much for all the suggestions and information. It makes complete sense to me. I took hours putting everything together to show that the market had changed and the only thing she did was add yet another old settled comp from last fall without addressing a changing spring market or answering a single question. The problem that I faced and I’m sure most will face when trying to challenge a low appraisal is that an appraiser with 17 years experience does not like to be questioned by any agent (experienced or not) who knows nothing about the appraisal business. Unless you can find a black and white error such as adding something that should have been subtracted, the chances are slim that they will change anything and there’s nothing you can do about it. Sorry to rant, I am just so frustrated.

          • says

            Hi Sue. I am sorry to hear about your situation. Appraisers do get so many bogus requests to “reconsider” the value, so I can understand why appraisers won’t budge at times. But if the appraiser missed something, it is prudent to go back and correct any mistake (a valuation mistake – not just a clerical error). Seeing that happen can be a rarity of course. Hang in there and just keep doing your best and doing all you can to be a professional as you interact with appraisers. Thank you for keeping the bar high.

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