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Price ceilings & literal ceilings that are too low

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I have two types of ceilings on my mind. How do you know when a market begins to reach its price ceiling for the season? And how low can a ceiling be in a home and still be considered legitimate square footage by an appraiser?

I recently inspected a house where the ceiling was 6 feet 8 inches high. Is that tall enough to count? Is there such a thing as too low? Let’s talk about it. 

How low can a ceiling be? Lots of people think 8 feet is the minimum ceiling height because that’s a common height in most homes, but it’s actually 7 feet according to the American National Standards Institute (ANSI Z765). Technically ANSI says it’s okay to have a ceiling height at 6’4″ under beams though. Keep in mind sometimes a ceiling might have a downward slope like we see with a Tudor or the photo above. When ceilings slope really low, there is something called the “5 foot rule” where the appraiser can count any space above 5 feet as living area as long as over 50% of the ceiling area is at least 7 feet.

When appraisers observe houses with ceilings below 7 feet, they’ll typically email the lender and say, “Hey there, this property has a ceiling less than 7 feet, and that doesn’t cut it according to ANSI standards. How do you want me to proceed?” After hearing that there’s a good chance the lender might not want to do the loan. Of course a property with low ceilings can still have value and even be appraised, but it may need to be marketed to an investor paying cash instead of a buyer using conventional or FHA financing.

Market price ceilings: Switching ceiling gears, how would you know if the market was beginning to reach its price ceiling for the season? That’s a great question to ask since many markets in the United States are going to be doing just that over the next couple of months. As I said in June, the Sacramento market is beginning to slow down even though we don’t see it in the sales stats yet. This doesn’t mean the market is cold or values are declining. It only means we are seeing subtle clues to a slowing market as high altitude values from the spring are at the beginning of a downward seasonal descent.

Umm, please don’t say the market is slowing!!!

At times it’s not very popular in the real estate community to publicly talk about the market slowing, but it’s something that happens nearly every single year. I realize we have big headlines about the market being “hot”, and it really is in many way, but catching the symptoms of a slowing market is key for valuing properties (and it’s good for clients). I suggest starting to watch price reductions more closely because they’ve been increasing lately in Sacramento and this is one of the first signs of a slowing market. Also pay attention to days on market increasing in coming time along with some of the other factors above (including the sales to list price ratio). I highly recommend asking other real estate professionals the question, “What are you seeing out there?” It’s amazing the type of insight you can glean from title reps, loan officers, appraisers, agents, escrow officers, etc…

I hope that was helpful or interesting. Any thoughts?

–——-——- Big monthly market update (it’s long on purpose) ———–——-

Values showed an increase again last month and sales volume was very steady compared to the past few Junes. Overall most price metrics were up 1-2% from last month, though the month prior they increased 2-4%. Inventory is still down about 20% from last year, and properties have been selling like hotcakes in only 9 days (that’s the median). In case you wanted to know, most price metrics are up about 7% from last year. One interesting thing to watch is FHA sales are starting to sag more noticeably as they ticked down a few percentage points to 21% of the market in Sacramento County. Granted, 1 in 5 sales is still quite a bit of FHA volume, but last year we were seeing 1 in 4 sales go FHA. It’s easy to think this means first-time buyers are getting squeezed out by Bay Area buyers, but that’s not really the case. My sense is the downtrend is due to more would-be FHA buyers using competitive conventional products instead of FHA. Lastly, it’s worth noting Curbed has a glowing article about Sacramento (cool that they quoted me too). This article is starting to go viral and it’s bound to get many locals pumped on how “hot” the Sacramento market is. Yet despite being “hot” in many ways, let’s remember to look for the signs of a slowing market because we have to realize the market usually hits its seasonal price ceiling right about now (but we won’t see it in the sales stats for a while). I could go on and on with words, but let me share some graphs to show the market visually.

DOWNLOAD 74 graphs (and a stat sheet) HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

Sacramento County graphs this month (more graphs & stats here):

Sacramento Regional graphs this month (more graphs & stats here):

Placer County graphs this month (more graphs & stats here):

DOWNLOAD 74 graphs (and a stat sheet) HERE: Please download all graphs in this post (and more) here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: Any low ceiling stories to share? Is the price ceiling for the season just about here? Did I miss anything? I’d love to hear your take.

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Smoking pricing crack, era charm, & blaming appraisers

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If you’re like me, you have many things racing through your mind. When it comes to real estate there is always so much to talk about, so today I wanted to mention a few topics I’ve been thinking of over the past week. Any thoughts? I’d love to hear your take. 

Smoking Pricing Crack: Did you see that listing in Waco Texas of the property that was rehabbed by Chip & JoAnna Gaines of the reality show Fixer Upper? It was purchased for $28,000 and now it’s listed for sale at $950,000. 

