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Solar panels & a normalish spring market

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Every week I get asked about solar panels. Do they add value? Should I price my listing higher? Will buyers pay for it? These are big questions and there’s no quick answer. But here are some things I think through and bring up when people call. This is just over ten minutes. Then for those interested, I have a huge market update to talk through the kinda sorta normal spring market.

Solar Video: Watch the video by clicking the image above (or here).

A Podcast I did with Norm: If solar isn’t your thing and you need a podcast to listen to, I just talked with Norm Shriever about appraisals, owning islands, Zillow, my Dad bod, etc… Listen directly on YouTube if you wish.

As always, thanks for being here.

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

Spring is feeling fairly normal so far. What a difference from the doom we felt in the latter half of 2018. Let’s talk about it.

THE SHORT VERSION:

  • Prices are up from the fall
  • Prices aren’t up much from last year
  • There’s lots of competition if priced right
  • Sales volume has slumped for 11 months
  • There are 2,500 less sales this year
  • So far the spring has felt fairly normal
  • This post is long on purpose. Skim or pour a cup of coffee.

DOWNLOAD 80+ 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 LONGER VERSION:

Here are some of the bigger topics right now:

It feels flat around here: Prices are definitely up from the big lull we had during the fall season, but they’re not up by much compared to last year. This is why I’ve been describing the market as flat. Most price metrics in the region are up only 2-3% over the year. In the region we’re seeing prices about level with the height of last year, though in Sacramento County we’re slightly above. This could obviously vary by neighborhood.

A more normal spring: I was talking to a real estate agent today and she said, “You know, it just feels like a normal spring.” I tend to agree. Stats are showing normalcy and we’re seeing what we’d expect to see at this time of year. Prices are up, inventory is down, sales volume has ticked up from the fall, it’s taking less time to sell, and pending sales have been strong. This doesn’t mean the market is perfectly healthy, but from a stats perspective it’s been fairly normal.

2,500 less sales this year: On one hand sales volume has recovered this spring to almost normal levels, but over the past year volume is actually down 8.5% in the region. I know that doesn’t sound like much, but think about it this way. There were 2,500 less sales this year in the region compared to last year. While this isn’t the sign of a market meltdown, it’s definitely something we have to watch. At best I would say this is an off year, and at worst it’s a symptom of the market starting to change in more significant ways (which we will only know as time unfolds). In short, don’t write home over this yet, but keep an eye on it.

Zillow: Last week Zillow announced they’ll be entering the Sacramento market by the end of the year. This is huge news, but it’s really what we expected. These days there are a handful of tech companies trying to challenge the traditional real estate model by buying privately from sellers and then re-listing on the open market. There’s lots to say about this and I’ll have some posts in the future. For now I just wanted to say I find it ironic that as much as Zillow loves to tout their accuracy rate, they won’t be buying properties based on the Zestimate. Otherwise I imagine lots of overvalued owners would jump at the opportunity, right?

Low rates are the x-factor: At the end of 2018 it seemed like the market was ready to take a dive, but lower rates this year have helped bring buyers back into the market and sustain higher prices.

Real estate is like the stock market: When I say the market is slower I get a little pushback at times. The idea is, “Dude, I just had 14 offers on my house. How dare you say the market is slow!!!” Look, it’s impossible to describe every neighborhood and price range with just one statement. This is why I say the real estate market is like the stock market. While the market as a whole might be doing one thing, not every stock is experiencing that same exact trend. In the same way, not every neighborhood, price range, or property type can be explained the same way.

Do cannabis dispensaries increase residential value? I did an interview last week with CBS 13 to talk about a study that claims cannabis dispensaries increase the value of surrounding residential properties. You can click the link to hear my take. In short, it’s true that vibrant commercial sectors can help increase value. But I’ve never met a buyer who said, “I’ll pay more because of a dispensary down the street.” In my experience locally at least, many people don’t even know dispensaries are there unless they’re cannabis connoisseurs. In short, I tend to be skeptical of studies like this.

