Why no value adjustment is sometimes the best adjustment

It has to add value, right? It’s tempting in real estate to make upward adjustments in our valuations whenever we see a feature that is remotely positive. Our thinking is that buyers have to be willing to pay something for that special feature, so we should give it a little value boost. But sometimes making no adjustment is the best thing to do. Let’s look at three quick examples.

no value adjustment given - sacramento appraisal blog

Three examples where no adjustment could be the best move:

  1. Duplex with Large Lot Size: We get used to giving value premiums for larger lot sizes for single family homes, but a larger lot size for a duplex is often not a positive gain for the property. Assuming the lot cannot be built on or divided, the extra space really costs more for the owner to manage, and that can actually diminish cash flow for the property. Imagine a duplex on 0.75 acres, while every other similar duplex is on a postage stamp lot. If there is no difference in the rent between all the duplexes, and the larger lot is not useful for building, there probably isn’t a value premium for that extra lot size. In fact, the larger lot may be a nuisance because of the cost of extra landscaping maintenance or even illegal dumping.
  2. Location Across from a Park: It’s always worth more to be located across from a park, right? Not necessarily. While a park location might feel like an asset, if it’s also located on a busy street, the negative of the busy location might balance out any positive gain for the park location. Or if a park is known for loitering or criminal activity, it might not be desirable at all to live across the street from it. This is why it is telling to hear home owners talk about their park location. At times they love it and wouldn’t trade it for the world, but other times it’s a clear negative. Of course market value is not just about one owner’s perception, but the entire market. How would most buyers respond to the location? This is where we have to look at neighborhood sales over time to see if there is any price difference between park sales and non-park sales.
  3. Condo with a View of a Lake: Imagine a condo with a view of a lake. We would all assume the lake view is worth more than a non-lake view, but what do the neighborhood sales and listings tell us? Is there any price difference at all? If the vast bulk of properties in the condo development are all rentals, and there is no difference in the rental value for the lake view vs. the non-lake view, then the lake view is not an asset. This real life scenario came from a conversation with a mentor recently.

The Point: Sometimes it’s tempting to give a positive value adjustment because we feel there simply has to be one. But there actually might not be one. Maybe the market doesn’t behave the way we think it should, or maybe the market in one subdivision trends differently than a nearby subdivision. This underscores the need to watch neighborhood sales and listings closely to try to let the data speak to us rather than let our assumptions trump the data.

Marketing to Millennials Event: Locals, I wanted to invite you to an event I’m moderating at the Sacramento Association of Realtors on May 6 at 12pm. It’s called Marketing to Millennials, and it’s all about how to connect with Millennials in your real estate business. This generation too often gets a bad wrap from so many sources, but how can you connect with them and serve them best in business? There will be a guest speaker and four panelists. Make sure to say “hi” if you can make it. Read more here (pdf) or sign up here.

Question: What other examples can you think of where a positive value adjustment wasn’t needed (even though it seemed like one should be given)?

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The slowish real estate market in January

January is usually a slow real estate month. That’s nothing shocking. Yet it’s always interesting to see how the market begins to maybe get a sense for where it might go during the year. Today let’s take a look at 6 specific areas of the market in Sacramento, which will help us understand and explain the way things are moving.

Longer on purpose: If you’re new to subscribe (thank you), most of my posts are not this long. But twice a month I break down the trends so we can better see the market. Most of my other posts are general enough to apply anywhere in the United States. Is your market similar though? I’m curious.

Two ways to read this post:

  1. Scan the talking points and graphs quickly.
  2. Grab a cup of coffee and spend a few minutes digesting what is here.

the story of the market in january

Email me if you want the graphs: If you would like all the graphs in this post (and 15 more), send me an email (make sure to write “I want the market graphs” in the header). You can use some of these in your newsletter, on your blog, and in other social spaces. See my sharing policy for 5 ways to share.

