Appraisal

Dude, people want smaller homes (sort of)

August 27, 2019 By Ryan Lundquist 13 Comments

Tiny homes are all the rage these days on HGTV, but most people would never pull the trigger on something that size. But the truth is homes in the United States are actually getting smaller lately. Well, sort of. Let’s talk about it.

Why this matters: Knowing a real estate market isn’t just about prices, but understanding what is happening to the housing stock.

Bigger homes in the United States (except lately): New homes seventy years ago were literally one-third the size they are now. So clearly buyers expect much larger homes today. But when looking at recent stats, the size of new homes has actually shrunk over the past few years according to the National Association of Home Builders. Why the shrinkage? Lots of people chalk it up to younger buyers entering the market and needing lower prices. Keep in mind new homes are still an average of 2,300+ sq ft though, so even if buyers are craving smaller homes, these dwellings are massive compared to decades ago.

How has home size changed in Sacramento? Like the United States, homes have definitely grown in size over the past two decades in Sacramento. In fact, based on MLS sales since 1998 we’ve seen the average home size increase by 11.6% and the median size increase by 15.2%.

What happens to home size during recessions? What’s going on with the dip in size after 2007? According to the National Association of Home Builders, the historical pattern is to see new home size fall after recessions as buyers tighten their budgets. Then as the economy improves we tend to see home size increase. The interesting part is we see this trend among new homes nationally and with MLS sales locally.

CLOSING THOUGHTS:

1) Baby Boomers & Millennials: In coming time we’re going to have lots of Baby Boomers downsizing and looking for smaller homes. As for Millennials we’ll keep learning what they want as they enter the housing market.

2) Marketability during recessions: With so much talk about a coming recession, let’s keep an eye on larger homes. Will they be less marketable during the next recession? Will buyers tend to gravitate toward smaller homes? These are key questions.

3) Smaller but not inexpensive: New homes have shrunk in size these past few years, but we’re nowhere near being able to call them inexpensive. The irony of course is society tends to expect new construction to be affordable for first-time buyers, but new homes are actually more expensive by virtue of being brand new. The truth is less expensive homes tend to be found more readily in the older housing stock instead of brand new subdivisions. It’s like shopping for a used car instead of the latest shiny brand new model.

I hope this was interesting or helpful.

BIG MARKET UPDATE I’M GIVING: I’ll be giving a deep market update at SAR on September 24th from 10:30-12:00pm. My goal is for everyone to walk away with an understanding of how the market is moving, ways to describe it, and some ideas for business in 2020. Sign up here.

Questions: What are you hearing from buyers and sellers about size? Any stories to share?

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Can you use brand new sales from the builder as comps?

August 21, 2019 By Ryan Lundquist 13 Comments

I get asked this question all the time. “What do you do for comps when a home is only one year old? Can you compare it to brand new homes from the builder?” Here are a few things on my mind.

Builders vs you: It’s important to step back and understand that builders are able to let buyers customize features in a house, and that’s a big deal. This is one of the alluring things about buying a new home, and it’s not something a typical seller is going to do. Thus right away a builder has more power than an owner in the resale market.

Fading premium: Just as buyers tend to pay a price premium for a brand new car, the same thing happens in real estate. And just like a car begins to depreciate when it’s driven off the lot, the same thing happens with a home. When you’ve lived in a home, it’s no longer 100% brand new, so it may not command that same price premium in the market.

The market doesn’t care about your rear landscaping: I often hear, “But my home is better than the brand new ones because I put in rear landscaping. The builder models don’t have a rear yard.” That may be true, but the market might not care about that. The premium a buyer is willing to pay for a brand new house could still likely outweigh your rear landscaping (assuming we’re talking about standard landscaping).

Credits & incentives: Let’s remember builders can offer credits and incentives to close deals and keep prices high. When a market starts to soften especially, we have to ask what concessions are being included to continue to boost prices higher. This is key to understand because if brand new homes have padded prices, they probably aren’t ideal examples of what the market is really willing to pay. Here’s the better question. What would the market pay without all the concessions?

