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Real estate trends to watch in 2019

January 3, 2019 By Ryan Lundquist 20 Comments

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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Will it be an appraisal issue if there is pot growing at a house?

April 24, 2018 By Ryan Lundquist 14 Comments

Is it going to be a problem for a loan if the appraiser sees pot growing at a house? Well, it depends. Like many things in real estate, it’s not always a simple answer. Here are some things to consider.

Different opinions: There isn’t one definitive opinion appraisers have on how to handle cannabis, so seeing pot growing at a home can potentially be dealt with in different ways depending on the appraiser and the lender.

Not an agricultural specialist: Many appraisers don’t want to be put in the position of identifying plants, so some say, “I can’t tell if it’s Ficus or cannabis. I’m not an agricultural specialist. I don’t need to mention roses or peaches, so why would I call attention to a different plant?” Of course to be fair, roses and peaches aren’t federally illegal, so this might not be a perfect comparison.

It’s personal property: Some appraisers say, “It’s personal property, and it’s not my job to discuss personal items belonging to a seller or Borrower. I wouldn’t mention cottage cheese in the fridge or a Lambo‘ in the garage, so why would I mention a specific plant?”

Not a code enforcement officer: An appraiser in residential real estate shouldn’t be expected to confirm legality or count plants. Appraisers are not there to tattle, judge, or explain code.

One plant vs. farm: Let’s be real. There’s a difference between having a few plants for personal use and a full-fledged cartel “grow house.” Remember, it is never legal to use a residential house for a commercial cannabis operation. Yet here’s an honest question. How many plants are acceptable for a federally-backed loan? Is one too many? How about five, ten, or fifty? Ask a loan officer and see if you can get a definitive answer.

Bouncing the ball: When seeing “alternative agriculture,” an appraiser might email a photo to a lender client and say, “Hey, I saw some plants at the property. How would you like for me to handle this?” The appraiser in this case is bouncing the ball of liability to the client and allowing the lender to give direction. It is the lender’s decision and loan anyway, right? Some lenders might choose not to do the loan and other times appraisers might be asked to blur photos that clearly show a certain type of plant growing. In other cases lenders have asked for plants to be removed, so they might instruct the appraiser to make the value subject to removal of plants. The reality is most lenders have been silent about cannabis so far, but some smaller banks have been clear they won’t do loans with cannabis on site.

Would the loan have closed?: Here’s a question running through my mind. If I would have included a photo in my appraisal of cannabis growing somewhere on the parcel or in the house, would the loan have closed? Even if I personally think it’s no big deal to grow, if a loan only closes because I chose to ignore something that I knew would (or could) be an issue for a client, is that more liability for me as an appraiser? I know, it sounds like I’m overthinking the issue, but I’m actually doing critical thinking. This isn’t a statement on how appraisers should think. I’m only saying it’s a viable question to ponder in the midst of an emerging market.

Closing Thoughts: Will it be an issue for the loan if there is cannabis growing? Honestly, there are many moving parts. I’m not trying to be frustrating, but it probably depends on the lender, how the appraiser handles it, and maybe even the number of plants. In short, this green issue is not black and white (sorry). Of course if there is obvious moisture or electrical damage associated with growing, then we can all agree that’s going to be a problem. The truth is some escrows with cannabis simply aren’t going to close since it’s an ambiguous world right now in lending due to the disconnect between federal and state law. Yet to be fair lots of people grow cannabis and they’re still getting loans. So clearly a few plants isn’t killing deals all the time either.

I hope that was interesting or helpful.

Questions: Did I miss something? Appraisers, how do you handle this? Lenders and Realtors, anything to add? I’d love to hear your take.

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Real estate trends to watch in 2018

January 2, 2018 By Ryan Lundquist 32 Comments

What’s the real estate market going to do in 2018? Let’s talk about some of the big conversation pieces emerging in Sacramento and beyond. Any thoughts? What are you watching? I’d love to hear your take.

1) Affordability: This year we’re going to have more conversations on affordability – or lack thereof. This is a big issue that’s not only covered extensively by the media, but it’s something being felt by real people – both prospective buyers and renters. According to NAR’s Housing Affordability Index, affordability has been declining.

2) More Color: Lots of design magazines and articles are talking about seeing more color in the kitchen and other parts of the house. Some say totally white kitchens are on the way out. Others anticipate seeing more avocado green on walls (hello 1970s). And brass fixtures are back in style too (hello 1980s).

