If the real estate market did shift…

The new buzz word in real estate is SHIFT. Everywhere I go I hear this word, and it seems like every other article is about a coming change in the market. Thus the question becomes, how would you recognize if the market did begin to shift? What signs would you look for? Let’s kick around some ideas below and I’d love to hear your take in the comments. Any thoughts?

change sign - purchased by sacramento appraisal blog by 123rf dot com

Key points when considering a market shift:

  1. Markets go up and down: Just like the stock market, gold, or any other commodity, at some point real estate values will go up and at some point they’ll go down. Bottom line.
  2. See it first in the listings: When the market does eventually “shift”, we’ll see the change in the listings before the sales. This means properties will begin to struggle to sell at the same level as the “comps”, which will lead to price declines. This underscores the importance of paying close attention to pendings and listings to see the current market. Granted, every year someone says, “the market is declining” when the fall season begins to unfold because values begin to soften. Just be aware there is a difference between a normal seasonal softening and a definitive declining trend.
  3. Word on the street: One of the ways we’ll know the market has changed is the real estate community will feel it in the number of offers, feedback from buyers and sellers, more credits being given to buyers, etc… We can always look at stats, but there is something powerful about the word on the street from real estate insiders.
  4. The previous peak: It’s always interesting to see how close or far prices are from their high point ten years ago, but there isn’t any rule that says prices have to get back to their height for a decline to happen.
  5. Watch higher & lower prices: The market isn’t always doing the same thing at every price range or in every neighborhood. When it comes to values declining, watch the top and bottom carefully because one of them might change direction before the other. Which one?
  6. Other metrics: I included an image below to talk through some of the metrics we might watch to know the market is softening. Again, these things all tend to happen during the fall months every year, but no matter what time of year we are not likely to get to full-fledged value declines without passing through a softening stage. Be sure to watch the sales to list price ratio too (I forgot to include that in the image).
  7. The power of lenders: Values have increased these past four years, but wage growth has been more or less stagnant. This means some buyers will now begin to struggle to afford higher prices. The temptation for lenders is to develop more creative financing to help buyers keep playing the game. Does anyone else think Kenny Loggins’ Highway to the Danger Zone would be good background music for this point?
  8. Future clients: This conversation can feel stressful for those who work in real estate because a change in the market can lead to a change in clients. Yet markets always change, so that’s something we can be prepared for, right? Blockbuster Video had a lucrative operation until they didn’t adapt to the way the internet changed the DVD rental landscape. When it comes to business we can spend so much time holding on to the way things have been that like Blockbuster we don’t take steps to adapt and position ourselves to be Redbox or Netflix so to speak. Here are two questions to continually ask: Who are you clients going to be in the future? What are your clients going to need in the next few years?

Signs of a soft market

I hope this was helpful.

Questions: What is point #9? What other metrics can we watch to see the market change? Anything I left out? I’d love to hear your take.

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  1. says

    Great post Ryan. When you say, “shift” my first thought is not that prices would be declining, but that the trend is no longer on the same rate of upward trajectory. In my market, I’m hoping for a shift to a more sustainable upward trend of more like two to four percent rather than the ten to fifteen percent that many areas near me have been seeing. If the market, as you say, “softens” now, I think we might be able to avoid a big correction later.

    • says

      Well said Gary. We can certainly mean different things when saying the same word. Very true. I am with you on a sustainable trend. It feels good to owners to have huge increases in value (and rents), but sustainability is an okay thing. In California though we only know extremes. πŸ™‚ Ultimately the market is the market. We cannot control it. It goes in so many different directions for so many different reasons. That’s what makes it interesting.

  2. says

    Ryan, you are so right about word on the street and feeling the change. Although, I was wrong in 2014. I didn’t think the growth was sustainable then. I sold a house we rehabbed for $150K, patting myself on the back for my acumen and ability to predict the market. That house today is worth $190K.

