The market is hot (but dull on paper)

February 12, 2020 By Ryan Lundquist 9 Comments

The market looks really dull on paper, but it’s not. Well, the latest sales stats from January are sluggish, but one of the worst things we can do this time of year is get stuck on sales. The problem is the market is actually heating up right now, but we just won’t see it for a couple months until current hot pendings start closing escrow. Here are a few fresh analogies to help explain this dynamic. Then for those interested, let’s take a deep dive into the market.

Examples to explain the market at this time of year:

Pregnancy test: You can technically be pregnant but an over-the-counter test won’t tell you that for a couple of weeks. Similarly, the market is heating up, but we won’t see the results of the market changing for a couple months until current pendings start closing escrow.

Getting a pay raise: You got a pay raise, but you won’t see it reflected until your next paycheck in a few weeks or months. The market is exactly like that. Something good is happening, but we don’t quite see it in the sales stats yet (but we do see it in the pendings).

Election results: The polls jut closed and there’s definitely a winner, but we don’t know who it is until the votes are actually counted. This reminds us of today. We don’t always know exactly what the stats are going to be in a couple months, but we do sense the market getting hot.

Planting a seed: The market is like planting a seed. You know something is growing, but you cannot see it yet until it pokes above ground in a month or two.

Thank you Twitter friends for helping me crowdsource some of these examples.

CLASS I’M TEACHING: By the way, I’m doing my favorite class at SAR on Feb 18th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

THE BIG POINT: In a normal January and February the market is in a weird spot. It’s out of hibernation from the holidays, but we might not see any upward value movement in sales stats until March (even though the market started heating up in January and February). The truth? Data lags the trend. I remind myself of this every year. Anyway, here are some things to watch right now:

I hope that was helpful or interesting.

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

This post is designed to skim or digest slowly.

THE SHORT VERSION:

January stats were down
Hot stats have an asterisk
Strong pendings so far
The market feels like 2017
Competitive feel vs increases
Pretty weak January volume
No “full” priced offers yet
Multiple offers growing
Sales volume feels normal (sort of)
Why volume slumped
Low rates are like steroids
Listings are coming
Ain’t nothing wrong with a slower pace
More visuals for surrounding counties

DOWNLOAD 82 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:

January stats were down: Usually January real estate numbers are sluggish, which is why we shouldn’t look to them to boost our self-esteem. This makes sense though because closed sales reflect what the market was doing during November and December when these properties got into contract. Here’s a good picture of the market where you can see clear softening from December to January in every category (this is normal for the time of year).

Hot stats have an asterisk: Most price metrics right now are up 5-7% compared to last year and this makes the market sound super hot. But one thing we have to realize is we’re comparing today with a very dull season last year. So for the past few months we’ve seen sexy stats that make it seem like the market is going insane, but we need to be aware of how easily numbers can get inflated if we don’t recognize how dull the market was then compared to now.

Strong pendings so far: The sales numbers for January are dull, but the seasonal market is definitely heating up. We just don’t quite see it in the stats yet. Last week 500 properties got into contract in the Sacramento Region. There were 600 new listings also. Overall pendings look to be up slightly compared to the past couple years at this time.

The market feels like 2017: It’s important to recognize the temperature of the market is definitely changing for the season as it’s getting “hot” around here, but it’s not also the type of hyper-aggressive market we saw in 2013 either. I think a good way to describe today is it’s a price-sensitive sellers’ market that feels much more like 2016 or 2017 rather than 2013.

Competitive feel vs aggressive increases: The market is definitely competitive out there, but it’s also important to realize it’s possible to have a really competitive market without crazy value increases either. In other words, we can have lots of competition without enormous price gains. This is sort of what much of last year felt like actually where the market was competitive but price increases were more subdued. Of course the verdict is still out on this spring season, and it’s frankly going to be interesting to see how the numbers evolve in light of how low mortgage rates are.