3) Marijuana: This is a big year for California because recreational or “adult use” marijuana is now fully legal. Whether you are personally for or against this, it’s something we need to watch because of the potential economic and real estate impact. I’m not writing as an advocate, but I am saying let’s pay attention to commercial rents, vacancy rates, job opportunities, cash purchases, changing zoning code, land value, advertising, public perception, etc… So far the City of Sacramento has been a lone wolf in allowing commercial cannabis cultivation since surrounding cities have basically said NO thus far. In 2018 I suspect we’ll see other cities also jump on the cannabis wagon.

4) Smart homes: We are seeing incredible advances in technology for homes. It’s not just the “Echo” or “Google Home” either, but “smart” products are showing up for thermostats, shades, color-changing light bulbs, appliances, door locks, security systems, etc… The market doesn’t fully expect these features yet in every home, but there may come a day when they are normative. I actually bought a Google Home for my office last week. Did anyone else?

5) Creative financing: There is still upward pressure on values in many prices ranges and locations in light of a housing shortage, but if interest rates rise too much it could soften values (duh). This is where lenders can artificially keep prices high by offering more creative loan products to help buyers “afford” the market. Sounds healthy, right? Keep in mind we are nowhere near 2005 when money was being given to anyone with a pulse, but if lenders loosen things up too much it’s probably a good thing to be concerned.

6) Appraisal waivers: About a year ago Fannie Mae rolled out an appraisal waiver program that would not require an appraisal on certain transactions. Fast forward to today. The narrative right now from quite a few voices in the real estate community is that we need to use more alternative valuation products (without a human appraiser) for the sake of quicker turn-times, a lower cost for consumers, and a more efficient mortgage process. I know, I sound like an angry human since robots are taking over the world, but there is a deeper issue here. Messing with a system of checks and balances can be dangerous for the market. Do me a favor and re-watch The Big Short and ask yourself if there is any reason to be concerned about loosening things up when it comes to real estate valuations. I may write more on this soon.

7) Rent control: Rents have risen dramatically in many parts of the country over the past few years, so let’s expect to see attempts this year to enact rent control. Remember, what rent control does is limit how much a landlord can increase rent by putting a price ceiling on rent. There are both staunch proponents and critics of rent control, so be ready for some heated conversation if you bring this topic up online. As an FYI, in Sacramento we’ve had near 10% rent increases for three years in a row without much wage growth.

8) Republican Tax Plan: Some say the new tax plan will create less incentive for home ownership and cut values drastically whereas others say there won’t be much impact in most of the country beyond some higher-dollar pockets. The truth is the future hasn’t happened yet, so in humility we must admit we don’t yet know the extent of any impact. This is why I like what Jonathan Miller wrote, “If there is one thing the housing market doesn’t like, it is uncertainty. As it relates to housing, this new law is an “uncertainty casserole” and homebuyers and sellers will take a while, probably 1-2 years to adapt to the new world order and sales will be tempered until there is equilibrium. Prices in high-cost housing markets will clearly slip, although I don’t anticipate a severity.”

9) Disappearance of the $150,000 market: Last year I put on my prophet hat and talked about the disappearance of the $100,000 market in Sacramento. It was a safe bet to make that prediction because there is so much upward pressure at the lowest prices. This year I think we’re poised to see few homes under $150,000 by the end of the year. Remember, it’s not just the lowest prices in the market that are experiencing upward price pressure. It’s really entry-level homes in most neighborhoods – regardless of the price. Yet the median price in Sacramento has been hovering around $350,000, which literally means half the market is shopping below that price point. This alone reminds us it can be much more competitive at lower price ranges since more buyers are shopping there.

10) Alternative housing: As values have risen for single family detached homes, buyers at the lowest prices may need to consider other options such as mobile homes, tiny homes, storage container units, and lower-priced condos. Some alternative housing can feel sexy because of the lower cost and the cool vibe, but let’s remember the most expensive thing in real estate is often the land and permits. Thus it’s not always easy to build that low-cost alternative structure.

11) Increase of real estate agents: When prices are hot everyone and their Mom gets into real estate, so let’s expect to see more new agents out there. I’ve talked to a number of former loan officers wanting to get back into action too (I wonder if they know how much the game has changed since 2005). I’ve also talked with a number of agents wanting to become appraisers.

12) Housing shortage: We’ve not had much new construction over the past decade, and we’re feeling it because there aren’t enough units to satisfy demand. The good news is builders seem to be busy at work, which will help add more units in 2018. But the bad news is it takes time to build, so sprinkling in some homes and apartments here and there is not a quick way to solve a housing shortage. Moreover, one of the struggles in Sacramento is many skilled laborers left the area when the previous real estate bubble burst, so having enough workers is an issue. If anything the housing shortage seems poised to persist, though it seems like there is some relief on the way too. Also, last year housing inventory was actually slightly higher during some months compared to the previous year (though still anemic).

