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That place where insurance & real estate collide

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Insurance can make a huge difference in a real estate market. We don’t often think much about this, but it’s something to watch in areas of California where we’re seeing insurers pull out of the market in light of disastrous fires. This is a big deal, so let’s talk about it.

Today I’m doing a Q&A with Eric Carlson who manages two Lyon Real Estate offices in Placerville and Cameron Park. I was talking with Eric about this recently and figured it would make for a helpful blog post. After all, this is a dynamic affecting real people right now. 

Ryan: What’s happening with insurance costs in El Dorado County? 

Eric: With all the recent wildfires in California over the past few years, and especially the Paradise and Malibu fires, insurance companies are rapidly pulling out of areas like El Dorado County with their fire insurance, or even their full coverage. In most cases they will still insure the structure and contents, but for the vast majority it’s really hard to get the fire insurance component. 

Ryan: El Dorado County is a 2+ hour drive from the Town of Paradise, but what happened there is affecting the local market?

Eric: Yes.

Ryan: Why does fire insurance even matter for real estate?

Eric: Lenders won’t close on a property without fire insurance. It’s something they tend to require.

Ryan: How are buyers getting insurance if big companies are backing out?

Eric: It’s now very common that buyers (and even some existing homeowners that got cancelled) have to go with the California Fair Plan for their fire insurance. This type of insurance is basically a last-resort policy available in California that is often used when someone has not been able to obtain insurance. Fun fact about the Fair Plan… It has already been announced they are raising their fee 10% to 20% on April 1st. 

Ryan: What type of rates have you seen your clients quoted lately?

Eric: For insurance companies that are still insuring, it’s super high. We’ve had some quotes come back for like $8,000, $14,000, and even $20,000 for the year. And that’s just for the fire insurance component… It doesn’t include all the other additional insurance for the structure, contents, etc. For now, it seems that a “typical” home, like a 3-ish bed, 2-ish bath home of 2,000 square feet or less, on 2-10 acres will pay about $4,000 per year for the California Fair Plan.

Ryan: What effect have you seen in the market due to these changes?

Eric: Additional insurance costs have scared away some buyers from buying in our rural area. Buyers have actually said that to my agents. They don’t want to pay an additional $300 to $400 per month for not-so-stellar fire insurance. Other buyers have put a hold on the rural property search/move until the insurance companies decide what the long-term plan is. As you know, added costs to a purchase can lessen desirability and/or affordability. And now there is that feeling of it being a “risky purchase” if a fire like the one in Paradise were to come through our part of El Dorado County. We actually had one seller credit the buyer about $25,000 so the buyer could get two years of insurance.

Ryan: Are you seeing this throughout El Dorado County?

Eric: We don’t see this happening in El Dorado Hills. But it starts in Cameron Park/Shingle Springs and carries up to Pollock Pines, and from Georgetown down to Somerset. Strangely, most of Grizzly Flats is not impacted. I’m told because of a great fire station there that can take care of the immediate town. But as some of our buyers are finding out, it applies to all homes in California on multiple acres with brush, slopes, dense foliage, trees, dry grass, etc. It’s not just our county; it’s all counties like us.

Ryan: Any closing advice for buyers right now?

Eric: Yes, I have three things: 1) Consult a few insurance agents to get a handful of quotes so you can compare rates; 2) If you can, try to use a local insurance agent in the county you’re buying in. Locals tend to be more in tune to what is going on with issues in your county and can better serve you; and 3) Talk to those insurance agents very early on in your home hunt. They can give you some general estimates while you’re searching (they’ll need a specific address to give an accurate quote), but as soon as you make an offer on a home and get into contract, immediately get specific quotes for insurance for that property. Don’t wait until your inspection contingency period is almost over. Both you and your lender will want to know those insurance costs of your future home as soon as possible.

Ryan: Thanks so much Eric. This was very helpful. You killed it.