Pretty weak January volume: The positive news is this January sales volume was up about 6% compared to last year, but it was actually the second lowest January in terms of sales volume in over a decade in Sacramento County.

No “full” priced offers yet: Did you watch “Full House” from the 80s and 90s? I sure did. But I’ll admit I haven’t jumped on the “Fuller House” reboot on Netflix. I’m just not interested. Anyway, the “Full House” home in San Francisco has been on the market and it’s not selling. It’s almost like buyers aren’t willing to overpay just because the house was on TV… Seriously though, this is a great lesson. Buyers won’t pay any price, but they will pay the right price. Did you hear that sellers?

Multiple offers growing: An interesting way to gauge the market is to consider multiple offers beause it’s a clue into the current market. We don’t have sales stats yet to show a “hot” spring, but we do have pendings, and this says something. Last month 44.5% of sales had more than one offer. This is actually higher than it was last year or any year for that matter since our MLS began tracking the number of offers.

Sales volume is normalizing (sort of): For over a year we saw sales volume drop, but over the past six months we’ve been coming out of the slump. Well, technically. Stats have been up these past six months, but we have to take this news in context because we’re comparing today’s numbers with really dull stats from the previous year. In short, on one hand we’ve seen volume sort of normalize so to speak over the past two quarters, but on the other hand we’re still down from previous years as you can see in the second image below. In fact, this past year saw about 1,500 to 2,000 fewer sales compared with the clear trend from 2016 through 2018. But here’s the thing to remember. Sales volume was lower these past two years, but it’s also on the lower side of normal. So if we look at 2014 and 2015, for instance, we can see this clearly. But the bigger truth is we’ve seemed to break away from the higher trend from 2016 through 2018. So in this regard sales volume is still down. Are we now entering a new normal with lower volume? We’ll see.

Why volume slumped: When giving market updates the conversation about slumping volume almost always leads into talking about anemic listings. The idea is volume has slumped because there are fewer listings available. It sounds logical because if you have fewer listings, you’re going to have fewer sales. The truth is over time if sellers don’t list this could absolutely affect sales volume. But here’s the thing to remember. When volume started to really slump in 2018 it wasn’t because of a lack of listings. It was because mortgage rates shot up and it shocked buyers out of the market. Buyers definitively put their foot on the brakes and we saw the effect of that for over a year. So while anemic listings can certainly influence sales volumes figures over time I think we have to recognize that what started this was a reaction against increasing rates (which is really about affordability).

Low rates are like steroids: Mortgage rates have almost never been as low as they are right now, and we have a market that is very sensitive to rate changes. So when rates move up, we really feel it and the market gets dull. Likewise, when rates drop, buyers jump into the game and the market feels much more competitive. Buyers at the moment need to get into contract quickly to lock in a low rate, so that only compounds a competitive feel.

Expect more listings: Buyers have been patiently waiting for good product to hit the market and that’s finally beginning to happen. There are hundreds more listings going live every week and we can expect to see this continue through probably mid-Summer (which is the normal trend).

Ain’t nothing wrong with a slower pace: There is no mistaking a slower pace of price growth lately. As you can see when looking at the annual median price in the Sacramento region, the market has clearly decelerated. This doesn’t mean it’s declining. It just means growth has been slower compared with the beginning of this real estate cycle. My observation is sometimes the real estate community struggles to admit this because people buy into the idea that you can only say good things about the market. But markets don’t always increase and they aren’t always aggressive either.

Okay, I need to mention one thing. When we look at the past quarter of sales for each respective year we actually see a more robust quarter this past year. Does this mean the market is starting to accelerate? Well, that could be, and mortgage rates could certainly be an x-factor here. But one thing we do need to consider is last year the market was REALLY dull, so I wouldn’t put too much stock for now in comparing today’s numbers with last year. My advice? Let’s get a few more months of data before drawing conclusions.

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

Thanks for respecting 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.

Please enjoy more images now.