I’m not located in Waco obviously, but I have a feeling someone might be smoking pricing crack on this one so to speak. A quick glance at Realtor.com for listings priced at $1M in Waco shows us there are zero other 1000 sq ft 1-bedroom homes anywhere near this level. Thus let’s remember a lofty list price doesn’t necessarily have anything to do with real value. Often times prices like this are more about publicity than anything. This is true not just in Waco, but in every market in the country. However, we still have to ask, would the market pay more for a home that was rehabbed by reality stars? Or is it just the upgrades people are paying more for rather than who installed them? (Photo credit above: Realtor.com).

Era Charm: I recently appraised a house in an older neighborhood of Sacramento and ended up bringing the value in on the lower side of the competitive range. Why? Because the house lacked era charm that buyers tend to pay more for in the neighborhood.

Instead of the home having wood siding, wood flooring, and a “charming” vibe from yesteryear, it had stucco siding, cheap laminate flooring, and it stood out in a bad way because it didn’t look the same as other homes from the curb. This might sound like I’m being subjective, but the proof of a lower value was in the comps. I found a couple “vibe-less” sales and they definitely closed at a lower price tier. I also talked with the previous Listing Agent who had the home on the market before it was withdrawn. She confirmed one of the bigger issues with why the house did not sell was the lack of era charm. This is a good reminder that value doesn’t always increase just because there are newer “upgrades.” By the way, the photo above is not the house I appraised, but it’s one in Tahoe Park that sold recently from Realtor Lola Mouras (photo credit: MLS).

Blaming Appraisers: I saw an economist on Twitter recently suggest appraisers are holding back the housing market. I’m not mentioning this to call this person out or start an argument, but I wanted to pitch in some thoughts because it’s really easy to blame appraisers.   

The truth is appraisers don’t make markets move up or down. Appraisers are more like a ruler to measure the market rather than a gas pedal or brake pedal for real estate values. In other words, we’ve seen massive value increases over the past 5 years, but that’s not because appraisers have driven the market up. Some of the big value drivers have been historically low interest rates, an influx of cash investors, and a shrinking housing inventory. Or right now in Sacramento we are seeing more price reductions, so is a slowing market being caused by appraisers? Nope. The market usually begins to slow at this time of year. This is exactly why I love the multi-layered real estate cake analogy because there is a recognition the market is influenced by many different factors or “layers” so to speak. I’m not discounting the reality that massive appraisal fraud can play in a market, but only saying we have to remember there are huge forces at play that are so much bigger than what appraisers are doing.

Well, that’s what’s on my mind today. I hope everyone had an incredible 4th of July. Let’s make it a great rest of the summer now.

Questions: Would you pay more for a Chip & Jo house? How much do you think era charm really matters in real estate? Do you think appraisers are holding back the housing market? I’d love to hear your take.

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Affordability in an increasing market (or lack thereof)

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Affordability is a huge topic right now. It seems like most real estate articles are talking about how insanely “hot” the market is and how much values have increased. But as much as the public eats up sensational headlines, we all know affordability is becoming an issue too for both buyers and renters. Today I hoped we could kick around some trends in the market when it comes to affordability. Anything to add?

Wage growth and values: One of the red flags over the past five years is having so much growth in home prices and rents without much wage growth. This is why we see some buyers technically affording the market, but at times they have several different jobs to help make ends meet. We also see multiple renters shacking up together to help afford higher rents.

Looking beyond single family detached homes: As values have increased, some buyers are starting to look beyond the single family detached market to something they might be able to afford. Other options include condos, halfplexes (attached unit), or even mobile homes. These properties represent affordability to many because they are often listed toward the bottom of the price spectrum. For reference, right now there are 27 mobile homes listed for less than $50,000 in Sacramento County (located in a mobile home park). I wouldn’t say the mobile market is “on fire” by any stretch, but I have heard more chatter about them lately, which is surely a sign of the times. I know, if you buy in a trailer park you’ll have to deal with “trailer trash” comments, though for some a mobile home is a viable financial option to help pay down debt and hopefully avoid some of the crazy rent increases lately. Ultimately let’s continue to keep an eye on what’s happening at the bottom of the market.

Unrealistic buyer expectations: My sense is some prospective buyers have unrealistic expectations about the type of house they can purchase in today’s market. For instance, I heard someone recently talk about wanting something under $300,000 that was modern, newer, eco-friendly, and located in Midtown. The truth is a property like that doesn’t exist right now in that price range in Midtown. But does it exist somewhere else? That’s the real question buyers need to ask. Coming to terms with locations you can and cannot afford is not always easy, but it is necessary for those who choose to buy.

Why tiny homes mostly don’t work: We see tiny homes on HGTV and like to think they are a viable option for many buyers or even a solution to the housing shortage, but they aren’t usually attached to the land, which means they don’t qualify for traditional financing. Of course you can obtain financing for a tiny home with an RV loan or personal loan, but that’s going to be more expensive. Even if you have the cash or financing to buy a tiny home, one of the bigger problems is the cost of land. We have to remember when a market increases in value, it’s mostly the land that is becoming more valuable. And when a market declines, it’s the land more than anything that loses value. The glimmer of hope though for tiny homes is that Fresno passed an ordinance last year that allows residents to put tiny homes on their property and consider them permanent residences instead of just temporary. This means for those who cannot afford higher prices in the single family detached market, this might be an option so long as they have access to land (maybe in a family member’s backyard). By the way, there is a 360 sq ft home listed for sale right now in the Elmhurst neighborhood of Sacramento.