QUICK TAKEAWAYS:

1) It’s NOT just about supply & demand: New laws, taxes, regulations, and changing business dynamics can affect prices and affordability in a market. It’s never just about supply and demand.

2) Different factors in different locations: The market isn’t the same everywhere, so it’s key to understand what factors are affecting a local area.

3) Uncertainty in the market: There is an element of uncertainty right now with changing insurance costs. This is definitely something that can constrain prices over time because it gets much more expensive to own property.

Market Update Video: In case it’s useful, here’s a market update video. It’s about ten minutes and I walk through some of the bigger trends right now with prices, sales volume, and momentum. My goal is to help explain what’s happening and give some different ways to look at the market. Enjoy.

Question: How have you seen insurance issues affect a market? Also, if you live in an area with increased costs, please share your story.

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Is the market good or bad right now?

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People ask all the time. Is the market good or bad? I have some quick thoughts and then a huge market update for those interested. 

The truth: The market isn’t always good or always bad. What I mean is it’s either good or bad depending on whether you can move, sell, buy, or invest. At times we get so focused on what prices are going to do that we forget to think this way. Remember, no matter what prices do in the future, the market will still be bad or good for various people.

College Admissions Analogy: Real estate is sort of like getting into college. It’s good if you have the grades and financing, but bad without a high GPA (or rich parents who can bribe school officials). Too soon? 🙂

The big point: I don’t say this to gloss over prices seeming to be closer to the top of a real estate cycle. I’m just saying sometimes we label a market good or bad without digging deeper. Who is it good or bad for? Who are the players in the market? Who will become the players if the market changes?

Any thoughts?

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

The market slumped during the second half of 2018, and now it’s an interesting spot. Let’s talk about it.

THE SHORT VERSION:

  • Pendings were fairly normal for February
  • Sales volume has slumped for 9 months
  • We’re starting to see prices tick up
  • I’m now publishing El Dorado County stats
  • Most metrics are doing what we’d expect for the spring
  • This post is long on purpose. Skim or pour a cup of coffee.

DOWNLOAD 70+ graphs: 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’s some of the bigger topics to consider right now.

That weird place of spring: We’re in a place in the market where a hotter seasonal trend is happening, but we don’t quite see it in the sales stats yet. Let’s remember sales from February tell us more about what the market used to be like in December and early January when these homes got into contract. So we have to look to the listings and pendings right now to understand the market.

It feels kinda normal-ish: It’s felt like a somewhat normal spring lately. We’ve seen prices tick up, multiple offers on many listings (if they’re priced well), it’s taking less time to get into contract, inventory is going down, etc… We’ve basically been seeing all the stuff we’d expect to see in the spring. Of course the real test is whether sales volume will be normal in March, April, and May, but we just don’t know that yet.

Dude, call the market already: Some people want to know definitively what the market is going to do in 2019, but we don’t have enough information yet. Besides, interest rates went down, and that’s like injecting a steroid into the market. So in some senses we have to wait until this steroid wears off.

Flattening rents: We’ve seen rents flatten lately. They’re still up, but the rate of increase is not as aggressive as it used to be.

The market isn’t slow, but it’s slowing: I get a little pushback when I say the market is slowing because the spring has felt more competitive. Here’s the thing. We’re having a hotter spring, but in the bigger picture of the market it’s just not as aggressive as it used to be. I think Barry Habib’s analogy says it perfectly. It’s like the market was driving 80 mph and now it’s driving 30 mph. In other words, we’re still seeing forward price progress, but it’s not 2013 anymore. If the stats over these next few months say differently of course, then I’ll change my tune based on new information. 

Less offers (but actually more): Multiple offers are down about 13% in the region this year compared to last year, but the number of multiple offers actually increased from January to February. But that’s normal for spring, so I wouldn’t write home over it. The takeaway? Buyers, you need to bring a strong offer. Don’t think you are running the show. You’ve gained power from last year, but you’re not in charge.

