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Are appraisers keeping up with rapid price growth?

March 10, 2021 By Ryan Lundquist 29 Comments

Rapid price growth. That’s what we’ve been seeing lately in many markets across the country. I’d like to share some stats below for my local market and then talk about whether appraisers are keeping up or not.

RAPID PRICE GROWTH:

The orange line at the top left is the median price these past two months in the Sacramento region. The gap between 2021 and previous years is quite wide, which shows prices have gone up quickly.

SOME CHARTS INSTEAD:

If you’d rather see some numbers instead of line graphs, here’s a quick market recap. Check out that 17% price growth lately. Holy Batman!! I typically share one big market post each month with lots of visuals, but this time I’m only going to talk about prices. I’ll have much more next week and I’ll put some stuff out on Facebook, Twitter, and LinkedIn. Oh, and sometimes Instagram.

RAPID PRICE GROWTH IN NEIGHBORHOODS:

Here are a few local neighborhoods to show how much the market has turned up lately. One of the things I do as an appraiser is calculate price change by following the trendline over time and comparing it to actual sales and pendings in the neighborhood to be sure the trendline is legit. Here’s a video tutorial for how to make a scatter graph like this. See my graphs tab too for other tutorials for gettin’ visual. 

Here’s an example where I appraised a unit in a small gated community with VERY few sales, so it wasn’t easy to understand what the market was doing. This is why I looked at the entire zip code in blue and gave strong weight to a couple neighborhood sales that also sold a few years ago too (I connected a line between these sales (green and orange).

ARE APPRAISERS KEEPING UP?

So the question becomes, are appraisers keeping up with the market? I’d say YES and NO. Here are a few things on my mind.

SMOKING PRICING CRACK: Some offers are disconnected from reality, so we SHOULD NOT be seeing appraisals anywhere near the contract price. We have a market where buyers are sometimes making irrational offers.

WORD ON THE STREET: I’m hearing stories of appraisals coming in at or above the contract price and ones that are lower than the contract price. It’s not all one thing, though I think the negative stories get the most attention. 

THE JOB: An appraiser’s job is not to “hit the number” or make the deal work. The appraiser’s role is to reflect the market and assess risk for the lender. It’s not about whether the buyer wants the house. It’s about whether the lender should make the loan. Thus an appraisal should be a reflection of what buyers would reasonably pay as opposed to an outlier buyer willing to pay more than anyone.

BRAKES OR GAS: Appraisers are not a brake pedal or a gas pedal for the market. They are more like a mirror to reflect the market. I mention this because at times when rapid appreciation happens, it is what it is. Even if an appraiser is baffled by how much current comps and pendings are up from last year, it’s not the appraiser’s job to hit the brakes by coming in lower. There is no such thing as a market only being able to increase by 1% each month either. Look, if the market is going up quickly, the appraiser needs to adjust up and call it a day while of course supporting all adjustments and conclusions in the report. And to my colleagues, we are NOT number hitters and should NOT be letting the contract price influence us (just in case you think I’m saying that).

SALES vs PENDINGS: It’s essential for appraisers to measure the difference between sales and the current market. Sales are like historical artifacts that tell us what the market used to be like 30-90 days ago when they got into contract whereas pendings are going to be a clue into what buyers are willing to pay in the current market. How has the market changed since the price was established for the comps (more or less the contract date)? That’s exactly what appraisers need to measure and precisely why appraisers need to look at both sales and pendings / listings.

BIG ADJUSTMENTS: At times lately I’ve given some hefty market adjustments. For instance, when appraising a home in Rancho Cordova I used a really similar sale from July that sold at $365,000 and the market was willing to easily pay about $40,000 more today. That’s over 10% growth in a very short time period, but that’s what the trendline showed on my graph (see above). This rapid growth was also very clear when comparing recent sales to older sales and looking at higher pendings.