1) The reality of the slower seasonal market right now:

seasonal dip in sacramento

It’s easy to freak out this time of year when values take a dip. It can feel the market is falling apart when we see price figures decline. Yet the market almost always softens at the end of the year and in the very beginning of the year. Knowing this can help you communicate well with clients and even plan for business. Remember that sales stats usually see a huge uptick in March, and this signifies the Spring market. Technically most of the sales in March actually get into contract in February though, which reminds us the Spring market hits its stride in February.

2) The median price softened by 3% last month:

price metrics since 2014 in sacramento county

context for median price since the real estate bubble by sacramento appraisal blog

median price and inventory since 2013 - by sacramento appraisal blog

The median sales price took a 3% dip in January to $256,000. It might sound extreme to see the market soften this much, but last year saw the same exact 3% dip as you can see in the image above.

3) It took an average of 60 days to sell a house in January:

DOM in Sacramento County

On average it took 60 days to sell a house last month in Sacramento County. This is up from 48 days one year ago in January 2014, but down from about 90 days in January 2012.

CDOM in Sacramento County - by Sacramento Appraisal Blog

It’s important to realize the market is not the same at every price range. In other words, some price ranges tend to take longer to sell than others. Generally speaking, the higher the price, the longer it takes to sell. Keep in mind there were only 9 sales at 750K-1M and two above 1M, so take those stats with a grain of salt.

4) Sales volume hit its lowest point in 8 years:

sales volume in Sacramento County

Sales volume was at its lowest point in 8 years last month. On one had that sounds alarming, but it’s really the story of the market these days. Last year saw slightly more sales at this time, so this year isn’t anything out of the ordinary for the current market. Volume is simply down right now as a whole, and we can look at this as the new norm for a while until the market can handle more inventory and more demand (when the economy improves).

january sales in sacramento county

It’s easy to get sensationalistic about having such a low volume of sales last month, but the graph above shows 15 years of January sales in Sacramento County. What do you notice? January almost always comes in last place for sales volume. In short, don’t freak out.

sales volume in fall and winter through 2015 - by sacramento appraisal blog

Lastly, remember to consider what usually happens in February. Sometimes February is right in sync with January, but other times there is slightly more volume. We’ll see what this year brings, but knowing how the market works makes you an asset to clients.

5) Housing inventory increased last month (technically):

inventory in sacramento county  Since 2013 - by sacramento appraisal blog

Inventory increased last month to 2.61 months of housing supply. This is slightly higher than it was one year ago, and exponentially higher than 2013 when there was only one month’s worth of homes for sale. Remember that inventory is the relationship between the number of active listings as of the first of the month divided by sales from the previous month. This means if there are VERY few sales in a month, inventory will actually sound much higher than it actually is. In short, an inventory at 2.61 months sounds like it’s on the higher side, but being that sales volume was really low last month, this figure at 2.61 doesn’t really mean the same thing as it would in the summer when there are far more sales.

months of housing inventory by sacramento appraisal blog

Housing inventory is never the same at every price range. This reminds us yet again there are many markets within a market. In this case, the higher the price, the more inventory there is.

inventory during fall and winter 2 - by sacramento appraisal blog

number of listings in sacramento - January 2015 - by home appraiser blog

6) Interest rates continue to decline:

interest rates by sacramento appraisal blog since 2011

Low interest rates are like fuel for the housing market since they create more demand by drawing buyers into the market. That is what happened in 2012 when rates went below 4% (for the first time ever), and it’s likely going to get some buyers off the fence right now.

interest rates by sacramento appraisal blog

Real estate is never just about supply and demand. There are so many “layers of the market” that are working to impact the direction of values. I hope this was helpful to create some context and conversation.

Share: Please feel free to share this link with clients, and see my sharing policy for 5 ways you can share my content so we’re on the same page about what it means to “share”.

Questions: What are you seeing out there? How does the market feel to you? Anything you’d add?