SACRAMENTO REGION (more graphs here):

SACRAMENTO COUNTY (more graphs here):

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

DOWNLOAD 82 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: Do you have any analogies to add to my list above? What stands out to you about the market right now? What are you seeing out there? Anything to add?

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Not getting distracted by outlier sales

February 5, 2020 By Ryan Lundquist 12 Comments

It’s been a record-breaking couple of years. In New York we saw the highest residential sale ever in the United States at $238M. Then a couple months ago California got a new record with the Beverly Hillbillies mansion at $150M. And now there’s a listing in Bel-Air that just hit the market at $500M. The truth is it’s easy to get distracted by the bling of outlier sales because of how lofty the prices are, but here are a few things to keep in mind.

Price records: It’s not a price record unless it actually sells. In many cases higher-end sales are overpriced by hundreds of thousands of even millions of dollars. As an extreme example, that $250M listing finally closed for $94M after two years of aspirational pricing.

That “One” five hundred million dollar flip: Have you heard about that five hundred million dollar flip in Bel-Air? This property hit the market last week and it’s called “The One.” It’s said to be one hundred thousand square feet and it comes with a bowling alley, night club, and four swimming pools. This property has been talked about for years and it’s finally here. You can buy this one or here’s what you can get in Sacramento instead:

Price records in Sacramento this past year:

– Sacramento County $5M
– East Sacramento $3.8M
– Woodland $2.94M
– El Dorado Hills $3.9M

Growth at the top: Here are a couple visuals to show growth in the million dollar market over time in the Sacramento Region.

Sales over $50M in the United States: If you woke up wondering how many homes are selling above $50M in the United States, you’re in luck thanks to Jonathan Miller who tracks this information and let me share the image. There were twenty three sales above $50M last year in the country. On one hand we’ve definitely seen more sales lately, but this is still a really uncommon price point (probably because FHA financing isn’t available). 🙂

Now here’s some final commentary.

QUICK CLOSING THOUGHTS:

1) These sales don’t pull the market up: Outlier sales don’t pull the rest of the market up, and they have nothing to do with the entry-level market or affordability for the average person.

2) I just gotta have it: My observation with the highest sales is sometimes cash buyers offer prices that seem disconnected from what looks reasonable on paper. This doesn’t happen in all situations, but sometimes it does where the buyer simply says, “I just gotta have it.”

3) Not the new comps: Unless you have an outlier home, the highest sales in town aren’t the new comps. In other words, don’t price higher because of an outlier. What is similar and selling? That’s probably the better question.

4) They sometimes sell for less: What’s interesting is watching record-breaking sales list again after having sold a few years prior. Sometimes they sell for more, but in other cases they end up selling for less than their original purchase despite the rest of the market having risen since the purchase. This actually happened with two of the top ten sales ever in the Sacramento region.

5) A different trend: I was asked recently if you can look at what a high-end sale sold for years ago and simply apply the appreciation rate from the city or county to come up with the value today. Look, there are many ways to figure out value, but as an appraiser I’m more interested in comps today rather than giving too much weight to a previous sale. After all, a past sale might have sold for too much if it was a unicorn “gotta have it” type deal. I saw this recently with a home that ended up selling 25% lower than the original purchase six years ago despite the surrounding market having seen massive gains. In short, I’m cautious about applying county or zip code metrics to these high-caliber sales. It’s just a completely different market that may or may not follow the county trend. What will the current market bear? That’s the bigger question.

I hope this was interesting or helpful.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on Feb 18th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: Why do you think people are so fascinated by lofty sales? What else have you observed about the high-end market? Anything to add?

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An open letter to homebuyers

January 29, 2020 By Ryan Lundquist 44 Comments

Dear Buyers,

Can we chat? I’ve been having SO many conversations about buying in today’s market, so I wanted to stir some thoughts and maybe offer some perspective. I hope this will be helpful.