LONE RANGER PENDINGS: It’s important to not base our perception of value on one “lone ranger” pending sale. So if all the comps are at $500,000 and there is one pending at $575,000, I’m not automatically making a $75,000 adjustment up. What I want to look for is a group of pendings to tell me where the market looks to be going. Thus if I see pendings are $510,000, $512,000, $520,000, and $575,000, I can see the market is increasing and I’m going to have to figure out what my market conditions adjustment needs to be by making graphs and understanding from agents the terms of the pendings. What is the contract price? Is the seller offering any concessions back to the buyer? How many offers were there? And these days, is there an appraisal waiver or removal of the appraisal contingency? In short, there is a story to understand about each pending and sometimes the pending might reflect the market well and other times it might be something to throw out because it’s too high OR too low.

YIKES, NO ADJUSTMENTS: A friend showed me an appraisal on her house from one week ago and the appraiser correctly stated the market was increasing in value. But three out four sales did NOT have any adjustments up to account for the market increasing. I’m not saying appraisers need to always adjust every comp, but I was scratching my head wondering why an upward adjustment was not given since the market absolutely went up in value since these properties got into contract 30-60 days ago. Basically, in this case it looks like the so-called appraised value in early March was more like a reasonable value from mid-January and early February because that’s when the comps got into contract and there were no adjustments up to account for the difference. In short, when stuff like this happens, appraisers are definitively behind the market.

THOUGHTS ON COMPLAINING: On real estate forums lately I often hear agents say stuff like, “Appraisers are a joke. Show me two appraisers and I’ll show you two different values.” I get it. But let’s be real. If I asked two agents to give me a value on a house, how many different values do you think I’d get? The answer is the same. We’d see two values and sometimes the difference would be really wide. I say this respectfully and humbly because value is difficult AND there is no such thing as only one value either. There is always a reasonable range, so it makes sense to see two appraisals not come in at the same level. BUT if they’re too far apart, then clearly someone botched value…. On a side note, it’s easy to fall into the trap of speaking down to other real estate professionals, but let’s raise the bar. There is certainly a place for complaining, but don’t make it a lifestyle or shtick. This goes for the way agents talk about appraisers and the way appraisers talk about agents. Sorry for the sermon, but this is something I believe strongly. You won’t hear me disparage another group because I am a professional. I’d rather listen, educate, elevate, and of course admit when I’m wrong.

OTHER: This post is starting to be a dissertation, so I’ll stop here. What am I missing? What would you like to add? Any helpful nuggets to share?

Questions: What are you seeing happen with appraisals right now? What stands out to you most about the stats above? I’d love to hear your take.

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Filed Under: Market Trends Tagged With: 2021 home values, Del Paso Manor, February 2021 price stats, high appraisals, home appraisals, house appraisals, Low Appraisals, Placer County, price appreciation, Rancho Cordova, rapid price growth, Sacramento Appraisal Blog, Sacramento County, Sacramento Region, skyrocketing values, trend graphs

How much have prices risen since the bottom of the market?

March 2, 2021 By Ryan Lundquist 15 Comments

Crazy price growth. That’s what the market has seen lately. But let’s take a step back to look at how much growth has occurred since the market bottomed out in 2012. With so much talk about rapid price appreciation lately, I figured this would be interesting. Enjoy if you wish.

DOWNLOAD TEMPLATE FOR YOUR AREA: I created a template to help anyone quickly make charts like this. Download HERE. See video for how to make these too.

QUICK POINTS:

1) Huge growth: In many areas of Sacramento we’ve seen $300,000+/- price growth since January 2012, which was the bottom of the market in our area. Remember, just because the median price rose by $300,000 or so since 2012 doesn’t automatically mean your home is worth that much more.

2) Not adjusted for inflation: These stats are not adjusted for inflation. If you want to adjust them, by all means please do so.

3) Limitations: I didn’t include every area locally because I don’t have time, but most importantly if there aren’t enough sales, it’s just not going to be meaningful to compare only one month of data. This is where I would suggest maybe comparing an entire quarter or year if you’re working in an area with few sales. If you want bonus points too, maybe look at the average price and average price per sq ft to see if you observe anything different.

