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Being neutral, price per square foot, and the Governor’s new digs

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I have a few things on my mind. Let’s talk about me being asked to recruit for a brokerage (really), price per sq ft, and the Governor’s new digs.

1) WHY I SAID “NO”:

A brokerage recently asked me if I would help them recruit agents. The idea was I could use my influence to attract agents to a certain brand and then get a commission for each person I recruited.

I said NO, and my answer will always be NO. I probably don’t even need to mention this, but I want to communicate clearly. As an appraiser I won’t take sides. I’m neutral in my work, but my independence also extends in the way I interact with the real estate community. This is why you’ll see me speaking in many different places and real estate offices. I’m here to educate, not advocate. The truth is if I said yes I would’ve instantly destroyed my credibility.

2) PRICE PER SQ FT:

Here’s a look at price per sq ft trends in a few local areas. I plan to share more graphs like this throughout the year if people like them. Does anyone want to see a video tutorial for how to make these? Let me know. What do you see?

Two Takeaways:

1) RANGE: There’s always a price per sq ft range, which means there’s never just one price per sq ft figure that applies to every property in a neighborhood. Sellers often want to hijack a price per sq ft figure from a sale down the street, but that’s one of the quickest ways to overprice. My advice? Pay attention to price per sq ft, but most of all ask yourself what the comps are selling for. That’s exactly what appraisers are going to do.

2) OUTLIERS: There are clear outliers. As an FYI, usually the highest price per sq ft figures end up representing the smallest-sized homes or over-the-top unique properties.

3) THE GOVERNOR’S NEW DIGS: 

Gavin Newsom is the new governor of California and he just bought a $3.7M house in Fair Oaks. This price point isn’t much in many areas of the country, but it’s actually the fifth highest residential sale ever in Sacramento County. This home is said to have over 12,000 sq ft and it’s located on 8 acres. It’s near the American River, but not on the river. Now two of the top five sales in the county have a connection to a governor (the other was the mansion Ronald Reagan started to build in Carmichael in the 1970s).

Here’s a picture I took of the front gate this week, and here’s a video from a previous listing if you wish to see the home. Not too shabby, right?

Value thought: In the future we’ll have to consider whether there will be a price premium or not for this home because a governor owned the property.

CLASS I’M TEACHING: I’m teaching my favorite class at SAR called How to Think Like an Appraiser on January 31st from 9-12pm. We’ll dig deep into comps and adjustments (and have some fun). I’d love to have you come out.

I hope this was helpful or interesting.

Questions: Would you pay more if a governor previously owned the home? What do you think of my recruiting story? I’d love to hear your take.

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At least read this part of the appraisal

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I know, nobody actually reads appraisal reports. Well, except for one thing – the value. But let’s talk about a critical place to look in an appraisal that can make all the difference. I have a story to share too about why this even matters.

BONUS: Check out the new new sales volume graphs below.

Look for these boxes: The bottom of page two in the appraisal has a few important boxes the appraiser can check, and these boxes help show if the value is “as is” or if there are required repairs, inspections, or other conditions. My advice? Be sure to look at these boxes carefully as well as any commentary listed in the space below (or the addendum if it says “See Addendum”).

If the value is “as is”, the appraiser is saying the property is worth that amount without any required repairs or further inspections needed.

If a “subject to” box is checked that likely means the value has already taken into consideration certain repairs or that the property will pass a future inspection (maybe a pest inspection, foundation inspection, two-year roof certification, etc…). So if an owner does the repairs listed, it doesn’t increase the value because the value was already based on the repairs being made.

In short, if you see a box checked besides “as is”, that’s a clue there is more to understand about the value.

An example of why this matters: A real estate agent uploaded an appraisal I did into MLS. This appraisal was completed for a lawyer and the value was not “as is”. In fact, this property had extensive damage, but the attorney asked me to value the property as if it was in average condition. This was spelled out blatantly in my report by using the boxes above (and in other places).

