What does the market expect? (a critical question to ask in real estate)

What does the market expect? That’s one of the best questions we can ask ourselves in real estate. Why? Because it helps us keep the focus on what buyers actually demand in certain neighborhoods and price ranges. In other words, what are buyers really willing to pay more or less for in a neighborhood? Being in tune with that is definitely one of the key aspects of coming up with a credible value.

Market expectations - Sacramento Appraisal Blog

Pool Example: Take a look at the table below to see how some areas and price ranges in Sacramento have far more built-in pools than others.

Market expectations pool example by Sacramento Appraisal Blog

Key Point: When built-in pools are more common in some neighborhoods and price ranges we can probably say the market expects a pool, right? This is especially true at the higher end of the price spectrum where over 70% of homes have a pool. In contrast, some areas of town have less than 1% of homes with a built-in pool, and it’s safe to say the market doesn’t expect a built-in pool in those areas. This doesn’t mean the pool is worth nothing in those places, but if anything it’s a reminder to really consider that a pool might be worth far less or more in some areas than others. While it’s tempting to always give a token $10,000 adjustment for a pool, based on the data above alone, that adjustment probably doesn’t make sense for every neighborhood because of differing expectations.

Not Just About Pools: This conversation isn’t just about built-in pools because we have to ask what the market expects for things like upgrades, square footage, condition, lot size, architectural design, bedroom count, garage spaces, landscaping, etc… As much as we’d like instant answers, there really isn’t a quick guide to understand what the market expects without immersing ourselves in comparing sales, talking with buyers and other real estate professionals, and crunching numbers.

Two Mentions: I’m honored to share a couple of recent media mentions. I was quoted in Inman SF Bay Area in “Sacramento housing boosted by Bay Area refugees” and in RealtyTrac’s June Housing News Report (PDF – pg 17-21).

Blackstone: One more thing. A recent article talked about the private equity fund Blackstone (Invitation Homes) selling off some of its homes directly to tenants. As you probably know, Blackstone purchased thousands of homes in the Sacramento market several years ago. They continue to buy today, but their purchase volume is minimal and nowhere near what it used to be. Anyway, the article states they would likely sell about 5% of their inventory this year directly to tenants. Whether that’s true for the Sacramento market or not is to be seen, but it’s worth watching closely. Keep in mind many landlords are selling straight to their tenants right now instead of listing on MLS. In short, this isn’t just a Blackstone thing.

Questions: How do you get a sense of what the market expects in a neighborhood? Any advice you’d give on how to better understand market expectations? Did I miss anything? I’d love to hear your take.

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Four things to remember about the value of a larger lot

The lot is huge, so it must be worth more, right? But how much is it really worth? Let’s look at four quick points to consider when it comes to lot size. Don’t miss the two images at the bottom of the post too. I’d love to hear your take in the comments.

larger lot size in real estate - sacramento appraisal blog - image purchased from 123rf and used with permission

Four things to remember about the value of a larger lot:

  1. It’s about what the market will pay: The best way to know what a larger lot size is worth is to start comparing similar homes with and without larger lots. What is the price difference? If we can line up a few examples, we’ll probably begin to see a reasonable range of value emerge. Keep in mind there might not be any recent larger lot sales, but you can easily look at the past few years of neighborhood sales as well as sales in a competitive market. Value could be exponentially higher for the larger size, but then again it might be less than we’d think. At the end of the day we have to look to the market for the answer though since it all comes down to what buyers are actually willing to pay for the difference in size.
  2. Usefulness: When dealing with a larger lot we have to consider the usefulness of the extra space. What if the larger lot size was located in the front yard? Could there be a difference in value between a huge backyard and a large front yard? What if the lot had a funky shape that made most if it unusable? What if the larger lot was located right next to the highway compared to the interior of the neighborhood? What if there was an easement running through the lot that essentially cut the usable space in half? From a value standpoint we have to consider the effective usable lot size and make sure we are choosing comps with similar utility.
  3. New construction: Remember, builders tend to charge more for a “lot size premium” or “lot elevation premium” when a house initially sells, but this premium may or may not exist in the resale market years down the road. The owner might expect to sell for more, but what are homes with similar features actually selling for in the resale market? That’s what our focus needs to be.
  4. The temptation to give an adjustment: It’s tempting to give a lot size value adjustment any time we see a difference in size. Thus when we see a lot that is 6534 sq ft and a lot that is 8000 sq ft, we automatically apply an adjustment. Or if we see something that is 4356 sq ft and a lot that is 6500 sq ft, we’re tempted to use a price figure we think makes sense. But we have to ask ourselves, would buyers really make the adjustment? (adjustments are supposed to be based on the behavior of the market (buyers)). It’s easy to be trigger-happy about giving adjustments like this, but we have to remember there is no such thing as an adjustment that is going to work for every single neighborhood, price range, or market. In short, if the adjustment is incredibly minor, maybe it’s better to just not give it in the first place.