4) Huge percentages at lower prices: The lower the price in 2012, the higher the percentage change. Do you see that in the charts? For instance Oak Park had over 600% growth, which is just completely unreal. Someone even asked me on Instagram if this stat was accurate. It is. But here’s the thing. Part of the percentage being so high is simply a result of the first number in 2012 being so low (typically foreclosures and fixers selling then). When we look at the dollar change in Oak Park, the number is fairly consistent with the rest of the market in how much prices have risen. I’m not saying this to diminish the pain of gentrification or lower-priced areas increasing exponentially. I only want to say it’s helpful to be aware of both percentage and dollar growth so we are well-balanced in what we understand and say about the market.

I hope that was interesting or helpful.

Are Bay Area buyers dominating? One more thing. Here are some thoughts about Bay Area buyers in the Sacramento market.

Questions: What stands out to you most about the stats above? Any other points to add? I’d love to hear your take.

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

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Filed Under: Market Trends Tagged With: Appraisal, Appraiser, boom and bust, free excel template for real estate, numbers, price cycle, price cycles, prices in 2012, prices in 2021, real estate data, Real Estate Market, Sacramento Appraisal Blog, sacramento housing market, sacramento regional housing blog

How long can this market keep going?

February 24, 2021 By Ryan Lundquist 16 Comments

Is the market about to crash? How long can this keep up? What’s going to happen? Every week I’m getting questions like this, so let’s talk through some of the issues. This post has lots of topics that are coming up, so just skim to something that looks interesting. Anything to add?

The truth is nobody knows the future: Most predictions these days either say the market is going to keep increasing for 5-10 years or we’re poised to crash. But nobody knows the future. I know that’s not a popular answer, but it’s true.

Unsustainable: This market is really starting to feel irrational. We are seeing freakish price growth and illogical offers, which is why this does not feel sustainable. I’m not saying the market is going to crash because of this, but I am saying this type of rapid appreciation cannot keep up without simultaneous economic growth or some other stimulus. Last week I got asked about this in a live interview with Fox 40. Enjoy the discussion (see 4:41 for my answer).

It’s not easy to time the market perfectly (seriously): On paper it’s easy to time a real estate market, but it’s not so easy to pull off in the real world because finances and lifestyle don’t always line up perfectly with market conditions. In other words, most people buy when their lifestyle requires a change rather than finding a so-called perfect moment where prices bottom out. In fact, most of the time when I ask people if they bought on purpose in 2012 at the bottom they say, “Nope, I just got lucky.” This is not to pressure anyone to buy right now. I’m just saying it’s a good idea to get rid of “the market is so easy to time” myth and consider your lifestyle as well as prices.

False prophets: Be careful of some who are forecasting the market because they’ve been making false predictions for years and they keep repackaging their prophecies when the old ones don’t come true. By the way, here is a prophet test flow chart to find out if you’re a real estate prophet.

We’re back to peak prices, so we’re going to crash: I gave a presentation recently where I talked about nominal prices being back to 2005 levels in a certain area and someone interpreted that to mean we’re at the top and about to crash. Look, the median price in the entire Sacramento region is now almost 20% higher than it was at the previous top in 2005, so it would’ve popped long ago if there was something magical about getting back to that level. In short, don’t put your stock in “getting back to the top” as a predictor of future trends. And for economic nerds, I’m talking about the nominal price here (which market participants tend to fixate on), so please don’t open up the inflation conversation.

Not the new template: What happened during the last housing correction is not the new template for every future market change, so we cannot look to the previous crash and derive some sort of bubble formula.

I’m going to sell at the top and rent: I had a conversation recently with someone wanting to sell soon and rent until the market crashes. I get it because this person wants to pocket equity and avoid pain, but here’s a practical consideration. If the market did decline it could take years to do so. For instance, it took about 6.5 years for the last cycle to fully decline in Sacramento. Of course the bulk of the decline happened in the first three years. No matter what though, the viable question becomes how long are you going to rent for?