Storage container homes: The market seems hungry for alternative housing as long as it’s affordable, though the unfortunate thing about this type of housing is it’s not necessarily inexpensive because of the cost to build and the problem of finding affordable land. It may still be possible though to build a storage container development on tiny lots at a reduced cost compared to stick-built new construction. We have seen some storage container commercial developments come to town, but it seems pretty quiet as of yet for residential units. Anyway, this reminds us there is space in the single family market for someone to “crack the code” or think outside the box to figure out a way to bring alternative housing at a lower cost than stick-built new construction. The image below comes from a local storage container company called TAYNR.

The squeeze on supply: Some buyers really are getting priced out of the market, though the truth is we might not feel the effect of missing buyers dropping out of the game because of the reality of having a housing shortage.

Creativity: It seems like every week I’m hearing about a new 0% down or 1% down loan. Thus as affordability vanishes for some, lenders are slowly helping buyers artificially afford higher prices by making their loan products less expensive. Lenders have so much power right now to shape the future of the market by what they do in coming time. Let’s remember another “creative” aspect of the market is seeing appraisal waivers become more common. I get there is a place for that, though let’s be cautious. 

Questions: Would you ever buy a tiny home or a mobile home? What else are you seeing out there? Did I miss anything? I’d love to hear your take.

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The fidget spinner “bubble” and softening real estate values

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I see fidget spinners everywhere. It’s incredible how popular they’ve become over the past few months, right? Though like any fad, the market is about to change. Well, that’s what my 11-year old son thinks anyway. He sensed a “bubble” brewing, so he unloaded some of his spinner inventory on the last day of school and ended up raking in $37 (little stud). 

Slower “spin” in real estate: About this time of year the real estate market begins to cool or “spin” more slowly so to speak. Though at times it feels controversial or blasphemous to say that because it goes against the grain of an ultra-positive real estate shtick. Yet no matter what, it’s normal for values to soften every year, and right now we seem to be in the beginning stages of that. This doesn’t mean the market is not incredibly competitive still or values have stopped increasing. It just means high altitude values in spring tend to subtly begin a downward descent right about now.

Pregnancy analogy: The problem is when the market slows we don’t see it in the stats yet for a couple months. It’s like taking a pregnancy test. You can be pregnant, but an over-the-counter test won’t tell you that for two weeks even though your body has 100% changed. Similarly, the real estate market may have begun to shift, but we might not see any difference in the stats yet. For example, almost every year July sales take longer to sell than June sales. It’s easy to then say, “The market changed in July.” But the truth is things actually began to change in May and June. After all, let’s remember the sales that closed in July got into contract in May and June. Thus when July sales stats show a slowing, it really tells us the market began to slow a couple months prior.

The Point: Whether spinners or real estate, let’s watch for signs of change so we can speak definitively about trends and give solid advice. Let’s be cautious to not talk about markets like they always stay the same either.

I hope that was helpful or interesting. Any thoughts?

–——-——- Big monthly market update (it’s long on purpose) ———–——-

If you didn’t know, sales volume last month was the strongest May we’ve seen over the past 4 years. But don’t get too excited because sales volume for the entire year is about the same as last year. No matter how we look at it, price metrics are up 7-9% from 2016 and they increased by 2-4% last month. One of the themes that won’t go away is we have a shortage of housing. In fact, housing supply is 22% lower right now compared to last year, and it’s been putting pressure on values to increase – particularly at entry-level price ranges. The tricky part lately is many contracts are getting bid up due to multiple offers (even beyond a reasonable appraised value). This can favor sellers accepting offers from buyers who have more cash to make up the difference between the appraised value and the contract price, though FHA sales stats show first-time buyers are still finding ways to close deals. In higher price ranges the market feels much softer, though we are still seeing multiple offers when properties are priced correctly. This is a good reminder that it’s possible for the market to feel more aggressive than actual value increases. In other words, having multiple offers doesn’t mean values are increasing rapidly or at all. Lastly, we are starting to hear more about lenders rolling out 100% financing to help buyers artificially afford higher prices (sounds healthy, right?). I could go on and on with words, but let me share some graphs to show the market visually.

DOWNLOAD 55 graphs (and a stat sheet) HERE: Please download all graphs in this post (and more) here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Sacramento County graphs this month (more here):

Sacramento regional graphs (more here):

DOWNLOAD 55 graphs (and a stat sheet) HERE: Please download all graphs in this post (and more) here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: Do you think we’re in a fidget spinner “bubble”? What else are you seeing in the real estate market? Did I miss anything? I’d love to hear your take.

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