I hope this was helpful. Now two quick images.

lot utility - sacramento appraisal blog

Example of Finding an Adjustment: Assume these two model match sales have a similar location, upgrades, and condition. Now how much is the extra lot size worth based on actual sales? Remember, it’s ideal to find a few examples instead of just one so our results are more meaningful.

lot size example - by sacramento appraisal blog

Questions: Anything else to add? What is #5? Did I miss something? I’d love to hear your take.

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How much is the largest home in the neighborhood worth?

How do you value a house when it’s significantly larger than anything else in the neighborhood? I’m talking 30-50% bigger than even the largest homes. Four years ago I came across an enormous property in a tract neighborhood, and I ended up shooting a quick 30-second video called, “Which house is overbuilt for the neighborhood?“. Being that this home sold recently, I thought it would be interesting to do a follow-up by asking two questions. Did this beastly house command a price premium because it was so much larger than anything else? Or did it suffer loss because it was simply too big for the neighborhood?

largest home in neighborhood - sacramento appraisal blog

This is what the  house looks like. You can check out the 30-second video below (or here) to see what surrounding homes look like.

square footage of sales in neighborhood 3

As you can see, when looking at all sales in the neighborhood over the past six years, the subject property is significantly larger than anything else. It is basically 1000 sq ft larger than even the largest homes, and it looks like a mansion in the middle of a ranch house development.

overbuilt house for neighborhood - sacramento appraisal blog

Despite its large size, the subject property ended up selling at a level consistent with much smaller-sized homes in the neighborhood. The subject property was listed on MLS for 119 days at $325,000 as an arms-length sale, so we know it was adequately exposed. In cases like this it may not be possible to find other “comps” that have a similar size. We simply have to use smaller sales. The assumption of course would be to start making significant upward adjustments for square footage, but if we did that in this case the property would be overvalued (unless of course we made huge upward adjustments for square footage, but then also made huge downward adjustments for functional obsolescence (being overbuilt)). In cases like this it’s important to find similar overbuilt homes in either the subject neighborhood (older sales) or even a competitive neighborhood. This will create a better context and reinforce how the market has dealt with overbuilt homes over time. It would be golden too if the subject property sold at any point in the past so you could go back to see how the market perceived the property at the time.

The Reality of a Neighborhood Price Ceiling: Every neighborhood has a price ceiling, and it’s important to be aware of where the top of the market is at. In other words, buyers tend to only be willing to pay so much in a particular neighborhood before moving on to a different community they think of as superior. In this tract neighborhood it looks like the price ceiling is around $325,000, and this mammoth home sold fairly close to that level. This is why when dealing with a huge property in a tract neighborhood, one of the first things we can do is to find out where the price ceiling is at. Is it feasible for buyers to pay above this level? That’s the big question. Ultimately in this case, despite the subject property having a much larger size, it ended up suffering economic loss because buyers didn’t expect such a large home in this neighborhood, and they weren’t willing to pay a massive premium for the extra space. This example also underscores how important it is for home owners to be aware of the expectations of buyers in a neighborhood (ask an agent or appraiser for advice on upgrades before doing an extensive remodel). My advice? Don’t overdo it.

REAA classAppraisal Class I’m teaching for 2 hrs of CE: On November 11 in the evening I’ll be teaching a class called “How to tell the story of value in appraisal reports”. The class will talk in depth about how the local real estate market is moving and how appraisers can more effectively tell the story of market trends in appraisal reports. The class is for the Real Estate Appraiser’s Association of Sacramento, and it will be good for two hours of CE (for appraisers). Dinner is included, and anyone is welcome. Registration closes tomorrow-ish I believe. See the image and click here for details.