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Real estate, water and the guy without a front lawn

Are you ready to pay a higher water bill in coming months? I shudder to think about more money leaving my wallet yet again, but it seems inevitable for water companies to raise rates and create mandatory restrictions because of the severe drought we’re having in California. That’s why this home owner without a front lawn is starting to look pretty smart. This guy is hands-down going to save money, but most of all he may be ahead of the curve in case severe lawn watering restrictions come into play. Yes, it’s still not as common to see xeriscaped front yards, but wouldn’t you say it’s growing in popularity? Might the drought spur on more yards like this?

front yard during a drought - by sacramento appraiser blog

The Drought & Real Estate: The truth is the drought in California can definitely impact real estate. Over time buyers are simply going to have to think about water usage during their real estate decisions. How much is it going to cost to fill and operate a built-in pool? How much is that expansive front yard going to cost to keep green? Will buyers pay more if the front yard has been dialed in already to save water? Will buyers pay a premium for water-saving appliances, instant tankless water heaters, or water efficient toilets or faucets? Will a golf course view be worth less if the “greens” are brown? Will builders struggle to get new construction off the ground because of water shortages? These are relevant questions.

layers of the market that create value - cake by Joy Yip

Cake, Water & our Wallets: I talk constantly about how the real estate market is like a multi-layered cake since there are many layers of the market that impact or create value. We know it’s obvious that things like inventory, interest rates and cash investors can strongly influence the direction of values, but we should add the cost of water as a layer of value since it is bound to be something buyers more readily consider in coming time. Granted, I doubt the cost of water will sway the market like interest rates can, but it is nonetheless a consideration and something to keep on our radar. Most of all, until there are severe restrictions in place and the cost of water dramatically increases, we may not see too much sensitivity in the market. Whenever our wallets are hit though, that’s when change can come.

parcel mullet word - sacramento appraisal blogParcel Mullet: By the way, since we’re on the subject of lawns, it seems natural to ask if you’ve incorporated the word “parcel mullet” into your real estate vocabulary yet. Heather Ostrom and I coined this term during a Twitter conversation two years ago, and the word was recently mentioned in Inman News, The Chicago Tribune and on Word Spy. Enjoy.

Questions: In what ways do you think the drought can impact real estate? How have you seen buyers respond to front yards without lawn? Any tips for water conservation?

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What 12 Realtors are Saying About Sacramento’s Housing Market

What do you get when you ask 12 Realtors one question? I know it sounds like I’m setting you up for a lame joke, but I’m actually going to share some insider perspective on the local housing market. I asked a handful of Sacramento area Realtors to describe the market in just a few sentences. This is first-hand insight straight from the trenches, and I hope it helps paint a picture of how the market unfolded in 2013 and what is happening right now. Enjoy.

Any thoughts? How would you describe the housing market right now?

sacramento real estate market in 2013 - image by sacramento appraisal blog

Steve-Ostrom-Realtor1Steve Ostrom – Roseville Realtor: The 2013 housing market was a roller coaster ride, with crazy turns the whole way, powered by years of government interference.

Barb Lebrecht – Realtor: It appears for now that the cash dragon is in hibernation. The Barbara-Lebrechtdecrease in competition and increase in inventory makes it a great opportunity for buyers that feel a little tattered from recent market conditions.

Jeff Grenz – Realtor: While we are looking at a little slow down, some of which is due to normal, but forgotten Jeff-Grenz-Real-Estate-Brokerseasonal trend, I am encouraged when I look at the suburbs, where the dollar volume is pretty significant, average prices are almost double and are hitting 2004 levels (vs 2003 for Sacramento)…. I’m thinking it is due to a return of confidence and ability to get loans in the higher price ranges, not necessarily income growth but I’m speculating.

Angela-Jones-RealtorAngela Jones – Realtor: I felt like 2013 was headed for the same disaster of a situation we experienced in the mid-2000s. Huge price increases, investors beating out owner-occupants, double digit multiple offers creating a feeding frenzy! Glad to see the values for the most part stabilize.

