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Ryan Lundquist

Dude, people want smaller homes (sort of)

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Tiny homes are all the rage these days on HGTV, but most people would never pull the trigger on something that size. But the truth is homes in the United States are actually getting smaller lately. Well, sort of. Let’s talk about it.

Why this matters: Knowing a real estate market isn’t just about prices, but understanding what is happening to the housing stock.

Bigger homes in the United States (except lately): New homes seventy years ago were literally one-third the size they are now. So clearly buyers expect much larger homes today. But when looking at recent stats, the size of new homes has actually shrunk over the past few years according to the National Association of Home Builders. Why the shrinkage? Lots of people chalk it up to younger buyers entering the market and needing lower prices. Keep in mind new homes are still an average of 2,300+ sq ft though, so even if buyers are craving smaller homes, these dwellings are massive compared to decades ago.

How has home size changed in Sacramento? Like the United States, homes have definitely grown in size over the past two decades in Sacramento. In fact, based on MLS sales since 1998 we’ve seen the average home size increase by 11.6% and the median size increase by 15.2%.

What happens to home size during recessions? What’s going on with the dip in size after 2007? According to the National Association of Home Builders, the historical pattern is to see new home size fall after recessions as buyers tighten their budgets. Then as the economy improves we tend to see home size increase. The interesting part is we see this trend among new homes nationally and with MLS sales locally.

CLOSING THOUGHTS:

1) Baby Boomers & Millennials: In coming time we’re going to have lots of Baby Boomers downsizing and looking for smaller homes. As for Millennials we’ll keep learning what they want as they enter the housing market.

2) Marketability during recessions: With so much talk about a coming recession, let’s keep an eye on larger homes. Will they be less marketable during the next recession? Will buyers tend to gravitate toward smaller homes? These are key questions.

3) Smaller but not inexpensive: New homes have shrunk in size these past few years, but we’re nowhere near being able to call them inexpensive. The irony of course is society tends to expect new construction to be affordable for first-time buyers, but new homes are actually more expensive by virtue of being brand new. The truth is less expensive homes tend to be found more readily in the older housing stock instead of brand new subdivisions. It’s like shopping for a used car instead of the latest shiny brand new model.

I hope this was interesting or helpful.

BIG MARKET UPDATE I’M GIVING: I’ll be giving a deep market update at SAR on September 24th from 10:30-12:00pm. My goal is for everyone to walk away with an understanding of how the market is moving, ways to describe it, and some ideas for business in 2020. Sign up here.

Questions: What are you hearing from buyers and sellers about size? Any stories to share?

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Can you use brand new sales from the builder as comps?

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I get asked this question all the time. “What do you do for comps when a home is only one year old? Can you compare it to brand new homes from the builder?” Here are a few things on my mind.

Builders vs you: It’s important to step back and understand that builders are able to let buyers customize features in a house, and that’s a big deal. This is one of the alluring things about buying a new home, and it’s not something a typical seller is going to do. Thus right away a builder has more power than an owner in the resale market.

Fading premium: Just as buyers tend to pay a price premium for a brand new car, the same thing happens in real estate. And just like a car begins to depreciate when it’s driven off the lot, the same thing happens with a home. When you’ve lived in a home, it’s no longer 100% brand new, so it may not command that same price premium in the market.

The market doesn’t care about your rear landscaping: I often hear, “But my home is better than the brand new ones because I put in rear landscaping. The builder models don’t have a rear yard.” That may be true, but the market might not care about that. The premium a buyer is willing to pay for a brand new house could still likely outweigh your rear landscaping (assuming we’re talking about standard landscaping).

Credits & incentives: Let’s remember builders can offer credits and incentives to close deals and keep prices high. When a market starts to soften especially, we have to ask what concessions are being included to continue to boost prices higher. This is key to understand because if brand new homes have padded prices, they probably aren’t ideal examples of what the market is really willing to pay. Here’s the better question. What would the market pay without all the concessions?

Resale homes rule: In an ideal world we want to find other homes that are one or two years old. Is there any price difference between the new models and resale homes not sold by the builder? That’s the big question and I realize it could be a fat chance we’re going to find something. But don’t be afraid to look through multiple years of sales too. Even if you have an older sale from a few years ago you can compare it to other newer ones at the time. How much of a price difference was there if any? Did the new ones still sell for more? Don’t forget to look to other competitive new developments in town too. You might get some insight there when it comes to brand new vs newer homes.

Keep an eye on the new stuff: I’m not saying to ignore new sales altogether or even to not use them. We should keep an eye on them for sure. Let’s just be cautious about flippantly choosing three brand new sales from the builder and calling it a day without really thinking through whether there is a price difference between brand new vs newer. If I was appraising in this situation I would hope to find at least one resale home somewhere, but I’d also be fine using brand new homes as comps too (but they might need an adjustment down).

The market: Keep in mind there are situations where the market may have gone up, but if the owner also lost some value due to a fading new construction premium, it’s possible the home might not sell for more than it was purchased for.

I hope this was helpful or interesting.

Questions: Which point resonates with you most? What did I miss? Any stories to share?