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

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The biggest change in Sacramento’s housing market (the mind of the buyer)

Have you been feeling the market change lately? We all know real estate has been slowing down, but the big theme last month seemed to be the change in the psychology of the buyer’s mind. A year and-a-half ago buyers were getting beat down by cash investors, but now buyers feel like they are sitting in the driver’s seat of the market because they have more power, selection, and even the perceived luxury of time being on their side. Let’s talk about this below as well as hit on some other trends. Remember, the goal of my big monthly post is to help better understand and explain what the market is doing. I hope this helps.

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.

changing market in mind of buyers -by sacramento appraisal blog


1)  The median price INCREASED, but the market is NOT increasing:

median price and inventory since 2013 - by sacramento appraisal blog

The median price increased from $270,000 to $275,000 last month. Does that surprise you? I think many of us were expecting the median price to show a decline this past month in light of rising inventory and a general malaise in the marketplace. However, remember that sales stats for September strongly reflect what the market actually did in August rather than September. Being that properties are taking 41 days to sell right now in Sacramento, this means most escrows in August actually ended up closing in September. Thus the slowness felt in the market in September will theoretically be better reflected in sales stats in October. This is a good reminder too to not take one month of data and draw a big conclusion from it. We also must ask what the surrounding market is doing (hint: The median price has been the same for 5 months in a row).

One last thought on Trendgraphix: I mentioned previously how Trendgraphix in MLS showed the median price was increasing over the past few months in Sacramento County despite the trend really being flat. This has now been corrected. Just be aware that Trendvision adjusts publishes stats at the beginning of the month, but then they adjust their graphs at the end of the month. This means the data might look different depending on when you look at it.

2) Distressed sales represent only 6% of the market

REOs and Short Sales in Sacramento County

REOs and Short Sales Percentage and Volume in Sacramento County

There were less REO sales and less short sales over the past quarter compared to the previous quarter. I hear rumors of increasing REO sales, but that hasn’t shown up in the stats yet since both bank-owned sales and short sales showed a decline from the previous quarter. Keep in mind REOs and short sales each only represented about 6% of all sales over the past three months. Remember too that “Boomerang Buyers” are entering the market right now after having gone through a foreclosure or short sales, and they are hungry to buy again.

3) Inventory increased again last month and is now at 2.5 months:

inventory in sacramento county - by sacramento appraisal blog

Inventory is now at 2.5 months of housing supply (up from 2.41 month last month). This means there are 2.5 months worth of houses for sale right now in Sacramento County. Inventory also increased in the regional market, but we’ll dissect that in two days. Inventory right now at the beginning of Fall is at the peak of what it was at the end of Fall last year.

months of housing inventory by sacramento appraisal blog

number of listings in sacramento - July 2014 - by home appraiser blog

What happens with inventory over the next 3 to 5 months will set the stage for the housing market in 2015. Increasing housing inventory is definitely one of the X-factors for how values are going to move in coming time. A larger housing supply is also indicative of having a more “normal” level of demand now that cash investors are no longer driving the market. Investors acted like a steroid for the housing market, and their rampant purchases made it seem like demand was much stronger than it really was. But lately we are getting a taste of what demand is really like now that regular non-cash buyers have to support the market. As you can see above, inventory is not the same in every price range, and that is a key marketing point for buyers and sellers to embrace. Anything below $300K is still a bit of a fight to get into contract.

4) Sales volume is down 10% from last year:

sales volume in Sacramento County

Sacramento County has seen about 10% less sales volume so far in 2014 compared to 2013, but sales volume is only down 2% when looking at September 2013 and September 2014. The more sluggish volume of course is due to less purchases by cash investors.

5) Sellers are lagging behind the changing market

sellers lagging behind the trend in Sacramento County

The market has changed and really softened over these past five months, but many sellers are stuck in Q1 2013 when the market was very aggressive, or the first quarter of 2014 when the market experienced a normal seasonal uptick. Throughout September there were about 400 price reductions every day in MLS, and that tells us the market has been overpriced. This means it’s all the more important to price according to the most recent listings that are actually getting into contract (instead of the most recent sales from six months ago). If you haven’t seen my “Open Letter to Sellers in Sacramento“, it may be worth a look or share.

