real estate trends

How would you know if the market was starting to tank?

August 14, 2018 By Ryan Lundquist 28 Comments

Is the market starting to tank? Or is it just a seasonal slowing? I’m getting asked this question all the time, so I wanted to share some thoughts. Then I have a big local market update for anyone interested.

How would you know if the market was sliding? I wish this was a 10-second answer, but it’s a big conversation, so let’s unpack some thoughts.

1) Change in inventory: It’s normal for housing inventory to increase as a market begins to cool for the season, but when a market starts to make a big turn we’d likely notice new listings aren’t being absorbed and the number of listings keeps growing beyond a normal pace.

2) Change in sales volume: Sales volume usually slows down as the market cools, but during a big shift we’d expect to see a more substantial change in sales volume over time. I’m talking about a market where buyers put on the brakes and properties stop selling. Currently in many areas throughout the country we’re seeing some smaller changes in sales volume. Could it be the start of something? Sure. But in my mind we need more time to see if this is a consistent pattern or just a slower end of the year.

3) Word on the street: What are people saying? How does the market feel in the trenches? We can learn so much when talking with informed local buyers, sellers, agents, appraisers, and other real estate professionals. Ask things like, “What are you seeing out there?”, or “What’s the market doing?” This is important because before we see a change in stats we’ll hear of change in the trenches. As an FYI, here’s a Twitter poll from a few days ago.

4) Less pendings: When a market starts to slide we can expect to see less pending sales, which is a big sign of waning demand. Let’s just remember though around this time of year we usually see fewer pendings as the market cools. This means we have to be cautious about saying the market is crashing just because pendings soften. My advice? Look for abnormal changes beyond a regular seasonal dip in pending sales.

5) Price changes aren’t the big issue: When a market shifts directions we often look to prices to tell us if things are changing, but it takes time for prices to catch up with the trend. For example, in Sacramento in 2005 we saw housing inventory triple and sales volume drop 43% in one year. Yikes! Those are insane stats, but price changes weren’t all that dramatic during this time period.

6) Other metrics: Lots of experts say to watch the number of new homes built as an indicator of the market changing. That’s huge. Others say it’s the GDP or economy, easy credit, housing affordability index, or flux capacitor sales (kidding on that one). There are definitely important indicators out there, and we should tune in, but for a local market I might suggest paying the most attention to inventory, sales volume, and the word on the street. If new construction is booming in your market though, definitely watch that too.

7) A closing dating analogy: Just like a dating relationship needs time to figure out what it’s going to be become, the same thing happens in real estate. Right now in many areas of the country we’re seeing inventory increase and sales volume starting to slump. At the least these are signs of a slowing market for the season, but it also makes us wonder if it’s something more. What does it really mean? Where will things go? The truth is we don’t fully know yet because the future hasn’t happened and we need more time to see how things unfold. I realize that’s frustrating to hear, but it’s honest.

CLOSING TIPS:

1) Crystal balls: If you don’t have a crystal ball that works, be careful about making very specific real estate predictions.

2) Watch local data closely: More than ever it’s critical to watch local data. Lots of articles are talking about “national” trends, but what’s happening locally?

3) Don’t just regurgitate headlines: It’s easy to read headlines and let the titles become our talking points. Be careful of that since headlines are designed to get clicks and they may or may not reflect the market.

4) Know the season: It’s not always easy to understand what a market is doing at this time of year when things usually slow down. My advice? Understand normal seasonal trends by studying past years. What does the market normally do at this time of year? This will help us spot normal vs abnormal trends.

I hope that was helpful.

—–——– Big local monthly market update (long on purpose) —–——–

The market has been slowing for the past few months in Sacramento. We’re seeing what we’d expect to see at this time of the year like softer prices, more price reductions, a lower sales-to-list price ratio, and it’s taking longer to sell. We’ve had a hefty uptick in housing inventory though, and that’s something to watch – especially if it continues over time (that would be a problem). But for context, housing inventory is actually still historically low, so it’s not like we have a crazy high level right now. Some have wondered if the market is a bit stalled right now, but sales volume is still looking pretty strong and so are pendings. But I’d say there is some shock in the market because of the rise in inventory. Keep in mind one of the problems is so many sellers are overpricing, and that only makes inventory increase because these properties end up sitting instead of selling. On the other hand homes that are priced well are moving quickly, and 48% of all sales in the region last month had more than one offer. So despite a slowing narrative, the market isn’t painfully dull either.

I could write more, but let’s get visual instead.

DOWNLOAD 64 graphs HERE: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

JULY 2017 vs JULY 2018: So how did this past month do? One of the ways we find the answer is to compare last month with the same month in 2017.

JUNE 2018 vs JULY 2018 (NEW CHARTS): The problem is if we only look at July this year versus July last year, we’ll miss what the market is doing right now. So that’s why I have new charts to show the previous month vs the most recent month. But there’s still an issue because if we only look at this chart and don’t understand that the market normally softens around this time of year, we might walk away with the idea that the market is utterly tanking when it’s normal to see inventory increase, sales volume decline, etc… Look at graphs below to help see seasonal changes (or check out this older YouTube video where I talk about seeing the seasonal market).

SALES VOLUME: One of the things we need to watch is sales volume because if we start to see a trend of slumping sales, it could be a sign the market is in trouble. The truth is we’ve technically had a couple of months in a row of lower sales volume in the region. But volume was only off by 4% in June and it was barely off at all this past month (which is why I said “technically”). When you really look at it, sales volume this year in 2018 so far has been stronger than last year. But when we look at the past 12 months as a whole it’s clear volume is down (still only slightly though). Ultimately volume is not crashing right now based on the stats, so let’s be careful about saying it is.