Resale homes rule: In an ideal world we want to find other homes that are one or two years old. Is there any price difference between the new models and resale homes not sold by the builder? That’s the big question and I realize it could be a fat chance we’re going to find something. But don’t be afraid to look through multiple years of sales too. Even if you have an older sale from a few years ago you can compare it to other newer ones at the time. How much of a price difference was there if any? Did the new ones still sell for more? Don’t forget to look to other competitive new developments in town too. You might get some insight there when it comes to brand new vs newer homes.

Keep an eye on the new stuff: I’m not saying to ignore new sales altogether or even to not use them. We should keep an eye on them for sure. Let’s just be cautious about flippantly choosing three brand new sales from the builder and calling it a day without really thinking through whether there is a price difference between brand new vs newer. If I was appraising in this situation I would hope to find at least one resale home somewhere, but I’d also be fine using brand new homes as comps too (but they might need an adjustment down).

The market: Keep in mind there are situations where the market may have gone up, but if the owner also lost some value due to a fading new construction premium, it’s possible the home might not sell for more than it was purchased for.

I hope this was helpful or interesting.

Questions: Which point resonates with you most? What did I miss? Any stories to share?

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Slow is not a dirty word in real estate

June 13, 2019 By Ryan Lundquist 11 Comments

Slow is not a four-letter word. Well, technically it is. But in real estate it’s not a “four-letter” dirty word. Let’s talk about this, and then for those interested I have a huge market update below.

The situation: It’s easy to feel good about real estate when the stats are glowing because there’s always something positive to share. But when a market begins to slow it can feel uncomfortable for some because all of the sudden slower stats don’t line up with the rosy narrative that’s been used to describe the market.

The reality of slowing: The market has been slowing. What I mean is right now we’re seeing more subdued price growth in many portions of the country. In other words, prices just aren’t increasing like they were in the past. This doesn’t mean the market is dull or that it’s not really competitive, but it does mean competition is more intense than actual price growth in many cases.

Main point: I wanted to mention this because it’s important to recognize when markets change so we can back away from real estate cliches that may not fit current trends. Moreover, it’s crucial to find new language to describe the market as things either speed up or slow down. My advice? Pay attention to stats and let data inform your market narrative. Thus if you see the market slowing, it’s okay to say that. In fact, sometimes it’s the best thing sellers or buyers can hear.

Abusing price per sq ft: Last week I made a quick video to talk through the problem of abusing price per sq ft in real estate. Enjoy here if you wish.

As always, thanks for being here.

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

Spring is feeling fairly normal so far. In fact, May was actually a pretty strong month. What a difference from the doom we felt in 2018. Let’s talk about it.

THE SHORT VERSION:

Prices are up from the fall and it’s shaping up to be a strong spring
Prices aren’t up much from last year
There were more multiple offers this May compared to last May
Sales volume has slumped for 12 months
There are nearly 2,700 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 70+ 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:

Normal: The stats for May were strong and showed what we’d expect to see for the month. Prices showed an uptick, inventory remained low, it took less time to sell, the sales to list price ratio increased, etc… In short, the market feels a bit normal right now. This doesn’t mean it’s perfectly healthy, but from a stats perspective it’s been fairly normal.

More multiple offers: We saw more multiple offers this May compared to last year at the same time. I know, it’s barely up, but all year the number of multiple offers has been lagging, so this shows us a strong spring has sprung.

Blackstone: I mentioned last week that Blackstone (Invitation Homes) is starting to sell some homes in Sacramento. For now it looks like they’re offloading some non-performing inventory, so that’s how I plan to describe it unless new information comes to light. Keep in mind lots of headlines talk about Blackstone selling, but these headlines refer to stocks instead of homes. If you didn’t know, in recent weeks Blackstone sold $1B of their stock in Invitation Homes. This is big news of course because it means Blackstone is clearly making a move to exit the market. But this doesn’t mean Invitation Homes is going to exit the actual housing market by dumping all 80,000+ homes they own in the United States. I’m doubtful this is their plan since Invitation Homes is such a well-oiled mega-rental machine. But we’ll keep talking about this as needed.

