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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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How does a reduced agent commission impact the appraisal?

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How does a reduced commission from a real estate agent end up impacting the appraised value? Does it matter? Let’s talk about that.

1) Comps vs contract: We have to remember value is found in the comps rather than the contract price. Thus imagine if both agents gave up their commission because they were feeling generous (and wanted to work for free). Does this mean the subject is now worth 6% less? Not at all because we find value from the comps rather than what the subject property is in contract for.

2) Add back in the reduction: When choosing comps and I read in MLS, “Buyer’s agent reduced commission”, it’s a tell I need to call for more information and find out what went on. In the case to the right the buyer’s agent was the buyer and waived the commission. Being that this $850,000 home sold about 3% lower than other sales, it was prudent for me to give an upward 3% adjustment to account for the commission that normally would’ve been padded into the contract price. Otherwise if I blindly used this comp without accounting for the reality that it closed lower for a reason, I could have undervalued the subject property.

UPDATE: I’ve received some grief from a few appraisers over point #2. Fannie Mae does not allow positive adjustments for concessions (though are my examples financing or sales concessions since the seller really didn’t give anything to the buyer?). Here’s the thing. If a sale legitimately sold too low because the agent waived a commission, appraisers have to consider if there was any impact to the price. Bottom line. I find many agents waive their commissions when they are buyers, so these “comps” may need to be given less weight in the overall value (or maybe adjusted up somehow). Ultimately we have to know the story of the comps so we can tell the story of value for the subject property. Don’t lose sight of that in the midst of my example – even if you disagree with the methodology.

3) No impact: There are times when I read in MLS that one of the agents waived or reduced a commission, but the property really closed right where it should have. In a case like this it can be frustrating that an appraiser doesn’t give an upward adjustment, but there’s not really one to give if the property sold on par with everything else. The truth is some agents who are buyers waive a commission without really getting a price discount. It happens.

4) Rubber stamping: Appraisers have to be cautious to not “rubber stamp” a lower contract price when there is a waived commission on the subject property. For instance, a property was listed around $950,000 and had multiple offers at that level. A cash buyer ended up getting into contract at $900,000. However, the real price would have been $960,000, but the buyer paid $60,000 of commissions and fees outside of escrow so the sales price would be lower (smart move to get a lower tax base). Anyway, as an appraiser I have to be careful to be objective and weigh the market in the comps rather than “rubber stamp” a property like this at the contract price at $900,000.

Advice to real estate agents:

1) Make it clear in MLS: Be clear in MLS when a commission has been waived or reduced. This helps appraisers when they are choosing comps.

2) Tell the story: When you’re talking with appraisers about critical neighborhood sales during a listing, I would definitely recommend pointing out any commission reductions in important comps because at times it’s easy to miss the fine print in MLS about waived commissions. In point #2 above I was appraising something for a cash buyer and I was told, “The buyer’s agent was actually the buyer on the house a few doors down and she waived the commission. You can definitely call to verify.” I appreciated the heads-up – especially since this detail was not in MLS.

I hope that was helpful.

How to Think Like an Appraiser: I’m teaching a class at SAR on May 18th from 9-12pm called How to Think Like an Appraiser. Click here for details.

Questions: What point above stands out to you most? Anything else to add? I’d love to hear your take.

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5 things to keep in mind about rising rates and values

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Rising interest rates is one of the big topics right now in real estate. I don’t know about you, but I find myself having rate conversations all the time, so I thought we could maybe kick around some thoughts. Anything to add?

rates and value - sacramento appraisal group

5 things to consider about rising rates and values:

1) Duh, values will soften: Rising interest rates can affect the ability of buyers to afford higher prices because mortgages become more expensive (thanks Captain Obvious). Unless there is another factor to help prop values up, rising rates can naturally lead to softer values. To be fair though, let’s remember rates are not the only driving factor to make value go up or down in real estate.

2) Demand is strong enough: Rising rates can certainly impact affordability, but the interesting part to consider is we have a shortage of housing inventory. This means there is actually room for some buyers to completely leave the market (or be priced out) because there would still be enough buyers left to afford higher prices. On one hand I am very skeptical of articles that say rising rates will not impact buyers at all because that sounds like spin. Yet we do have to entertain the reality of demand being strong enough to a certain extent to deal with some rate increases without much value change (assuming modest increases of course).

3) The squeeze on lower-end buyers: In a market with rising rates, it’s buyers with less money that will be impacted the most because some buyers are on the brink of struggling to afford the market already. Thus an increase in interest rates that makes a $100 or $200 difference in a mortgage payment can be a very big deal for someone on a tight budget. Moreover, buyers with larger down payments simply have more power when making offers, negotiating, paying beyond appraised value, etc…. But before we start saying buyers putting less money down cannot play the real estate game, let’s look at actual stats. If you didn’t know, 25% of all sales last month in Sacramento County were FHA (very low down payment required) and nearly 29% of all sales under $400,000 went FHA. It’s easy to say things like, “Buyers without real money down are not winning in this market,” but the stats say otherwise.

4) Lenders getting creative: When rates rise it can put pressure on lenders to get more “creative” in their financing so more buyers can keep playing the market. In other words, lenders can help buyers artificially afford higher prices with newer and looser loan programs that compensate for higher rates. Part of me hopes lenders put movies like The Big Short and Inside Job in their Netflix queue just to remember how much power they truly have when it comes to making markets move. On a realistic level though, the lending market probably could loosen up a bit in a healthy sense since the regulation pendulum swung very far after the “bubble” burst. For anyone who has tried to get a loan recently, you know how rigorous and stressful it is. Simply put, getting a loan is not as easy as pushing a “rocket” button on a smart phone app.