Things to keep in mind about buying a home right now:

Starter home vs dream home: We all want that pristine HGTV flip, but we can’t expect a dream home on a starter budget. In other words, a first home might not have the best upgrades or condition and it probably won’t be found in the best neighborhood either.

Be realistic: Sellers are prone to overprice and that’s their glaring real estate “sin” so to speak, but for buyers I’d say being unrealistic about what you can buy is a big issue. The dream is to pick up a $150,000 brand new modern home in Midtown, but that’s nowhere close to reality. At times it can be sobering to see what you can honestly afford, but if you’re serious about buying it’s best to get up to speed with that. You don’t want to be like Jim Carrey in Dumb & Dumber saying, “So you’re telling me there’s a chance?” No, there’s not a chance to buy that house with your budget.

It’s okay to be picky and patient: Buyers get flack today for being patient. My sense is buyers are picky about getting into contract at the right price and staying in contract. That’s okay and I think you’re wise for being discerning rather than making a flippant decision (like many of us made in 2005). So take your time rather than being hasty. Just be sure you’re realistic that the home you want actually exists in your price range.

Waiting for the market to crash: Quite a few people say they are waiting for the market to crash. The idea is to hold out until prices are low and then swoop in for something cheap. But if a market implodes you might not be able to buy. The temptation is to talk about a crash as if it’s isolated without any effect on income, jobs, consumer confidence, credit scores, etc… But a crash in prices could mean other parts of the economy and life are plummeting too.

The last implosion: There is real concern about buying at the top of the market and I understand why buyers are hesitant. Just remember the implosion that happened last time isn’t the new formula for every future market change. On one hand it’s normal to see prices go up and down, so we can expect to see prices decline at some point because that’s what markets do. But the severe collapse during the last decade isn’t the new template for the future either.

Timing a market perfectly is hard: It sounds easy to time a market perfectly and buy at exactly the right time, but it’s not so easy to pull off in real life. In my experience most people buy because of lifestyle and being able to afford the mortgage payment rather than being technical about where we’re at in a price cycle. I don’t say this to gloss over a growing lack of affordability or frothy prices in some markets, but only to share a real issue. Your lifestyle is likely to be the trump card here. Where do you want to live? What school district do you want for your kids? Or if the market did decline, where do you want to ride it down? (my friend Mike Gobbi asks this honest question). Realize there is no right time for everyone either. I say it’s best to weigh your goals and lifestyle with current market trends. Does buying make sense for your lifestyle and wallet? If the market did go down, would you still be comfortable with the monthly mortgage payment? Those are reasonable and honest questions.

Bring a strong offer: If you are playing the market, bring a strong offer rather than lowballing. I just saw a Realtor on Facebook talking about a client who wanted to offer at 50% of the list price. Yeah, don’t do that. We all know sellers are smoking pricing crack and they need to come down from their “high” expectations, but at the same time sellers are in tune enough to sniff out offers that have no chance.

Fear of missing out & pressure: I recently spoke with a young man who just graduated college and wants to get into real estate. He asked me for advice since he was worried about missing out on the market if he didn’t buy right now. I told him: “Do what you want and be sure you can afford the mortgage. If you can though, get aggressive first about paying down student debt so you have more freedom for future real estate opportunities.” I mention this because there is often pressure to buy RIGHT NOW when in fact timing might not be right for every individual. For this recent grad, I’ll respect whatever decision he makes, but he won’t lack opportunities in the future if he doesn’t buy now.

Pulling the trigger: At some point you have to decide if buying is right for you. I’ve watched friends obsess over prices for years and become paralyzed in making a decision because they’re so worried about the future. Look, either do it or don’t. That’s entirely up to you and there’s no pressure from me. But my hope is for you to come to a place where you have confidence and peace about your decision rather than being anxious for years without any progress.

Talk to a loan officer: Some people can afford the market but they don’t realize it because they haven’t explored options with a professional. This is why the first step is talking to a reputable loan officer. Find out about different financing options and special programs that might be available. Remember, we don’t live in a world where everyone has to bring 20% to the table either.