Slower growth: Prices are up from last year, but they’re not up by much. The market feels really competitive, but we’re just not seeing insane price growth. Most metrics are up anywhere from 2-3% from last year. This reminds us it’s possible to have a really competitive market without insane price growth.

Highest sale ever in Sacramento County: There is now a $5M sale that just closed in the Sierra Oaks Vista neighborhood. It was a private sale and it’s the highest residential sale ever in Sacramento County. The ultra contemporary home was previously listed a couple times and here’s a video from Nick Sadek’s listing. I mention this because we are starting to see outlier sales like this pop up. This is a reflection of where prices are at, but it’s also a reflection of growing demand for the luxury market.

Michelin star: The big news locally is Sacramento got its first Michelin star for a restaurant called The Kitchen. Yesterday someone asked me if this star will affect property value in surrounding neighborhoods. I can comment later on that, but for now I have a Twitter poll going. Please vote.

Picky about getting into contract (and staying): I haven’t run stats on failure rate yet, but I hear from lots of real estate agents about buyers falling out of contract more often these days. I’ll have to run the numbers at some point, but I wanted to say it doesn’t surprise me to hear this. The reality is today’s buyers are incredibly picky about what they purchase. They’re choosy about condition, location, and price, so they take their time to get into contract. Moreover, since they don’t want to get stuck in a bad situation, if something doesn’t go right during an escrow, they’ll bail. Thus they’re picky about getting into contract AND staying in contract. Sellers, did you hear that? Buyers aren’t desperate.

A year of slumping volume: Sales volume in the region was strong for May and has rebounded substantially from a dreadful fall season, though technically volume has been down 12 months in a row in Sacramento County (and 13 months in the region). All things considered we’ve had 9% fewer sales, which means there have been 2,700 fewer homes sold this year. Keep in mind this is not the sign of a market meltdown, but it’s definitely safe to call this a slower year in terms of volume. This is something we have to keep watching. I suspect if rates go up, we could see volume slump again too.

Rates are doing the limbo: Rates keep doing the limbo by finding lower levels, and that tends to put a steroid in the market to create more competition. This is a big factor to watch since our market feels heavily influenced by the direction of rates right now. As a side note, if rates get really low it could lead to stronger price growth.

Getting back to the top: The median price in the region is now higher than the previous peak in 2005. It took us fourteen years to get back, which is the entire lifespan of my 8th grader. Anyway, in coming time we’ll surely have more “bubble” conversations because of this. But let’s be real. Many buyers are already wondering and having these conversations. 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” when reaching 2005 levels. Technically, current values aren’t actually anywhere near 2005 when we consider inflation. But in my experience very few buyers actually think about inflation like this unless they’re statistics nerds. In case it helps, here’s a post I wrote about buyers worried about another housing bubble.

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

FOUR BIG ISSUES TO WATCH:

1) SLOWING MOMENTUM: Despite the spring market clearly heating up, stats show the market is slowing down when we look at the rate of change by year. So while we might describe the market as “hot”, we can also describe it as slowing.

2) 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.

3) SALES VOLUME SLUMP for 12 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:

May volume down 4.6%
Volume is down 9.2% over the past 12 months

SACRAMENTO COUNTY:

Key Stats:

May volume down 6.1%
Volume is down 8.3% over the past 12 months

PLACER COUNTY:

Key Stats:

May volume is up 2.7%
Volume is down 8.4% over the past 12 months

EL DORADO COUNTY:

Key Stats:

May volume down 4.9%
Volume is down 12.6% over the past 12 months

4) SPRING GETTING HOT: The market is heating up for 2019. We’re seeing price changes, low inventory, and increased sales volume.

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 REGION (more graphs here):

SACRAMENTO COUNTY (more graphs here):

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

DOWNLOAD 70+ 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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Two things to understand about Zillow’s accuracy rate

May 1, 2019 By Ryan Lundquist 35 Comments

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?

If you liked this post, subscribe by email (or RSS). Thanks for being here.

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