    • says

      Aww, thanks for the kind words. You know, 2014 felt VERY dull. There were lots of articles in the latter part of the year that talked about a looming real estate bubble about to burst. I wondered myself what the market was going to do. This just goes to show we really don’t know the future. Someone asked me the other day if he should buy. I told him values have been inflated for the past four years, I don’t know what the future holds, and ultimately buying or not was a question only he could answer for himself. I have respect for the market and respect for him too. We all make our decisions. Besides, very rarely will we get lucky enough to time a market absolutely perfectly so we maximize profit during a sale.

      The thing is there is still room for the market to grow because of how low inventory is. Yet what happens with interest rates and creative financing will be a big deal in coming time. Will we settle into a sustainable normal market or will we introduce more “steroids” into the market to inflate values? Time will tell.

      Thanks again Jana.

  3. Andrea White says

    You are my favorite appraiser and your timely articles have helped me tremendously. I have also heard another statement or “word on the street” that is similar to “Shift” I keep hearing this: “It is time for an “adjustment”, regardless of the word or words on the street I appreciate how you break it down for the consumer. Thank you for your blog.

    • says

      Thanks Andrea. That makes my day to hear. I’m such a fan of analogies, metaphors, and finding ways to describe the market. It’s always changing, so there is often something new to say. Thanks again.

  4. Reymon Hernandez says

    This is was a very good read. Thank you for all the input. Love the value you constantly provide.

  5. says

    Aside from the “fog a mirror” boom, prices in the Sacramento region are often driven by incoming equity from the Bay Area, which doesn’t need appraisals to help it and isn’t measured fully by “personal income growth” except in arrears (when they are buying, their income is measured elsewhere until they are here for 1-2 years). Are they coming? Soon. Usually buyers and sellers wait out presidential elections.

    • says

      Thanks Jeff. I always appreciate your take. There are definitely Bay Area investors buying here. Things are so much cheaper here. On a side note, I will say I’ve found some Bay Area Listing Agents at times list too high, while some cash buyers tend to pay too much also. It’s not always the case of course. I remember Blackstone a few years ago could “overpay” because they had the funds, but also they saw where the market was going too, so it made sense for them.

      So you think buyers and sellers are waiting to see if it’s going to be Trump or Hillary? I won’t ask which candidate will give buyers more confidence. πŸ™‚

        • says

          Hi Valerie. That’s a great question. I think there are a variety of opinions out there. In fact, four years ago I did a blog post interviewing a few agents on the subject (http://sacramentoappraisalblog.com/2012/07/18/how-do-presidential-elections-effect-the-real-estate-market/). Ultimately there may be some government manipulation to help housing sound better, but I believe whatever the market is doing during that year is not trumped (no pun intended) by a presidential election. In other words, I don’t think an election has much power to sway the market unless the platform issues happen to be issues that are already driving the market (economy, jobs, interest rates, etc….). For example, let’s consider the local market the past few elections to see if we can discern a trend:

          2016: Rates already low and have been flirting with 4% for the past four years. Modest seasonal uptick in value. The economy really isn’t that great in Sacramento (it’s about where it was before the Great Recession began).

          2012: Real estate values are bottoming out and interest rates hit below 4% for the first time ever. This is a great time to buy because values are low and rates have are at historic lows.

          2008: The economy is really struggling. Dark days. A recession just hit in 2007. Interest rates are still closer to 6 and weren’t below 5 for another year. The federal tax credit hit the real estate market in 2009 / 2010 as a way to help stimulate the economy (did not happen in an election year). If we remember, Obama marketed on the platform of “hope and change” and many Americans resonated with that message because this was not an easy time in the job market or economy.

          2004: Values are increasing and construction is booming. The market feels great and people are trying to get in before values rise too quickly. Interest rates do take a dip during the election season.

          * These trends above may be hyper-local to Sacramento and not present everywhere.

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

          • Valerie says

            unfortunately, I do not consider myself anywhere near knowledgable enough to have a take. I am 27 and have had my real estate license since 18 however shortly after I turned 21 the market crashed and i continued with my full time secure banking job. I have owned homes since 2006 so you can imagine what my husband and I have been through. We are trying to get back to placer county, for us its going to take two incomes (meaning leaving my babies for work so we can live in a better community and school district) … or a market slump, dip, or crisis! which after I sell my house, I hope happens πŸ™‚

          • says

            I appreciate you sharing your story Valerie. Thank you. Sorry to hear of the struggle. Your story is such a common one. These days it’s not easy to make it without two incomes in a household. It’s definitely not like it used to be many decades ago. If you aim to get back to Placer County, I hope you can figure that out somehow.