Hey girl, let’s have bubble talk: Prices are just about back to where they were fourteen years ago when the market collapsed in 2005. In fact, most price metrics in Sacramento are within 1-3% of the peak. This means with just a little more modest price growth we might be having “Hey girl, we’re back” (yes, that was a Ryan Gosling reference (sorry)).

Keep in mind the market in 2005 was much different than today and there is no such thing as a formula where the market “pops” if we reach 2005 levels. Technically speaking, current values aren’t actually anywhere near 2005 when we consider inflation. But you know, very few buyers actually think about inflation like this – unless they’re economists, grad students, real estate geeks, etc…. In case it helps, here’s a post I wrote about buyers worried about another housing bubble.

Appraisals coming in lower: I’m hearing from some contacts of appraisals coming in lower than the contract price. As the market slows, this is something we’ll likely see more frequently if properties are getting into contract at prices that cannot be supported by market data. Of course some appraisals may legitimately come in too low, and I’m not naive about that. Whatever the case, I’d advise sellers to price realistically and in some cases pick the strongest offer instead of the highest one.

Price sensitivity: Literally half of all homes last month had multiple offers in the Sacramento Region. This reminds us buyers need to bring strong offers. But sellers ought to price correctly too. Buyers are not desperate and willing to pay unrealistic prices, so I advise aiming for the market instead of that one mythical buyer who will overpay for some reason. Remember, the market is very competitive, but that doesn’t mean prices are going crazy. 

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

FOUR BIG ISSUES TO WATCH:

1) SPRING GETTING HOT: The market is heating up for 2019. We’re seeing price changes, lower inventory, and increased sales volume. So prices are up from the dull fall, but they’re also flat as you can see under #4.

2) SLOWING MOMENTUM: Despite the heating, stats show the market is slowing down when we look at the rate of change by year. Looking at monthly, quarterly, and annual numbers helps give a balanced view of things.

3) SALES VOLUME SLUMP for 11 months: It’s important to look at sales volume in a few ways to get the bigger picture. Here it is by month and year.

SACRAMENTO REGION:

Key Stats:

  • April volume down 8.2%
  • Volume is down 8.5% over the past 12 months

SACRAMENTO COUNTY:

Key Stats:

  • April volume down 6.8%
  • Volume is down 7.2% over the past 12 months

PLACER COUNTY:

Key Stats:

  • April volume down 4.3%
  • Volume is down 8.9% over the past 12 months

EL DORADO COUNTY:

Key Stats:

  • April volume down 2.4%
  • Volume is down 12.5% over the past 12 months

4) LAST YEAR VS THIS YEAR: Check out the price metrics below. Can you see why I’m saying prices seem flat lately? This may not be true in every single price range or neighborhood of course, but this shows us price momentum is slowing. With that being said, it’s still okay to say the market is “hot”. It is. But I’d say competition is hotter than price appreciation.

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

Quick note on how NOT to use my content: Please don’t copy my post verbatim or alter the images in any way. I will always show respect for your original work and give you full credit, so I ask for that same courtesy. Here are 5 ways to share my content.

Now here are a bunch of images. Please enjoy.

SACRAMENTO COUNTY (more graphs here):

SACRAMENTO REGION (more graphs here):

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

DOWNLOAD 80+ 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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When the best comps are four years old

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Do appraisers have to use comps from the past 90 days? Nope. Of course not, but this idea is still pretty common. The truth is sometimes the best comps are much older. Usually they’re not four years old, but they were in this situation. Let’s talk about it. Anything to add?

Warning: This post is a little longer on purpose.

Some details: The subject is located in Old Folsom and was built less than ten years ago whereas most neighborhood homes were built many decades ago. The subject is about 2500 sq ft with a 572 sq ft Accessory Dwelling Unit (ADU). It had a high-quality of construction and the builder nailed the architecture because it resembled the old world charm found in nearby homes.

My appraisal & the sale: I did an appraisal before the subject was on the market to assist the owner in pricing the property. This home was listed by Gail DeMarco at $899,999 and it sold for $925,000 in only six days of market exposure. It had four offers too. By the way, I appreciate getting permission to share about this property too.