Keith-Klassen-RealtorKeith Klassen – Realtor: The market in 2013 began with a hopefulness and turned into an upward, turbo-propelled rocket. People who were upside down in their mortgage and investors who were hanging on for dear life, now could sell – and that’s what many did! During the later part of the year the mood changed as investors hit the brakes and many have pulled out of the market. It’s no secret, but at this moment at the end of the year, the savvy investors that have stuck around and are not too busy with holiday shopping may get some good deals. Busy-with-life home buyers will most likely get back on track come the end of January 2014. We are primed for more balanced, but slowly increasing market in 2014.

Doug-Reynolds-RealtorDoug Reynolds – Realtor: The market was in full sprint mode from January through July with prices skyrocketing, multiple offer competition, no inventory to speak of and cash buyers everywhere. As 2013 comes to an end, the market is taking a holiday breather where many cash investors have pulled back, inventory is trickling up and buyers are taking a bit more time to make a decision, as balance of power is being restored.

Erin-StumpfErin Stumpf – Realtor: In 2013 the Sacramento real estate market started off with a high fever, and the only cure was higher interest rates and rising prices and waning investor demand. As 2013 ends, we have higher interest rates, higher prices, and lower investor demand — and a low fever but still solid demand. It’s nice to see your average joe have a legitimate chance to actually purchase a house!

Craig-DunniganCraig Dunnigan – Realtor: Investors dominated the residential market the first half of 2013….The last half of 2013 has seen the market returning to normalcy, with more “move up” and first time homebuyers.

Bruce Slaton – Realtor: Market had overcorrected, Hedge Funds saw increasing need for rentals, Bruce_Slaton_reasonably_smalllower gains in stock market, housing undervalued.. Hedge buys until their internal data shows they may have priced themselves out, left to better markets…we captured equity, was best time to sell…2014 will be the year of no smoke and mirrors, the market will have to face reality and novel things such as Appraised Value, Condition, Pricing At Something Called Comparables…The difference between Listing Agents and Marketing REALTORS will be defined in 2014…looking forward to a medicated market in 2014…

Eric-Peterson-Praxis-Capital1Eric Peterson – Realtor: The market accelerated through the spring with higher than expected price appreciation across all segments. Unfortunately, on the 1st of July the market began to cool and once the numbers are in for the final months of 2013, I believe roughly half of the appreciation gained in the first six months of 2013 will have been given back in the second half of the year.

Gena-Riede-RealtorGena Riede – Realtor: The real estate market in 2013 saw most homes in multiple offers with buyers willing and able to pay the difference in appraisal amount & buyer’s offer. By the end of 2013 with low inventory & freezing temperatures, buyer rush somewhat cooled with fewer multiple offers & some reduction in listing prices where sellers continued thinking prices were on an upward trend. Typically, this time of year more buyers are dealing with the holidays so I believe we will see multiple offers again in 2014 even though lending will be tighter and home sellers are preparing their homes for sale.

Lori ModeLori Mode – Realtor: Although the real estate market in Sacramento has been challenging at times this year because of many changes and shifts in the market, I have great expectations for an incredible 2014. I see many more homeowners being able to move up or downsize due to added equity in their homes, which makes 2014 a very promising year.

As an FYI, here is a quick video I put together to talk through the image above. It’s amazing to see that the median price in Sacramento County increased by 53% over the past two years. That’s NOT a typo.

Closing Comments: Thank you everyone for your thoughts. I sincerely appreciate the array of insight and experience represented here. As an appraiser it’s my job to pay close attention to market trends in the Sacramento area, and a big part of that involves digesting what I hear from trusted Realtors who are riding the waves of the market with buyers and sellers. Thank you again friends.

sacramento realtors - by sacramento appraisal blog

Question: Any thoughts, insight or stories to share? I’d love to hear your take.

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