The problem here is the selling agent may not have realized the appraisal was not “as is” because the listing said something like, “Appraised at $670,000 in August 2018.” Yet the property was listed for $100,000 less because it was being sold “as is.” So the question becomes, could this be a liability for the agent? What if an out-of-town buyer bought based on thinking he/she was getting a discount because of the attached appraisal? Also, does this expose the appraiser to liability or reputation damage if people are reading the report and not understanding the value isn’t “as is”? I’m not a lawyer, but something doesn’t quite smell right here.

I’m not trying to make a big deal out of this, but sometimes details matter, so I caution real estate friends to look closely at the appraisal to understand the value. By the way, the agent was cool about removing the appraisal when I reached out about this.

The Big Point: Please read the bottom of page two to understand if the value is “as is” or if there are repairs built into the value. That can make all the difference.

I hope this was interesting or helpful.

SALES VOLUME SLUMPING: On a different note, here are some graphs I made yesterday to tell the story of sales volume slumping 11% in the Sacramento Region. I included a graph from 2005 also in case you’re wondering what volume did when the housing market imploded.

Questions: Any stories to share? Do you look at the boxes I mentioned above? When is it okay and not okay to upload appraisals in MLS?

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Will buyers step on the gas or brakes in 2019?

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It’s the big question right now. Will buyers put their foot back on the gas pedal or will they continue to put on the brakes? For the past couple quarters in many markets around the country buyers seemed to show some resistance to prices and back off the market a bit. So we saw more sluggish sales volume, and now we’re wondering if it’s going to continue into the new year. I have a few quick thoughts and then there’s a big monthly market update for those interested.

What will buyers do in 2019?

1) We need time: Just like a dating relationship needs time to figure out where it’s heading, we need a little space to see where the market is going to go. In the next 30-90 days especially we should get a better understanding of the direction of the market.

2) Interest rates are a band-aid: Mortgage rates are declining again and that can be a steroid to help buyers jump back into the game. During the second half of last year there was a strong negative reaction to rate hikes, so we’ll see if lower rates today can create a similarly strong positive reaction to propel buyers back into the market. But let’s remember low rates are really just a band-aid on a gaping wound. What I mean is low rates offer a temporary solution to create more sales right now without making any dent in the huge issues of a housing shortage and affordability.

3) What to watch: I have a couple quick recommendations for what to watch over the next few months. First of all, know what is normal for the spring market. What normally happens to things like sales volume, inventory, prices, days on market, etc..? Knowing what is normal can help us spot what is not normal. Secondly, I recommend keeping a close eye on listings. Is the market absorbing inventory? Are properties getting into contract? And is the number of pending sales normal or not? Remember, if pendings are anemic today, in a couple of months these properties will close escrow and show up as anemic sales volume. So by watching listings and pendings today we can get an idea of what sales might be like in a couple of months.

I hope this was interesting or helpful.

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

There were two parts to the market in 2018. The first half of the year was fairly normal, but the second half definitely slumped. Here’s some things to consider right now.

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 Camp Fire and volume: Sales volume slumped 11% these past two quarters, but December was particularly sluggish. In fact, it was the worst December in volume since 2007. Furthermore, in 20 years we’ve only seen two lower Decembers in the Sacramento Region. On one hand we figured volume would be anemic for December because it’s been more sluggish for two quarters, but then it was painfully low (25% lower). In short, if this is the actual trend, it could be a big issue if we start to see volume slump each month by 20%+. It would be a sign the market is starting to change even more dramatically. However, there could be more to the story. Let’s not forget the devastating Camp Fire in November. I mention this because in Sacramento the smoke from this tragic fire was with us for two weeks or more, and many locals stayed indoors because of the unhealthy air quality. Thus this could have led to less pending sales in November, which in turn led to less closed sales in December. I’m not saying the fire is the culprit behind our dismal December, but I think we have to at least entertain it could have been a factor to a certain extent. Yet to be fair if we see other areas of California without any fire influence show a similar dip, then I’ll be the first to say the fire didn’t have any effect. For now I think it’s okay to keep it on the table as a possibility, but at the same time let’s not blame the fire for the trend of slumping volume.