NOTE on Trendgraphix: I have some thoughts on the way Trendgraphix is pulling stats. This month their stats show sales volume in Sacramento County is down by 6%, but that’s not accurate. I can explain why if anyone wants to know. And I love Trendgraphix. What an incredible resource. I just find when we’re looking at the market carefully in a time like this, it’s critical to know how the numbers work.

2005 vs CURRENT: In case you wanted to compare current price metrics with 2005, here you go. A couple of months ago I talked about peak prices because some metrics were showing 2005 levels. But with the market softening right now we’ll expect over the fall season to see current prices grow further apart from the “top” so to speak.

SACRAMENTO COUNTY (more graphs here):

SACRAMENTO REGION (more graphs here):

PLACER COUNTY (more graphs here):

I hope that was helpful.

DOWNLOAD 64 graphs HERE: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: What would you look for to know the market was turning? What are you seeing out there right now? I’d love to hear your take.

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Fake real estate trends & rising rents

February 14, 2018 By Ryan Lundquist 10 Comments

Let’s talk about fake news. No, not anything political. Let’s consider a couple of examples where it’s easy to misunderstand trends and then report fake real estate news. Then let’s look at how rent increases are fueling the 2-4 unit market. Anything to add? I’d love to hear your take.

Part I: This is Part I of my big monthly market update. Part II will come next week. If you need a few graphs now for marketing, send me an email. This post is long on purpose. Scroll or read in depth.

1) FAKE NEWS: The market is starting to turn because sales volume is down.

TRUTH: Sales volume declined by 21% last month in Sacramento County. That sounds dramatic, right? Should we be concerned? Is the market shifting? Nope. It’s actually normal to see volume drop like this between December and January. I circled January in red below as proof. This January was actually the strongest we’ve seen since 2013.

2) FAKE NEWS: The market is flat and didn’t have a price lull during the fall.

TRUTH: The median price has been flat in Sacramento County for six months, and normally it softens by about 5% during the fall, but that didn’t happen this year. So it’s easy to say that the market is so “hot” that prices didn’t dip, but that’s not true. Here’s the thing. Sometimes the median price ends up being a bit more flat despite the market showing a legitimate cooling. Besides, if we step back and look at the average sales price and average price per sq ft, both declined during the fall. Moreover, the median price in the region also declined. The moral of the story? Don’t put all your eggs in the median price basket.

3) *FAKE NEWS: Bay Area residents are buying EVERYTHING in Sacramento.

Truth: Bay Area folks are getting lots of attention and they should since there are over 20,000 new Bay Area residents migrating to Sacramento each year according to the Greater Sacramento Economic Council and Mercury News. That’s jaw-dropping to hear, but let’s pause and consider a few things.

* WHAT I AM NOT SAYING (update): I am not saying Bay Area buyers are not a factor in our market. They are. Bottom line. All I am saying is they are not buying everything. Thus it can be misleading news to perpetuate the idea that our market is being utterly gutted by Bay Area residents. As we have conversation about Bay Area buyers, let’s consider some of the points below. I find these fascinating for the sake of our conversation. Moreover, when we are talking about trends, let’s look to not only how the market feels, but actual stats too where possible.

A) Bay Area cash is not gutting Sacramento. Only 15% of all sales were cash in the region last year. Cash used to be about 30% during the “Blackstone” days.

B) Nearly 20% of sales in the region last year were FHA, which tells us first-time buyers are winning in this market – not just loaded Bay Area residents.

C) There are 20,000 new residents every year from the Bay Area, but there are only about 28,000 single family detached home sales in Sacramento per year. This tells us not everyone who moves here is actually buying. Of course if Bay Area buyers are picking up the slack of locals not buying, then that’s another story. If anyone has data to suggest that is the case, do share. For now though let’s admit not everyone who moves here is getting a mortgage.

D) I might be more bullish on thinking the Bay Area is dominating the purchase market, but having more than twenty thousands residents migrate to live in Sacramento is definitely putting pressure on rents. According to Yardis Matrix, rents are up 8.5% this year, and that translates to renters paying an average of $105 more each month for rent (or $1,260 more over the course of the entire year). Yikes.

4) NOT FAKE NEWS: Rising rents are heating up the 2-4 unit market.

TRUTH: An investor told me the other day, “Sacramento’s hot rental market is now the worst kept secret in the nation”. Such a headline quote (thanks Eliot). He is 100% correct because news of rising rents has seemed to permeate the marketplace lately. For years after the housing collapse prices seemed more subdued, but lately it’s been eye-opening to see how much demand there is for the 2-4 unit market. Yet many units hitting the market actually have below-market rents because the rents have not been raised in many years. This is why most of the time it seems like I cannot fully trust rental data in MLS because it reflects older rental contracts from years ago rather than the market today.

What the? There are also some lofty sales that leave us asking, “What the? It sold for how much?” I thought this recently when seeing a triplex sell for 1.8M in Midtown and a 4-plex at $850,000 in Curtis Park. A “lone-ranger” outlier sale might reflect the “hot” market in some senses, though remember a high sale could also be a trophy property, have a subdividable lot, or maybe a buyer overpaid in light of needing to do a 1031-exchange.

I hope this was helpful or interesting.

Questions: What do you think of the “fake” real estate news above? How much of an impact are Bay Area buyers really making? What are you seeing in the rental market? Did I miss something?

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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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