Lack of recent comps: There were no recent similar sales. Zero. Most other areas of Folsom are much newer in age too, so using other neighborhoods wasn’t ideal in my book. This is why I chose to focus on older sales to understand the neighborhood market.

The city vs the neighborhood: I looked up sales to get an idea of what buyers have been paying historically in Old Folsom. Lately there hasn’t been anything above the low $700s, but if I look back in time I can see two outliers in particular. Could those be clues for me?

The best comp: As I looked back in time I found a neighborhood sale that was ideal as a comp because it was newly constructed, had era charm (higher quality), and it also had an accessory unit. It’s like the heavens opened up and gave me a gift. Yet this sale was from 2015. Doh!! But then again, this property sold twice on the open market and commanded a price premium both times, and that helped show what the market was willing to pay for something unique.

I wondered how this one comp competed with the rest of similar-sized sales in Folsom too, so I made some visuals. This gave me clues into what was competitive in the past during both sales. In other words, which areas of town did this property compete with when it sold in 2006 and 2015?

How much has the market changed? I gauged the increase in value since 2015. The market had increased about $125,000 to $150,000 since this property sold based on the trendline on the graph and other sales, so I gave a huge adjustment up in my report. By the way, if you don’t know how to graph, you can always try to see the market by comparing sales in 2015 vs 2019 or maybe crunching numbers on a CMA. But then again, why not learn to graph?

Okay, this is getting too long, but that was some of my process.

CLOSING THOUGHTS:

1) Be sure to look wide enough: Sometimes we focus so heavily on comps over the past 90 days, but there might not be any. At times we need to look much further in time to get a sense for how a unique property might fit into the market. Whatever we do, let’s just be cautious about imposing such a narrow view that we miss older sales that might be relevant. Usually we might have sales within the past 12 months, but this was a unique case. I’d recommend finding more than one comparable sale too because one data point might not be enough to get a sense of value.

2) Keeping lenders happy: Lenders like things to be neat and often ask appraisers for very recent sales, but in my mind there just wasn’t anything adequate to use that was recent. This would be a really ugly appraisal for a lender, and it’s why I told the owner that the appraiser for the loan was going to have a hard time finding two other similar sales that were more recent. I don’t know what the appraiser did, but part of me hopes at least the appraiser used this one older sale because it was the best (in my mind).

3) Crunching old data but using new sales: It’s possible to use old data to help understand the market and still focus on new comps. So in a case like this you could study much older sales but then choose to focus on much newer ones in an actual appraisal or CMA.

4) The fine print of lenders: Keep in mind lenders do sometimes have requirements for how old comps can be. For instance, FHA wants all sales to be within 12 months. So if a buyer here was using FHA, I could study older sales and even give weight to this older sale in the comments in my report, but I wouldn’t actually use this as a comp in my appraisal.

REAL ESTATE AGENTS: If you happen to be having a conversation with an appraiser about sales you used to price the property (without pressuring the appraiser to meet a certain value of course), I suggest you generally try to focus on more recent data because lenders tend to get fixated on new sales. Yet don’t be afraid to talk through older stuff. Just be sure older sales are truly relevant though. For instance, in the case above it would be okay to share this one comp from 2015 because it was truly the best one. But you hands-down need current stuff too.

I hope that was interesting or helpful.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: Anything else to add? What would have you done in this situation?

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Two things to understand about Zillow’s accuracy rate

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How does Zillow’s accuracy rate work? Let’s talk about two important points. I’m not writing because I’m angry, but only because the public places enormous trust in this brand, and I see this accuracy rate quoted everywhere. Well, let’s at least know the fine print so we can have informed conversations.

Two quick points on Zillow’s accuracy rate:

1) Median makes all the difference: Zillow says their median error rate is 5% for the United States. That sounds impressive, but we have to realize this is a MEDIAN error rate, which means the Zestimate is within 5% of the purchase price only half the time. So Zillow’s slogan could be, “We’re within 5% half the time.” But that doesn’t sound as polished as “Our median error rate is 5%”.

