When the market feels aggressive…

The market feels aggressive out there. I don’t know about you, but I’m having so many conversations about rising prices at the lower end, a shortage of inventory, and even low appraisals. So I wanted to share some of the talking points floating around out there and give some commentary too. Here’s a list of things coming up in discussion lately (it’s longer on purpose). Anything to add?

sacramento appraisal blog - housing market

One buyer vs market value: Value is what a buyer is willing to pay. I hear that statement quite a bit, but what one buyer is willing to pay could represent an individual’s value rather than market value – which is what appraisers are gauging.

Front-loaded market: Most of the value increases are usually found in the beginning of the year. Thus if values went up 5% last year, that means we probably saw about a 1% increase per month during the first two quarters of the year. But if the bottom of the market increased by say 12%, then we saw a 2% monthly increase. Of course some months might see greater appreciation rates than others.

sacramento appraisal blog

The need to respect pendings: Sales tell us about where the market used to be when they got into contract 60-90 days ago, but pendings tell us about the temperature of the current market. This is why we have to respect pendings. For instance, during a recent appraisal of a fairly original home in South Sacramento I saw some properties close around $230,000 less than six months ago, and now similar ones are getting offers galore at $245,000+. The tricky part is I don’t know the exact price and terms of a pending unless I call the agent (and he/she tells me). 

One sale or pending doesn’t make the market: Let’s remember value in a market is not based on one high sale. In today’s market if a buyer paid $25,000 above appraised value, for instance, an appraiser has to consider if that property at $25,000 above everything really represents the market or just one buyer willing to pay more. This is a reminder that appraisers and agents have to “appraise the comps” so to speak. We can’t just blindly accept the final sales price of a comp without understanding the back story of why it closed that high. The same holds true with pendings as we can’t base an entire valuation on one “lone ranger” that is higher than anything else.

South Sacramento

Upward adjustments by appraisers: Value adjustments can be given by appraisers to account for an increasing market. These adjustments can be figured out with graphs, analyzing sales and pendings, talking to real estate agents, etc… This is what I did with the South Sacramento property above as my comps were 2-6 months old, but the market was 4-6% higher easily because the pendings were all trending higher. The truth is if I didn’t give upward adjustments my value would have reflected the past instead of today’s market. Some appraisers might not give a specific upward adjustment, and I won’t split hairs over that so long as an increase in value is accounted for somehow in the appraisal.  

Appraisers aren’t hired to “hit the number”: A lender hires an appraiser to assess whether a loan should be made or not. Thus if a buyer offers an unrealistic price, the buyer might be willing to pay that amount, but if the house cannot sell for that price to the rest of the market, it doesn’t make sense for the lender to make the loan at that level. In this regard it’s reasonable to see appraisals come in lower than some of the high offers we’re seeing.

Multiple offers don’t always mean aggressive increases: Just because there are many offers doesn’t mean values are increasing rapidly. In some price ranges we are seeing clear increases in value and other prices ranges feel a bit flat. Realistically though there are likely to be multiple offers in about every price range (more at the lower end). This is a good reminder that at times there is a difference between how the market feels and what it is doing (actual data).

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Different trends different neighborhoods: It’s easy to project what is happening in one neighborhood onto another or use one sweeping cliché to describe all locations and price ranges, but we have to look at actual numbers in each neighborhood to understand what the market is doing there.

Informed buyers: Having low inventory is creating some aggressive offers out there, and while buyers are willing to overpay to a certain extent for the right property, they won’t literally pay any price just because “nothing is on the market.”

Not easy to interpret: If we’re honest it’s not always easy to interpret what the market is doing – especially when things seem crazy with multiple offers and bidding wars. This is a good reminder to be humble because the market isn’t always wrapped up in a neat little perfectly decipherable package. There are things we can expect of course and seasons of the year, but the market is still distinct and sometimes even surprising. Let’s be real about that.

A perfect season for communication: This is a perfect market to foster excellent communication between real estate agents and appraisers. Agents, sticks to the facts and tell the story of the marketing of the property when talking to appraisers. Feel free to use my Appraiser Info Sheet (local agents, I love when you use this). In any price range where values are changing quickly, insight from agents can really help appraisers. On that note, Appraisers, glean insight from agents by finding time to make phone calls and asking the right questions about comps and the subject.

Reconsideration of value: I did a presentation recently on tips when asking an appraiser to reconsider the value. If anyone wants a copy of it, just send me an email (lundquistcompany @ gmail  dot com). You can also read this post.

Hindsight makes everyone sound smart: When in the thick of a “hot” market it’s not always clear what the exact trend is, but after a few months when more stats are published everyone and their Mom sounds like a real estate expert. #truth

Questions: Anything else to add? What else are you seeing out there in the market right now? I’d love to hear your take.

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Hot Pockets & adjusting for an increasing market

Hot Pockets. Yep, I’m about to use them to explain the housing market. That either makes me deeply creative or really immature. I’ll let you decide. On a serious note though, let’s talk about this analogy and consider the importance of giving value adjustments to comps during an increasing market. As always, I’d love to hear your take in the comments below.

Hot Pockets and real estate - Greater Sacramento Region Appraisal Blog

Hot Pockets analogy: The real estate market is like a Hot Pocket taken out of the microwave a tad too early. Some portions are blazing hot while others are only warm or frozen. Like a Hot Pocket, we can say the real estate market is “hot” overall, but it’s definitely not the same temperature in every neighborhood or price range.

Thoughts on making adjustments in an increasing market:

  1. Changing Market: If the market has changed since the most recent sales got into contract, a value adjustment may be needed. In other words, if the market is now higher or lower than the sales, we can account for that in an appraisal (or listing) by making an up or down value adjustment to the comps. Of course there needs to be support for making such an adjustment. We can’t just say, “There’s no inventory, so value must be higher”. We need to rather find support in the market (see #2 and #3).
  2. Pendings vs. Sales: There are many signs of an increasing market, but one of the best things to do is compare competitive pendings and sales. Are pendings getting into contract at higher levels? The other day I appraised something where pendings were about 3-4% higher than similar sales from December, so I ended up giving a 3-4% upward adjustment to a couple of sales I used from November and December. I didn’t have many recent sales to work with unfortunately, but comparing a few older sales with a few current pendings helped me see the current market. Remember, the entire county might show certain trends, but we have to look in each neighborhood to find neighborhood trends (which could be different).
  3. Contract Date: When making adjustments we need to look at when the comps got into contract. One comp may have a contract date four months old, while another is from 40 days ago. The change in the market could easily be different for each comp, which means it’s okay to give big adjustments to some comps and smaller ones to others (or no adjustment).
  4. The Real Price: In an increasing market it’s very helpful for appraisers (and agents) to know the exact price of pending “comps” where possible. After all, we might see something listed as “pending” in MLS, but the real contract price could be higher or lower. On one hand appraisers might give less weight to pendings because we don’t know the precise dollar amount in many cases, though when agents divulge the exact contract price and terms, it can help appraisers give even stronger weight to pendings in the neighborhood.
  5. Imperfect Data: It would be nice if all neighborhood data was perfectly aligned, but sometimes it’s conflicting, which means we have to use good judgement. Does that one high sale or pending really reflect the market or not? Is it reasonable? Do those two lower pendings mean the market is starting to soften? Did the hefty credit to the buyer in that one comp inflate the sales price? At the end of the day we have to spend time weighing both sales and listings to see the market, which means sometimes we end up throwing out certain sales because they’re outliers more than anything.

I hope that was helpful.

Questions: When was the last time you ate a Hot Pocket? Anything else you’d add to this post? I’d love to hear your take

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