  6. says

    Hey Ryan, awesome post. I often hear agents say I “think” the markets going to slow down, I “think” short sales are coming back this year. No real evidence to back it up other than 10 year interest only loans that were obtained back in 2006-7 are going fully amortized and many people aren’t going to be able to afford the monthly piti. Perhaps but it’s yet to happen in our market.

    Then I went to a Bruce Norris event the other night and his charts indicate we’re not currently in a bubble and not close to one either. The two most important charts he showed us were affordability and one that showed the average price of resale vs new construction. Once resale outpaces new construction prices then it can be an indicator of a problem. Also I think he said once affordability gets below 17% it can also be an indicator of a bubble. Of course there are other charts he looks at such as trustee sales to be very low, inventory below 3 months and owners with lots of equity to move up.

    There were others but as a real estate agent I found it intriguing that he dispelled (with proof) that many in my industry think we’re in or very close to being in a bubble.

    • says

      Thanks Brett. I appreciate hearing your take too. I like the critique of “I think”. We really need to do some fact checking when we say trends exist. Do they? What does the data say?

      I’ve heard of Bruce Norris, though I’ve not listened to him. I would be curious to hear what he was saying in 2002 to 2006 though. Did he predict the previous “bubble”? What did he say the market was doing at the time?

      Interesting thought on resale vs. new construction. I would suspect new homes will almost always sell for more than similar ones that are not new. Affordability can be something that changes depending on the job market, interest rates, etc… We’ll see how it pans out.

  7. says

    Ryan, thank you so much for your posts. They are so educational and valuable. Just wanted to say thanks for all the work and value you bring to the whole RE community!

  8. Steve says

    Ryan, I know I’m posting this a while after your post was written. You have good insight, and your list of factors to watch is great. Can you post an update describing how those factors are currently trending? I get the impression you’re not willing to offer your opinion here on whether values are too high, but perhaps just listing how many of those indicators are trending in the right or wrong direction would be useful! Thanks. I’m moving back to Sacramento after being gone 16 years, so all of this is very interesting to me.

    • says

      Hi Steve. First off, welcome back to Sacramento. Quite a bit has changed in the past 16 years. πŸ™‚

      Thanks so much for the comment and compliment. I’ll keep posting updates. I have one blog post each week and once a month I do my big monthly market update. Th big update post unpacks the local market and it comes out usually between the 10-15th of the month. I might not address every single point above, but I definitely talk about the direction of prices, days on market, and so many other factors that help explain what values are doing. I post about 50-60 new graphs too so we can see market in a visual way. What I find valuable too is there are often some insightful comments from others on that post in the comments section. My next update will be on Tuesday or Wednesday this week actually. For anyone interested, here is last month’s update: http://sacramentoappraisalblog.com/2016/11/16/predictions-trumps-impact-on-real-estate-and-a-sacramento-market-update/

      It’s not that I’m not willing to offer my opinion or trying to hold back from saying something, but I do tend to stray away from making predictions about the market since my crystal ball is broken. I’m honestly more interested in explaining the present while considering the impact on the future (rather than focusing only on the future). I think of the recent example of how bad the political pundits predicted the presidency is a very real reminder how easy it can be to get it wrong about the future. That’s one reason why I am careful about what I say. Most of all though, I respect the market and I realize markets are constantly changing. I try to keep the focus on what the market is doing right now and why it is behaving the way it is. Of course I consider the future carefully and I’m not hesitant to say values are inflated right now. They are. I’ve been saying that for many years. Values needed to correct when they bottomed out in 2012, but they’ve really increased in recent years because of cash investors, low interest rates, and ridiculously low inventory (there are reasons why inventory is lower than it should be).

      Keep me posted if you ever have insight or specific questions. I love the conversation that happens here and you are invited to pitch in.

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