2) Zillow uses the most recent Zestimate: This is such an important point – even if it feels a little technical. I have an example to help show what I mean too. Zillow states “Zestimate accuracy is computed by comparing the final sale price to the Zestimate on or before the sale date.” Let me show you why this matters.

An example: Imagine a property listed for $380,000 and the Zestimate was also $380,000. But then after a series of price reductions, the home sold for $350,000. That would be 8 percent lower than the original Zestimate. That’s not very good, right? Well, now imagine as the list price was reduced, so was the Zestimate, and the most recent Zestimate was $353,000, which is only 1 percent higher than what the property sold for. Here’s the kicker: The home may have sold for 8 percent below the original Zestimate, but for its accuracy rate Zillow can claim 1 percent because it uses the most recent Zestimate instead of the original one.

In short, the most accurate stat here would be 8%. After all, the home literally sold 8% lower than what Zillow said it was worth. Thus when Zillow uses the most recent Zestimate instead, it’s a clever way to get much sexier stats. 

One more thing.

Chasing the List Price & Fixer Upper TV show: What sort of effect does the list price have on the Zestimate? In other words, does the list price actually change Zillow’s value? This might not happen in all cases, but here’s a glaring example of the “shotgun” house from the TV show Fixer Upper. It’s a one-bedroom that was listed for $950,000 and didn’t end up selling.

In this example the list price was outrageously high, but Zillow’s algorithm looks to have simply matched the Zestimate to the list price. This might not happen in all cases, but it certainly did here.

I hope that was interesting or helpful.

Article I wrote: Here’s a piece I wrote about online valuation sites for Comstock’s Magazine last month.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: What do you think? Anything else to add?

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How much is that new roof & AC unit worth?

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“I paid $25,000 for a new roof and AC unit. How much is that worth in an appraisal?” I get questions like this all the time and my answer can be frustrating as I say, “It depends.” Here’s my thought process though and why I can’t just rattle off a quick number. Anything to add?

The full amount: A new roof and AC unit are costly, and sellers often want to pass on the full cost to buyers. The idea is, “Hey, I spent twenty five grand, so the buyer is going to reimburse me.” But cost doesn’t always equal value, and it’s not so common for buyers to pay “dollar for dollar” either.

Boring & bling: A roof and AC unit are definitely important, but they’re sort of boring maintenance items instead of bling. What I mean is buyers don’t tend to visit a property and say, “Oh my gosh, did you see that epic new roof? I’m in love.” Nope, they tend to be more impressed with the latest trendy features instead of the age of the roof or AC unit.

Bare minimum: Buyers expect a working roof and AC unit as a minimum. Lenders definitely expect a roof with a minimum of two years of life also. This is why buyers aren’t always willing to pay big bucks for these features because on some level they simply expect them to be adequate already.

Long-term improvements: A roof and AC unit are going to be an advantage for decades, but a buyer might only be in a house for 10 years. So it probably doesn’t make logical sense to pay for the benefit of the entire lifespan of these items in one instance. In other words, the seller has added marathon improvements, but buyers may not pay that during their sprint to purchase.

Location: An AC unit in Antarctica probably isn’t too valuable, so on some level we have to consider location. On a related note, the higher-end of the price market might react differently compared to the lower end of the market. The truth is buyers in some locations or price points are going to be more informed or picky about certain features. Let’s remember energy efficiency can be a factor here too in light of extra savings.

The comps: At the end of the day we have to look to the market for the answers. I tend to consider all the things above, but I also have to be careful not to impose any of my general thinking on the appraisal. Here’s the key. What have buyers been paying for these features? As we look at comps, what seems to be a reasonable amount that buyers would pay? Let’s study comps to begin to get clues about value. 

I know, I didn’t actually answer the question. But that’s not my goal here. My goal is to highlight some important thinking as we try to find the answer.

I hope that was helpful or interesting.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: What point stands out to you the most? Anything to add?

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