Slowing, blah, blah, blah: We’re all pretty tired of hearing words like softening, shifting, slowing, and slumping, but that’s the nature of the beast when the market changes. The trend graphs below show higher inventory, it took longer to sell these past few months, and prices sloughed as they normally do. Beyond sales volume being anemic, other metrics were fairly in line with what we’d expect to see during the fall. Though still we can easily say this fall was more dull than the past few years for sure.

Hiding behind hot annual stats: I posted some market recap images below and they’re glowing. When looking at annual stats most price metrics are up about 6-7%. Does that sound surprising since we’ve been talking so much about the market slowing? Here’s the deal. Annual stats are sexy, but when we look at the numbers over the past 3-6 months instead we see a much different trend. This just goes to show if we’re not careful we can end up hiding behind hot annual stats and missing a duller trend in front of us.

Less offers: Here’s an interesting way to see the market has changed. I know this is a bit obscure, but then again it’s a cool way to look at the market.

Momentum change: The rate of price changes has slowed lately. What I mean is in years past we’d regularly see 7-10% price increases when running stats, but over the past few months we’re starting to see only 3-6% increases instead. I talked about this recently, and fresh stats show this same trend.

Leftovers: Right now in early January we have a market of leftovers. The reality is lots of properties that didn’t sell during the fall are still on the market. Most of these homes are simply overpriced. If sellers only would’ve looked at similar sales and considered similar listings that are getting into contract it would’ve made all the difference. There are a decent number of pendings in most neighborhoods right now, but the pendings are priced right (and often in good condition).

Listen to the Listings: In case it’s useful I wrote an article in Comstock’s Magazine this month to talk about the importance of giving strong weight to listings. It’s not just about the sales.

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

BIG QUESTIONS:

1) 2018 RECAP: What did the market do last year? Here’s some recap images.

2) LAST YEAR VS THIS YEAR:

NOTE: Placer County had very few sales this December, so I wouldn’t put much weight at all on the price figures for this month. The median price actually increased quite a bit from November to December. My advice? Don’t read anything into this.

3) SALES VOLUME: It’s important to look at sales volume in a few ways to get the bigger picture. Here it is by month, quarter, and year. As an FYI, volume was down 11% during the second half of the year in the region.

SACRAMENTO COUNTY:

Key Stats:

  • December volume down 24.9%
  • 2018 volume down 3.4% (entire year)

SACRAMENTO REGION VOLUME:

Key Stats:

  • December volume down 24.8%
  • 2018 volume down 4.8% (entire year)

PLACER COUNTY VOLUME:

Key Stats:

  • December volume down 19%
  • 2018 volume down 6.9% (entire year)

4) SLOWING MOMENTUM: The 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.

SACRAMENTO COUNTY (more graphs here):

SACRAMENTO REGION (more graphs here):

PLACER COUNTY (more graphs here):

I hope that was helpful.

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: Do you think buyers are going to put their foot on the gas pedal or brake pedal in early 2019? What do you see happening in the market right now?

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Real estate trends to watch in 2019

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What’s the real estate market going to do in 2019? Let’s talk about some of the bigger emerging trends in Sacramento and beyond. You can quickly scroll or spend a few minutes digesting things. Anything to add?

TRENDS TO WATCH IN 2019:

Affordability: We’ve had seven years of price increases without dramatic wage growth, so it’s no surprise one of the most pressing issues today is affordability. This is true for buying and renting.

Buyers gain power: It’s been a sellers’ market for years, but buyers have been gaining more power as price growth has slowed. Unless we see something happen to reverse the slowing, I expect buyers will continue to gain more power this year. If sales volume persists to slump, then it will turn into a full-fledged buyers’ market.

Uncertainty about future: For the past two quarters we’ve watched sales volume slough in many markets throughout the country. Was this simply a dull year or is it something more? Buyers seemed to take their foot off the gas pedal. Will they step back on? That’s the big question, and we’ll have to watch closely over the next two to three months to know how the market is going to unfold.

This is a poll I ran on Twitter yesterday. I know it’s only one random sampling, but it reminds me of an uncertain vibe I’ve noticed. When I ask people what they think the market is going to do I get quite a few, “I’m really not sure” answers. It seems like many people are floating the idea the market could be flat or experience something very modest – whether up or down.