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A massive garage & paying too much attention to prices

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I saw a massive garage while on vacation that I just have to share. I also have some quick thoughts on focusing too much on prices. Those are the two things on my mind. Then for those interested let’s dive deep into the market. 

I took almost two weeks off and part of my vacation was to drive to Boise to visit family. Of course my real estate mind doesn’t shut off when out of town, so I was blown away to see a brand new neighborhood with nearly every other house having a massive RV space in the garage. This one actually has two separate RV spaces. I’ve never seen two spaces like this in my market. Have you?

I’ll admit the neighborhood looked a little odd from the street because of the amount of space dedicated to garage doors. It didn’t look bad per se, but it was definitely different. And for the record, I would use both spaces for a massive woodworking shop. Forget the RVs.

Migration garage marketing plan: This is actually brilliant marketing because the builder is clearly appealing to the retiree crowd. In fact, when talking with a few neighborhood residents, they tell me there are lots of ex-Californians as well as people from Texas and North Carolina. This reminds us of the reality of migration. Who is coming to the market? And who is leaving? Those are two vital questions to ask to know a market.

And a quick thought on prices…

Focusing too much on price? Price is THE obsession in real estate, but focusing too much on price can actually cause us to miss the real story of the market. It’s common to hear stuff like, “Prices are up, so the market is doing great.” I get that, but what if we had a market where there are fewer buyers, but those who are buying are still paying higher prices? This is where fixating too much on prices would cause us to miss what’s really happening. After all, if sales volume is sliding, it could be a sign of buyers stepping away from the market, which is a much bigger issue (that will eventually show up in prices if the trend continues). My advice? Pay attention to prices, but give equal or more focus to what is happening with current listings and sales volume. Are buyers absorbing the listings? What are they saying about the market? How is volume changing? Is the number of sales normal or not right now? These are some of the questions to keep asking.

Any thoughts?

—–——– Big local monthly market update (long on purpose) —–——–

Now for those interested, let’s talk about Sacramento trends. Prices have been a bit flat, but the bigger story here is the sales volume slump streak of fourteen months has ended. If I had to pick a few phrases to describe the market it would be competitive if priced right, modest price growth, lower volume, and fairly normal stats for the spring / summer so far.

DOWNLOAD 70+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

THE SHORT VERSION:

  • Prices feel a bit flat
  • The volume slump streak ended
  • July looks fairly normal stat-wise
  • Pendings are strong right now
  • Sales volume is still down this year
  • The market is slowing for the season
  • Mortgage rates are like a steroid
  • Inventory is sparse (but not in El Dorado County).

THE LONGER VERSION:

Here are some of the bigger topics right now:

The volume slump streak has ended: We had a fourteen month streak going, but it’s now done. For fourteen months in a row we’ve seen sales volume down compared to the same month last year until this month where sales volume was up about 4% in the region. It was a strong month for most local counties, though El Dorado County was down 15% from last year. 

Modest price growth: Price metrics in the region are up about 2-5% or so this year compared to last year depending on which price metric we’re looking at. In short, this is pretty modest price growth overall, which has been the narrative all year (did you hear that sellers?).

Not surprised by slowing: At this time of year we tend to see prices begin to cool and it takes longer to sell. This is exactly what the stats are showing us below too. This comes as a shock to some, but if you follow real estate closely there’s a rhythm to the market, which means we can expect this slowing EVERY. SINGLE. YEAR. In short, in a normal seasonal slowing we tend to see most of these things below happening to greater degrees as we inch closer to the holidays. This is a good reminder that low mortgage rates and sparse inventory aren’t a trump card to buck a traditional seasonal slowing. And if you want proof, it took three days longer to sell last month in the region compared to the previous month.

Rent control: The City of Sacramento approved a rent control measure today. This is huge news and it’s absolutely something to watch. I’ll be talking lots about this in coming time as the trend unfolds. I actually ran a Twitter poll the other day about rent control.

Inventory is down overall (mostly): In the region we have less than two months of housing supply. This is actually down from last year. In short, inventory is sparse on one hand, though on the other hand the new normal is low inventory. It’s tempting to say stuff like, “It’s normal to have a 5-month supply of homes for sale,” but that’s simply not true for today. Maybe it used to be the norm, but for now our new normal looks to be somewhere between 2 to 2.5 months of housing supply.

Multiple offers: When I talk about the market slowing it can sound confusing because the market feels really competitive when properties are priced right. In fact, you’ll probably get a few offers if you price it correctly. But if you overprice you can very easily get zero offers (really). Here’s a stat I’ve been tracking each month. As you can see nearly half of all sales had more than one offer last month. But then again, nearly half of sales didn’t too.

Inventory is GROWING in El Dorado County: Inventory has been shrinking in the market, but not in El Dorado County. This is a new graph I made and I hope you like it. I know it’s busy, but can you see recently how inventory has been shrinking everywhere besides El Dorado County? I may unpack this in a deeper blog post at some point, but this is definitely something to watch. Part of it could be due to the struggle of obtaining affordable fire insurance also.