13) Bubble conversations: With values creeping back to their previous peak (or beyond) in some neighborhoods, it’s only natural to have conversations about “bubbles”. If you don’t believe me, show this graph to 10 people and tell me how many mention the word “bubble”. See my open letter to buyers worried about a housing bubble because this is a loaded conversation. On a side note, one thing to keep in mind is some owners who sense the top of the market is near may choose to list this year, and that can create some inventory. Just today I spoke with someone who is planning to leave California (and probably move to Idaho or Texas). This guy’s idea is that he’ll list his home in a few months in order to cash out while values are high. Does this man represent all sellers? No. But does he represent some? Yes.

I hope that was helpful or interesting.

Questions: What else do you think will be important in 2018? Did I miss something? I’d love to hear your take.

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When marijuana grow operations are down the street

August 8, 2017 By Ryan Lundquist 13 Comments

Does it matter for value if there are a few legal marijuana grow operations in the neighborhood? That’s not really a question we asked much in the past, but it’s definitely a reality in many portions of California now since recreational marijuana was approved at the ballots last year. I know this is a polarizing topic, but legal cannabis cultivation is something we have to pay attention to now in real estate – regardless of our personal views. Today let’s look at a specific situation I encountered a few weeks ago and consider a few takeaways.

Not an advocate: Just to clarify, I am writing for the sake of analyzing real estate trends. I am not a cannabis advocate in any way and this post is not about whether marijuana is good or not for society.

If you didn’t see in the SacBee, there are now 108 locations within the City of Sacramento with a commercial cannabis permit in process. This means there are at least 108 planned legal grow operations. The largest cluster is in an industrial section off Power Inn Road, but there are quite a few in North Sacramento too.

The situation: I appraised a house on Eldridge Avenue in Sacramento a few weeks back and I discovered there are three commercial cannabis cultivation permits on file with the city one street to the south. This is a residential area, but it’s next to industrial properties.

On Kathleen Avenue there are residential homes to the north and the “green zone” to the south. In many cases commercial grow operations will be far from residential homes, but not in every case as seen below.

Three things to consider about legal cannabis cultivation:

1) Neighborhood trends: Part of knowing the market and being a real estate expert is being in tune with what is happening in the neighborhood – even in the commercial sector. If you haven’t bookmarked the SacBee cannabis map, I recommend doing that. You can also see where marijuana dispensaries are located here.

2) Disclosure: Anyone who works in real estate needs to consider what disclosure looks like when we find out about cannabis grows nearby. I won’t tell anyone what to disclose or how to do it because that’s not my role, but knowing about commercial cannabis grow operations might be a good place to start. This is especially true in a situation like the one above where one side of the street is residential and the other side is industrial. This is a conversation that each appraisal firm and brokerage ought to have as the legal cannabis industry emerges. In my appraisal report on Eldridge Ave I simply disclosed my knowledge of three cannabis cultivation permits one street south of the subject property. Remember, it is illegal to have a commercial cannabis operation in a residential home, so disclosure is probably something we’ll think about more when there are nearby industrial properties. Moreover, it is only legal to grow commercially in the City of Sacramento as most other areas including Sacramento County have said NO to legal commercial grow operations (for now).

3) Value impact: Over time we’ll have to ask if there is a value impact due to proximity of cannabis cultivation businesses. Right now this is all so new and we are only seeing the beginning of an emerging industry take root in Sacramento. Keep in mind there are very strict guidelines for these businesses, and the City of Sacramento is putting rules in place to ensure neighborhoods and areas don’t “go to pot” so to speak (pun intended). There are rules for security, safety, proximity to schools, and even odor. In many cases these businesses could operate without any visible evidence at all. Though if there does end up being a problem with odor, crime, or stigma, then that’s something we’ll have to watch and consider. On a side note, it seems many of these grow operations so far are located in areas with lower property values. To be fair there may be more industrial properties in these locations, but this is still something to watch closely.

4) Other: What is #4?

Cannabis class I’m teaching: By the way, I’m teaching a class at SAR called “The emerging trend of marijuana in real estate” on August 30. I’ll talk for 60-75 minutes about zoning, land value, disclosures, etc… More details here.

Questions: Do nearby cannabis businesses need to be disclosed? What do you think we need to look for to know if there is any impact to value? Anything else to add? I’d love to hear your take.

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