5) Pressure to buy “before it’s too late”: Many buyers feel pressure to get into the market before rates get too much higher, and that’s a dynamic likely to persist throughout this year as discussions about rate increases ensue. It’s as if buyers feel like they have a small window of time to act before they are forever doomed and shut out of the housing market. What do you think of that? What advice or wisdom would you share with buyers feeling this way?

Questions: What is #6? How do you think rising rates will impact the market? Did I miss anything? I’d love to hear your take.

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An open letter to buyers in an aggressive market

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Dear Buyers,

Yesterday I talked with a few buyers who are in the trenches of the market. One is feeling frustrated at not getting offers accepted, and the other is starting to feel like affordability is beginning to vanish. I was actually taken aback with the sense of hopelessness felt by the latter individual, so I wanted to share some perspective as an appraiser when it comes to making offers in an aggressive-feeling market. Whether you are in Sacramento or elsewhere, I hope this helps. Any thoughts?

40519811 - empty notebook and pen on table

Advice for buyers in an aggressive market:

1. Shop below your price range: We are in a market where multiple offers are commonplace in many price ranges and neighborhoods. This means if you are qualified up to $300,000 and money is tight, you might want to consider homes that are priced $270,000 to $300,000 instead of just $299,000. This allows you some space in case there is a bidding war.

2. Expect to get beat: Sorry to be a downer, but you probably aren’t going to get into contract on the first home you offer on. Remember, real estate is a bit like dating. You often don’t marry the first person you go out with. So take heart and expect you’ll submit many offers until something sticks.

3. Know when listings usually hit the market: There is a season in real estate, just like there is a season for baseball, weather, or elections. It’s true inventory is sparse, but it’s also true listings don’t start to hit their stride until March through August. Sometimes February will be a stronger than usual month, but we still don’t see the bulk of what’s going to hit the market until May through July / August. If you don’t believe me, look at the light green listings below over the past few years. In short, don’t freak out in February if there isn’t much on the market. 

listings in sacramento - sacramento appraisal blog

4. Don’t let sensational headlines stress you out: Headlines these days often talk about how hot the market is, but my advice would be to read stories carefully and ask a few real estate professionals what they think too. For instance, one headline says “Sacramento will be one of the hottest markets in the nation” as values are projected to increase by 7% in 2017. This one story has seriously saturated the market and I’m hearing this sentence about everywhere I go. The irony though is a 7% price increase is about what happened in 2016, which means the headline could have just as easily said, “The market looks like it’ll do about the same thing this year.” I don’t say this to gloss over how competitive the market is, but only to highlight we need to read articles carefully and think critically rather than immediately stress out.

5. Don’t mistake low-ball pricing for the market: Some properties are attracting 15-20 offers, but my sense is when that happens it’s usually more about low pricing than the actual market. This week I saw a property listed at $290,000 that probably should have been listed at $350,000. We can look at the 15 offers and bemoan how intense it is out there or we can realize this one was priced ridiculously low.

6. Be careful of bidding up to “no man’s land”: While it’s plausible to think the contract price might get pushed up a bit with multiple offers, don’t forget to be realistic about what the home is actually worth. If you know you don’t have cash to pay for the difference between a realistic appraised value and the contract price, you might not want to offer that high then. Somehow you’re going to need to stand out as a buyer to the seller, but an unrealistic offer well beyond a reasonable value probably isn’t going to help you in the long run.

7. Realize cash doesn’t always win: There is a false idea that cash investors from the Bay Area are beating out financed buyers all the time – especially those bringing very little money to the table. The truth is 1 in 4 sales last year in Sacramento County were FHA buyers who put down 3.5% (or less if they used down-payment assistance). Keep in mind only 14% of all sales were cash during this same time. Moreover, 27.4% of all sales under $500,000 had FHA loans in 2016 in Sacramento County.

8. Find a way to stand out: There could be multiple offers, so you need to figure out a way to stand out and make a positive impression on the seller. Of course the strength of your offer is the first place to start, but beyond that find a way to make an emotional connection with the seller too if possible. I might recommend brainstorming ideas with your agent. When my wife and I bought a house a couple of years ago there was actually a higher offer on the property, but the seller accepted our offer instead. When touring the home we were fortunate to meet the seller and we hit it off a bit. During the conversation the seller mentioned her son was going to start at a new private school. Anyway, when we submitted the offer we wrote a personal letter complimenting the house and reminding the seller who we were. We also looked up the school and found it was $1400 per month. We then wrote in our offer we were going to give the seller an extra $1400 at the close of escrow to help pay for her son’s school (The underwriter actually freaked out because she’d never seen a buyer do that). I’m not saying you need to do something like this, but in our case it definitely made a huge impression. It showed that we listened, we truly cared, and we were very serious about the home. 

9. Listen to your agent: You probably know the market pretty well by now because you’re scouring listings in an obsessive compulsive way on Redfin, Zillow, and MLS. This also means you are most likely going to find your eventual home before your agent does. That’s how it works these days. Just remember finding the home is the easy part, but the most important thing your agent can do for you is negotiate on your behalf and offer professional guidance and advice along the way. Will you listen?

I hope this was helpful.

Sincerely,

Ryan

Questions: What piece of advice resonates with you? What is #10? Did I miss something? I’d love to hear your take.

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