Just kidding about rates never going below 4% again: It’s unreal to hear about mortgage rates at 3.5%. Remember just a couple years ago when everyone and their Mom were saying, “Rates have bottomed out.” Just kidding. They didn’t. On a serious note, low rates can act as a steroid to help get buyers off the fence and play the market. It helps buyers also artificially afford higher prices too, which isn’t the healthiest sounding thing in the world.

Property tax appeal season: If you didn’t know, it’s now property tax appeal season in the region. Most counties allow residents to dispute their property taxes between July and late November or early December (Placer County is mid-September). Here’s how the process works. Not many people honestly pay attention to their property taxes in an up market. It’s just true. But I advise for all property owners to stay in tune to be sure they are paying a fair share and no more.

I could write more, but let’s get visual instead.

FOUR BIG ISSUES TO WATCH:

1) SLOWER GROWTH: The market continues to show price growth, but the rate of change is slowing. This almost sounds offensive to some because the narrative in real estate is often that the market is always blazing hot. But let’s remember “slow” is not a dirty word in real estate. Moreover, do you know what sellers need more than anything right now? They need to price for the real market today rather than the ultra “hot” market of yesteryear.

2) A QUICK RECAP: All year prices have shown a modest uptick. What I mean is prices are up from last year, but not by much. Keep in mind the lowest price ranges are likely the “hottest” market in town too.

3) VOLUME SLUMP: Up until this past month the number of sales slumped in the region for 14 months in a row (and 13 months in Sacramento County). Sales volume was strong in July though and actually up. This year volume is still down about 9% in the region though. Overall despite a lower year of volume, it’s still not outside of normal low ranges (see 2014 and 2015).

4) PRICES SOFTENED IN JULY: The market generally slowed in July in terms of price growth. This is why I’m saying prices feel a bit flat. This is fairly normal for the time of year, and sometimes we see prices bounce up and down as summer comes to a close. Stay tuned. Let’s keep watching.

NOTE: Take El Dorado County data with a grain of salt. Stats change significantly month by month.

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SACRAMENTO REGION (more graphs here):

SACRAMENTO COUNTY (more graphs here):

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

 

DOWNLOAD 70+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: What are you seeing out there? What do you think prices are doing? What are you hearing from buyers and sellers lately?

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The invasion of tech companies in real estate

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Tech companies want a piece of the real estate pie. Amazon. Zillow. Opendoor. Rex. It seems like every week there’s a new company announcing its venture into the game. Here are some things swirling through my mind as I think critically about this trend.

1) Stress & real estate hold hands: Tech companies talk about real estate like it’s as easy as the click of a button, but it’s complicated because humans are involved. There are real people trying to negotiate, advocate for their interests, and navigate complexities in the housing market. Can we make things less stressful? I sure hope so. But are real estate transactions innately stressful because of all the moving parts? Probably.

2) The obsession with speed: There is space for escrows to be faster as tech firms say, but I hope we don’t lose sight of the importance of time. It’s okay to have space for necessary inspections, negotiation based on those inspections, and a reasonable contingency period so buyers and sellers are sure about their decision. There’s this idea that real estate should be instantaneous, and maybe one of these days it will be on the blockchain, but mistakes are easy to make if we go too fast. On that note, let’s be cautious about expecting too much from appraisers in this climate because speed can water down quality. Do you know what we need more than fast appraisals? Reliable appraisals.

3) The fine print: A company like Opendoor or Zillow can offer to buy a house at a price that seems reasonable on paper, but it can quickly become low when money for repairs is skimmed off the top – not to mention a higher commission than what is being paid during public sales on MLS. This is where sellers need to weigh how much they’re going to net with a tech company’s offer.

4) The narrative of convenience: Big brands are trying to capture consumers with the idea of making transactions easier. This sounds amazing and consumers certainly want convenience, but in my mind the bigger issue is money. Sellers want the highest price possible and buyers want to pay the least amount possible. I wonder at times if this idea is getting lost in the midst of clever marketing. Or are we as a society starting to value convenience more than anything? To be fair there is a segment of the market that will sacrifice profit for the sake of convenience. How much of the population will do this? We’ll see. The market gets to decide.

5) Models change: We no longer go to Blockbuster to rent videos, we use Google Maps instead of the Thomas Guide, and when booking a vacation most of us don’t use a travel agent. Thus when it comes to real estate, let’s expect to see change in the future. I’m not saying tech companies are going to take over and humans will lose to Skynet (a Terminator reference). But for anyone working in real estate, it’s a good idea to watch this trend, listen closely to the narrative being spun, show your value to consumers, and try to think ahead of the trend so you can position yourself for the future.

Anyway, that’s what’s on my mind. I hope that was helpful or interesting.

Bubble story on CBS: Yesterday I was interviewed for a piece on CBS Sacramento about Sacramento home prices being similar to the peak in 2005. Check it out if you wish. One quick note. The reporter said, “Have no fear” in the story. I wanted to clarify that those were not my words.

Questions: Which point resonates with you most? What did I miss? What are you most and least excited about with tech companies in real estate?

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