Prophets: Everyone has ideas about the future, but nobody really knows what will happen. I’m not saying to ignore trends or red flags, but only to be humble about predicting. Also, realize many who make predictions simply move their prophecies to the next year when they don’t come true.

Other: What am I missing? Please speak up in the comments.

That’s my two cents. I hope it was helpful.

Questions: Buyers, any stories to share? Is there any helpful advice here? What are you most concerned about? What am I missing? Anything to add?

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Tax Records is not the definitive source for square footage

January 22, 2020 By Ryan Lundquist 41 Comments

Why is the appraiser saying it’s only 1,400 sq ft? Tax Records shows the home is 600 sq ft larger. This issue comes up ALL the time, so let’s talk about it.

MY BIG POINT: I can’t speak for every market across the country, but I’ll say there can be a difference between what the building department has on file for a house and what is listed in the Assessor’s Records. In my market Realist is what we call Tax Records and that data comes from the Assessor. In my experience it is usually pretty good, but sometimes it’s completely off because it doesn’t actually reflect what is permitted. This means we need to look to a source that does (or should) keep reliable records on building permits. And that source would be the building department instead of the Assessor.

The truth: The Assessor’s records are generally reliable, but I’m just saying sometimes they’re not. Why is this? At times it’s as simple as the original builder not turning in accurate information when a house was built. Or maybe an owner took out permits but official records were never updated. Of course we’ve all seen instances where the tax roll shows two units on one lot, but there’s really just one house nowadays. Let’s not forget sometimes owners do an addition without permits, so the Assessor might actually be correct even though the house is technically larger or has even sold on MLS as a larger home. For reference, here are ten reasons why an appraiser’s sketch might be different.

TWO SITUATIONS ON MY DESK:

1) Garage included in the square footage: I recently measured a house for a Realtor that was about 1,100 sq ft despite Tax Records stating it was nearly 1,600 sq ft. Based on my sketch it looks like the Assessor had the garage included in the square footage for whatever reason. I’ve definitely seen basements included in the square footage too.

2) Non-permitted area included: I’m also working on something where the tax roll shows an area at nearly 2,500 sq ft but about half this space isn’t actually permitted. Look, most of the time Tax Records is pretty much right (especially in tract areas), but in this case it’s scarily inaccurate. One of the problems is in Sacramento County home owners can “correct” property characteristics in Tax Records by submitting a sketch from an appraiser. I get the idea here, but what if the area in the sketch was not actually permitted (and the appraiser hopefully disclosed that in the report)? It would seem like verifying square footage as permitted would be a nice touch when adding square footage into the tax roll, but I’m afraid that doesn’t always happen. It certainly didn’t happen in the case on my desk and I’ve seen many other instances where an area that was not permitted ended up being reflected as square footage in the Assessor’s information (and then Realist).

UPDATE: The chief appraiser at the Sacramento County Assessor’s office commented on my post and I wanted to link to it here. I think he provides some helpful context (and he’s a really nice guy).

Closing advice: If something doesn’t seem right about the square footage, start digging further. Most of the time you’re likely going to be able to trust records, but sometimes they’re going to be off. So when something doesn’t smell right about the size, quality of work, setbacks, etc… it’s time to call the building department to see what permits are on file. I never rat out an owner either, so I don’t call and say, “Hey, this house measured 2,300 sq ft, but what do your records say?” Nope. I would call and ask, “Can you help a brother out? What do your records show for square footage and anything else that has been permitted?” Also, if you’re in Sacramento, here is a link that shows building permits online (you’re welcome). Lastly, remember that it’s not enough that permits were pulled. Were permits finaled? That’s the real question.

I hope this was helpful. This could honestly be a dissertation and what I’ve written only scrapes the surface. Please add your comments below.

Questions: Any stories to share or advice about relying on Tax Records (or not)? How is your market different than mine? Anything to add?

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