Fear of missing out: There is a palpable fear among some buyers about missing out on the market and not being able to afford in the future. If you’re in that boat I recommend having lots of conversations with people you trust and maybe don’t buy if you cannot make a decision based in confidence. In my experience buying anything based on fear doesn’t usually work out so well. 

The market was slowing and now it’s not: The market was slowing down for years and now it’s doing something completely different (unexpected). The thing is despite being in a global pandemic we’ve had artificially low inventory in light of COVID (less sellers listing their homes), more migration due to the ability to work from home, and shifts in what people want and need as a result of the pandemic. Oh, and mortgage rates dipped below 3% which has created truly excessive demand. It’s been the perfect storm to build what is likely the most competitive market we’ve seen.

Do you see how price growth was slowing until last year?

This upward price trek is happening in many places around the country. Here is a killer visual from Freddie Mac economist Len Kiefer:

A foreclosure wave is coming: There is talk about a coming wave of foreclosures in light of elevated forbearance rates. Here’s the thing. We don’t know for certain how forbearance is going to shake out because we’re still in the thick of this pandemic. Yet forbearance rates have been declining per the Mortgage Bankers Association and not everyone in forbearance is going to sell either (the stats literally show this). Moreover, the vast bulk of people in forbearance have equity to deploy (sell, refinance, etc…) instead of lose their home. I’m not sugar-coating anything and I’ll be the first to say there is uncertainty on the horizon in light of this. I do expect for some of these people to legitimately go into foreclosure, but at this present moment the stats don’t support a narrative of a massive wave of foreclosures materializing. We’ll see what happens of course, but this is what the stats are currently seeming to show.

Riding down the market: If the market did crash, which neighborhood do you want to ride down the market in? This is a relevant question that I heard first from Mike Gobbi. Remember, the equity in our homes means very little unless we are taking money out or selling.

Freakishly high price growth: We’ve had uncharacteristic price growth over the past year. The median price far outpaced where it should have theoretically gone. From my estimation it’s about $40,000 or 9% higher than it should theoretically be had we had a normal year last year (see visual). This could of course be the new normal, but no matter what I think we need to recognize the market is doing something right now that goes against a slowing trend we were experiencing in previous years as well as normal price growth.

The double-edged sword of appraisal waivers: We’ve seen so many more appraisal waivers this year. I get the necessity in light of appraisers being so backed up with a refinance boom and huge volume in the resale market, but what happens to prices over time with so many waivers? If some of these homes are essentially closing too high, does that help inflate the market? Of course let’s remember one sale doesn’t make or break a market, but if we start seeing lots of inflated sales that could certainly help speed up price appreciation. This is something to watch.

Market price cycles & the 7-year rule: Some people buy into the idea that the market changes every seven years, but that’s really not true because here we are in our tenth year of price growth (in Sacramento at least). But there is something to be said about real estate price cycles. Markets go up and they go down. That’s what they do. Bottom line. So at some point the most natural thing we can expect is for prices to go down. You know what wouldn’t be normal? If prices just kept rising forever…

Rates going up can help (eventually): The other day a Realtor friend said he thinks rates need to go up. You know we have a problem when real estate professionals start saying rates are too low. Just remember it’s possible we could see more buyers rush the market if they sense rates really are going to go up. The idea is to get in before they rise.

Look for price resistance: One of the things to watch is whether buyers are resisting prices. So far that is not happening. This doesn’t mean everyone can afford the market, but this month we’re likely to have our eighth month in a row of higher sales volume and pendings have been off the charts. In short, buyers are clearly pulling the trigger right now and we are not seeing resistance when it comes to playing the market.

Dude, this is so obviously a bubble: I get the sentiment. But remember, one of the ways we know something is a bubble is if it actually pops. Freddie Mac had a great article referencing this point years ago.