Mortgage companies merge: In 2018 we saw some mortgage companies merge as a way to hold on in this market, and I expect we’ll see more of that in coming time. The reality is certain companies are struggling because the refinance market died off and sales volume was weaker last year.

Color: The word on the street is we’ll keep seeing color complimenting gray. For reference, the Pantone color of the year is Living Coral. I’m not saying this orange-ish shade is going to be splashed everywhere, but maybe we’ll see it at some point. In 2016 the color of the year was a shade of blue, and we’ve certainly noticed blue in kitchens. I suppose the color of the year could be like the cerulean belt scene in The Devil Wears Prada where we mock the color until years down the road we realize we’re actually wearing it… Not that I wear cerulean belts.

Looking for an exit: Some homeowners are concerned about a “bubble” and they sense the top is near, so they’ll be looking to exit “before it’s too late.” This doesn’t represent everyone, but some have been waiting for the right time to list and they’re feeling more ready. I expect this will be more pronounced for those in a place to downsize or move out of state. The struggle for others is it’s expensive to sell and buy again in the same market, so it becomes easier to stay put. For locals, I’d watch for Bay Area migration to Sacramento as the dream is to exit a higher-priced market and purchase in a lower-priced area. And Texas, we are the “Bay Area” buyers to you.

Overpricing: Sellers struggled with overpricing in 2018 and I expect they’ll continue to struggle – though hopefully not as much. It’s normal to see sellers want to price higher, but the problem lately has been sellers pricing for a more aggressive market from the past instead of today’s slower market. And of course sellers have been aiming for “unicorn” buyers instead of real buyers.

Laws for Cannabis: Recreational cannabis is now legal in 10 states and medicinal use is legal in more than 20 additional states. Whether you like it or not, this is a trend, and we’re bound to see more states jump on board as cannabis is normalized. I don’t say this as an advocate, but as an observer paying attention to potential impacts to the real estate market. Locally I’m expecting at some point to see other cities besides Sacramento change their zoning code to allow commercial cannabis cultivation. Think about it this way too. With so much talk of a coming recession, it’s hard to imagine city councils are not considering this move to secure future tax revenue.

Emergence of concessions: Sellers have been in the driver’s seat for years, so they haven’t been in the habit of giving credits to buyers or offering concessions, but this year could be different as buyers presumably gain more power. Sellers are going to have to get used to the idea that they won’t have multiple offers on every deal and they might have to offer credits, make repairs, etc… to get escrows closed.

Smart homes: As Wi-Fi doorbells, security cameras, smart thermostats, and voice-activated light bulbs become common, we’re only going to see more “smart” features in homes.

Energy efficient construction: Green is all the rage and we’re seeing laws change to usher in more energy-efficient technology. For instance, in 2020 in California solar panels are going to be required on roofs for new construction.

Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.

Pickier buyers: Buyers are patient about finding the right house, they’re more informed than ever about price trends, and they have higher expectations about condition and location. In a market where buyers seem poised to gain power, it only makes sense to see them grow more finicky as they have a greater selection of homes to choose from.

Crowded for real estate pros: We’ve seen explosive growth in the number of real estate professionals. This makes for a crowded and competitive market – especially in light of slumping volume. I’d expect 2019 to begin to weed some people out of the market if there isn’t enough pie to feed everyone.

Getting rid of appraisers: Over the past couple years we’ve seen an increase in appraisal waivers and there is currently a move to not require appraisals under a certain threshold. There is a clear agenda to start using “evaluations” instead of traditional appraisals. This is a big deal and removing one of the systems of checks and balances (the appraisal) as the market slows might not be the best idea ever… Read more here.

Creative financing: Last but not least, underwriting has been strict for years, but lenders are feeling the sting of the refinance market drying and sluggish sales volume. Do you think there might be more pressure to loosen lending standards to help fuel more business? Right now lenders hold tremendous power and what they do in coming time can shape the next few years. If they help buyers artificially afford higher prices through creative financing, that can only inspire price growth or stall the slowing trend. Sounds healthy, right?

I hope that was helpful or interesting.

Questions: What else do you think will be important in 2019? Did I miss something? I’d love to hear your take.

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