Nine months of slump: Sales volume has slumped for the past nine months in the region. This means the number of sales was lower compared to the same exact month the previous year. In short, if this doesn’t change over time and get back on track, then we could be talking about the market starting to embark on a different trend. This past month volume was down about 7% in the region, which is much better than over 20% in December.

Normal pendings & steroids: Last month pending sales looked fairly normal, which suggests the market is trying to flirt with normalcy for the spring compared to the slump of volume we had over the past 9 months. What’s making the change? It’s most likely due to interest rates declining. Low rates are like a steroid for the market. Remember, if pendings were fairly normal in January and February, that could lead to fairly normal sales volume in March & April. But let’s see how it shakes out. We don’t have those stats yet.

Not many listings yet: There’s not much on the market yet, but that’s fairly normal for the time of year. Historically listings hit their stride between April and the end of summer, so we can expect lots more in coming time. For now inventory is declining, and that’s normal for the time of year.

Final thought before the graphs: In closing, the market is in an interesting spot. It feels like it’s juggling uncertainty from last year with a striving for normalcy today. We only have two months of data and we need to keep watching to see how this market is going to emerge.

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

BIG ISSUES TO WATCH:

1) SPRING GETTING HOT: The market is heating up for 2019 and here’s proof. We’re seeing price changes, lower inventory, and increased sales volume.

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. As a side note it’s going to be interesting to see price metrics these next few months.

3) SALES VOLUME SLUMP: 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 COUNTY:

Key Stats:

  • February volume down 10.5%
  • Volume is down 5.2% over the past 12 months

SACRAMENTO REGION:

Key Stats:

  • February volume down 6.7%
  • Volume is down 6.6% over the past 12 months

PLACER COUNTY:

Key Stats:

  • February volume was up 13.3%
  • Volume is down 6.8% over the past 12 months

EL DORADO COUNTY:

Key Stats:

  • February volume was up 23%
  • Volume is down 7% over the past 12 months

NOTE: El Dorado County monthly stats vary significantly. I wouldn’t put much weight on volume being down 23%.

4) LAST YEAR VS THIS YEAR: Here’s a comparison of last year compared to the same time this year. What do you see?

Quick note on how NOT to use my content: Please use these images in blog posts or on social media, but don’t copy my post verbatim or alter the images in any way. I recently saw someone remove my blog link on an image. Look, 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):

NOTE: This is the beginning of sharing more for El Dorado County (as long as people want it). What type of graphs would you like to see?

DOWNLOAD 70+ graphs: 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? Which metrics above stand out to you the most? What are you hearing from buyers and sellers lately?

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The problem of giving too much weight to previous sales (or not enough)

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It must be worth more than it sold for in the past, right? In many cases, YES. But sometimes NO. Let’s talk through some things to consider when pulling comps and noticing a previous sale. I find many of these points coming up lately in conversation, so I hope this is helpful.

Here’s some things I keep in mind about previous sales:

1) Context: Previous sales can be powerful sometimes because they help us see how a property has historically fit into the market. In other words, we get to see context. What were the comps at the time of the sale? Here’s an example where a home sold three times at a very similar price position in the market. When I see something like this I can get clues into comps and where this one might fit into the market today. Click thumbnail to see larger image.

2) Unique property: Sometimes when a property is unique though a buyer might have been willing to pay more than what current buyers will pay. Thus a prior sale doesn’t always paint the perfect picture for value. For example, a home in Granite Bay sold for $4.7M in 2013 and then $4.2M in 2018 despite the market showing hefty increases over the years. Thus we have to be careful not to give too much weight to a previous sale while ignoring current comps.

3) Unicorn buyer overpaid: Buyers overpay sometimes – especially if they’re paying cash. I can think of a property that sold at a lofty level a few years back and it’s been re-listed for a while now without any bites. In this case I wouldn’t give any real weight to the previous sale because it looks like it represented a unicorn buyer at the time rather than the market.