But inventory is low: There is the notion that inventory is low, so prices cannot decline. That’s a reasonable idea, but it’s only true until it’s not true. If 2020 taught us anything it’s that sometimes dynamics shift, so let’s be open to the idea of the market not having to behave a certain way despite low inventory. With that said, there is such a profound imbalance between supply and demand right now, so prices are clearly poised to rise in the immediate future. Nobody knows how long this run will go, but we would be wise to recognize inventory is about both the active listings on the market as well as demand for those listings. I find conversations about low supply can be lopsided at times if we only discuss what is on the market rather than factors that create demand. Remember, when demand changes, it can also affect supply.

Keep your credibility intact (for real estate professionals): To my real estate friends, I recommend knowing the stats more than ever and being able to articulate what the market is doing by highlighting numbers instead of being swayed by every new sensational idea. I imagine many real estate professionals (including appraisers) will lose credibility in a market like this by being swayed by clickbait, posting predictions that don’t come true, or promising a future that is not known. Remember, sometimes the best answer is “I don’t know” when people ask you to predict the future – while having intelligent discussion about all the moving parts. My advice? Keep your credibility intact by being rooted in data.

I DIDN’T ANSWER MY QUESTION: You may have noticed I didn’t answer the question in my title. But hopefully after reading my post you can understand why.

I hope that was interesting or helpful.

Questions: What did I miss? What is coming up in conversations right now for you? I’d love to hear your take.

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Filed Under: Market Trends Tagged With: Appraisal, Appraiser, current prices, forbearance, foreclosure wave, housing market, housing market 2021, housing trends in sacramento, illogical, irrational, previous bubble, rapid price appreciation, real estate bubble, real estate bubble conversations, unsustainable market

What is your housing persona?

February 16, 2021 By Ryan Lundquist 23 Comments

The market is going to implode. No, it’s actually all good. There are so many opinions right now. Take a look at the housing personas and let me know which one(s) you’ve seen. Then I have a big market update for those interested.

WHAT IS YOUR HOUSING PERSONA?

Doomsday Daniel: The market is going to crash like it did years ago.

Worried Will: Not making any decisions because he’s so worried.

Zoe Zillow: Totally obsessed with Zillow.

Pedro Prophet: Makes new predictions when old ones don’t come true.

Bubble Betty: This is definitely another housing bubble.

Fine Fiona: The market is fine. There are no worries.

Waffling Wally: Sorta kinda 50/50 about the market.

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

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

Polly Pollyanna: It’s all good and it’s always a good time to buy and sell.

Uncertain Ursula: Honestly not sure what to make of this current market.

Bloodthirsty Benjamin: Cannot wait for a crash to buy investments.

Withdrawn Wionna: Stepped aside because she cannot afford the market.

Forbearance Felix: All housing conversations lead back to forbearance.

Spencer Spinster: Negative housing aspects are spun into something positive.

Rosy Rosario: Sees everything through a rose-colored lens.

Equity Ernesto: Has huge equity to deploy to a different neighborhood.

Discouraged Dominic: Has struggled to get an offer accepted.

Eva Exodus: Close to moving to Idaho. Or South Carolina. Or Texas.

Sell Soon Stanley: Getting ready to list because the top is near.

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

FOMO Finnegan: He’s jumping in because he’s afraid of missing out.

Sariyah Stats: Has stats and numbers to quote. Always.

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

Cyclepants Chloe: The market has a 7 year cycle and time is up.

Laid-back Lexi: Not stressed about housing. Always chill.

Carson Corrector: Prices will correct but not implode.  

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

Bailey Broken Crystal Ball: Nobody knows the future.

This is all in good fun. I hope you enjoyed this. What other names would you suggest? Did I miss anything?

———————- (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: Which housing persona(s) have you seen? 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.

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Filed Under: Market Trends Tagged With: 2021 housing market, 2021 housing stats, Appraisal, Appraiser, El Dorado County, housing predictions, January 2021 housing market, market recap, personas, Placer County, real estate stats, Sacramento County, sacramento region housing market

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  • The housing market feels like chaos
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  • How much have prices risen since the bottom of the market?
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