6) Cash sales are down 42.5% from last year:

cash sales and volume in sacramento county - by home appraiser blog - Copy

Cash sales since 2009 in Sacramento County by sacramento appraisal blog

There have been more non-cash purchases in 2014 so far compared to 2013, but the big news is cash sales volume is down by 42.5% from last year. Furthermore, cash sales used to represent almost 36% of the entire market in Sacramento County, but now cash sales are just under 18%. At the same time, it’s important to realize cash sales below $200,000 still represent almost 34% of the market, which tells us cash purchases are more aggressive at the lower end of the price spectrum than the rest of the market (that’s normal). Remember, taking cash out of the market has led to buyers gaining more power.

7) Buyers are gaining an obvious edge in the market

FHA sales in Sacramento County by sacramento appraisal blog

FHA and cash sales since 2009 in Sacramento County by sacramento appraisal blog

FHA sales have taken back about 7% more of the entire market since cash investors began exiting the scene 15 months ago. This is important for several reasons: 1) It shows us many first-time buyers are getting FHA offers accepted; 2) Sellers are more accepting of FHA offers lately (and conventional & VA); and 3) As buyers gain more power in the market, they are gaining the power to negotiate for lower prices and seller credits. If you are rusty when it comes to FHA appraisal standards, be sure you get in tune with FHA minimum property requirements.

8) It took 1 day longer on average to sell a house last month:

CDOM in Sacramento County - by Sacramento Appraisal Blog

On average it took 41 days to sell a home in Sacramento County last month, which is up 1 day from the previous month (and up 68% from September 2013). All things considered, properties that are well-priced and in good condition are tending to sell quickly, but anything that is overpriced is simply sitting on the market. Buyers have become much more picky about location and upgrades also, so any detrimental property characteristic is standing out like a sore thumb right now. Remember, when the market is very competitive and inventory is low, outdated homes and adverse characteristics are less of a big deal for buyers, but now that buyers have more choice and feel that time is on their side, they are tending to ignore certain listings because they believe they can find something better or wait out the market to see what happens. On the positive side, if your home is upgraded already, you have a marketing edge.

9) Interest rates are hovering in the 4% range:

interest rates by sacramento appraisal blog

Interest rates have been hovering in the lower 4s lately. It seems week by week the tone of real estate articles change from saying rates are likely to increase or they’ll likely to decrease. Ultimately only The Fed knows what will be done, so we’ll see how this pans out. This will be an important factor to watch since a change in rates can impact affordability and competition. Personally, I’m hoping interest rates don’t creep down too low because that will only ramp up prices again. Our market needs some space to figure out how to be normal rather than more outside forces to help inflate values beyond where the local economy would naturally take housing prices.

10) Values when the “bubble” burst and when we hit bottom

Since the bubble burst by sacramento appraisal blogThe median price is currently about 30% lower than it was when the previous real estate “bubble” burst in the summer of 2005. This may be helpful to consider for context for some buyers and sellers. I’ve heard a number of friends say, “I know values increased rapidly recently, but they are still so much lower than they used to be.” What do you think of that?

Median price and inventory since 2012 by sacramento appraisal blog

The market hit bottom in early 2012 and has since seen exponential appreciation.

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

Current values in Sacramento County are similar to where they were during Dec 2007/Jan 2008 and Dec 2003/Jan 2004. Keep in mind different neighborhoods or property types might not be experiencing this same trend.

Summary: Despite the median price showing an uptick this month, the market is NOT increasing. The market can best be described as flat, price-sensitive, and less competitive than it was in recent months. At the same time inventory is still relatively low, interest rates are near historically low levels, and there is still stiff competition to get into contract in various price ranges. We can look at housing market metrics until we’re blue in the face, but one of the biggest changes not shown on a graph above per se is the mind of the buyer. Real estate and Psychology definitely mix, and we’re seeing the mixture with buyers beginning to feel much more confident and in control of their housing destiny.

Two speaking engagements: By the way, I’m speaking at Sacramento Association of Realtors at the end of the month on the 24th. This is a free event, and I’ll be sharing about market trends and how to talk about them with clients when the market slows down. Secondly, I’ll be teaching a class on how to work with appraisers on the 27th. The cost is $25 for this class, and you have to sign up with SAR. Full disclosure, as the instructor I get a portion of the $25 fee.

ryan lundquist speaking events in october - 530 2

Sharing Trends with your Clients? If you want to share graphs online or in your newsletter, please see my sharing policy. Thank you for sharing.

Questions: How else would you describe the market? I’d love to hear your take.

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