4) Appraisal waivers: One thing I’m watching is appraisal waivers. If there was no appraisal on a property and it ended up selling too high, the previous sale likely means very little for value.

5) Inflated & distressed: When a sale took place in an inflated market (like 2005) or a distressed market (like 2007-2009), I tend to give very little weight to these sales. I’m going to look at them and probably even graph them, but I might take them with a major grain of salt.

6) Neighborhood change: One of the things we need to consider is how neighborhoods have changed over time. In other words, it’s possible the market would look at a property differently today than the past. This is especially true with gentrifying neighborhoods, so I better be careful about giving too much weight to older sales.

7) Slower market: Previous sales sometimes remind us the market is slower. I find owners today often expect massive value increases from two years ago, but comps might not be astronomically higher since price appreciation has been slowing. We just haven’t had recent 20% increases like we did in 2013.

8) Not penalizing because it sold too low: If a property sold too low in the past, it shouldn’t penalize the value for today. This is why appraisers have to take a previous sale with a grain of salt and not give too much weight to it. Let’s remember value is found in the comps – not in a previous sale.

CLOSING ADVICE: I recommend paying close attention to previous sales to get clues to understand how a property fits into the market. But don’t get so stuck that you don’t see the most important thing – current comps.

VIDEOS: If you need some background noise, here’s two videos. The first is a presentation to Realtors and the second is a Q&A after a talk I gave to investors.

10 things to tell your clients about the market (or not) – 30 min
Q&A after a presentation I did to investors – 20 min

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

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Appraisal waivers & the foreclosure wave

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I have two things on my mind today. Yesterday I had a conversation about appraisal waivers and “hybrid” appraisals, so I wanted to share my take. Then I have some new graphs to help tell the story of the foreclosure crisis.

APPRAISAL WAIVERS & “HYBRID” APPRAISALS:

Here’s a Q&A with with Scott Short on appraisal waivers and “hybrid” appraisals. I get things changing for appraisers in light of big data, but diminishing the role appraisers play seems like a bad idea for the housing market. Watch here. If you want to just hear the “hybrid” part, it’s at 7:12.

By the way, a local appraiser named Barry Cleverdon had an accident a few weeks ago and is currently in a coma. Here is Barry’s GoFundMe.

THE FORECLOSURE CRISIS:

1) Healing: The foreclosure rate in the United States is way down. I would guess most markets have essentially healed. In Sacramento County ten years ago 84% of sales were distressed and now that number is less than 2% when considering both short sales and bank-owned sales (REOs).

2) Not the same in every neighborhood: When it comes to distressed sales, some areas and price ranges did better than others as you can see below. This reminds us the market doesn’t experience the same exact trend everywhere.

3) The power of equity: Areas with more equity and higher prices tended to fare better with the number of distressed sales. I know that’s what we’d expect to see, but it’s interesting to actually see it. It’s amazing how equity (and probably better jobs) can create opportunity and even help people weather a storm.

4) The promise of a new wave: Many have promised a new wave of foreclosures, but we just haven’t seen it. I hear things like, “Dude, there are so many Notice of Defaults right now.” That may be true, but not all of these NODs end up hitting the market. Or if they do go into foreclosure they may likely be sold on the court steps before MLS.

Two weeks ago I asked friends on LinkedIn which areas they wanted to see, and that’s how this post was born. I didn’t get to everywhere, but I got to most areas.

MAKE GRAPHS LIKE THIS: If you want to know how to make a graph like this, here’s a tutorial for how to put a few different layers of data on one graph.

BLOG BASH: Just a reminder my wife and I are hosting a party at Yolo Brewing on Saturday March 2nd. It’s an excuse to get together and you’re invited. It’s okay if we’ve never met too. I’ll be buying the first 100 beers. Details here.

Questions: What do you think of appraisal waivers and “hybrid” appraisals? What stands out to you most in the images above?

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