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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How to use a CMA to gauge the temperature of the real estate market

Temperature changes all the time. It’s a reality whether we’re talking about a cup of coffee, the weather, or even the real estate market. Today I want to show you one of the ways I use a CMA to take the temperature of a neighborhood real estate market. This helps me communicate well with clients, and I hope it will do the same for you.

Image purchased by sacramento appraisal blog from 123rf dot com - neighborhood market

NOTE: “CMA” stands for “Comparative Market Analysis”, and it’s a tool real estate agents (and others) use to communicate about the market to clients.

Three steps to gauge the market with a CMA:

1) Draw Neighborhood Boundaries:

rosemont neighborhood

All your data is going to come from the boundaries you choose, whether you draw them with a polygon tool in MLS or pick an MLS area (you choose since you are the market expert). I don’t recommend using a radius search because you’ll probably pick up sales from other neighborhoods that could skew the accuracy of what you are trying to present to a client.

2) Run a CMA in your MLS system:

Now run a CMA in MLS so you have access to current listings, pendings, and sales over the past 90 days. The final product may look something like this. I truncated the images below, but you can see the total count of listings and sales in yellow.

Active Listings:

listings in rosemontPendings:

pendings example

Sales over Past 90 Days:

sales example

Compare listings, pendings, and sales: As you can see, actives have been on the market for 103 cumulative days, it took pendings 61 days to get into contract, and recent sales took 49 days to sell. In other words, buyers have been pulling the trigger in about 50-60 days, but at the same time a whole host of homes in the neighborhood are not selling.

BIG POINT: If listings have been on the market for longer than sales, something has changed in the market. Maybe it’s the real estate season, or sellers are trying to “test the market” at higher prices. It could also be that inventory has increased, buyers have become more picky, or maybe current listings consist of different types of homes that take longer to sell. This is key to communicate with clients since clearly some properties are selling and others are definitely not.

3) Figure out Monthly Inventory:

You can quickly figure out monthly housing inventory in the neighborhood. There were 61 sales over the past 90 days, which means the market absorbed about 20 sales per month (61 divided by 3 months = 20.33). Note there are currently 47 active listings. If you want to figure out monthly inventory, all you need to do is divide the number of current listings by the number of sales over the past month. In other words, 47 listings divided by 20.33 sales equals 2.31 months of housing supply.

how to calculate monthly housing inventory

WHAT TO SAY TO CLIENTS: Here is an example of what you might be able to tell clients about this neighborhood:

Right now there are about 2.5 months worth of houses for sale in the neighborhood. This isn’t very many listings, BUT when houses aren’t priced right, they are sitting instead of selling. Most homes are taking 50-60 days to sell, but overpriced homes are literally on the market for over 100 days. These homes will probably sell for even less than they would have had they been priced right from the beginning. 

General Tips:

  1. Don’t make sweeping interpretations because of one CMA.
  2. Be sure you have enough data since few sales can lead to skewed results.
  3. Remember that trends for a larger county or even an entire neighborhood may not reflect trends for the property you’re trying to value. This is why it might also be worthwhile to run a CMA for competitively-sized properties instead of the entire neighborhood.

Keynote Speaker on Friday: By the way, I will be the keynote speaker on February 6 at the Masters Club Roundtables event at the Sacramento Association of Realtors. My 30-minute talk begins at 9am and is called “How to tell the story of the market to your clients”. I’ll focus on unpacking what the market did last year, where it is right now, and how to talk with clients about trends. Swing by if you can.

SAR roundtables

Questions: How do you use a CMA? How else do you gauge the temperature of the market?

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10 ways to make your home worth less

I get questions all the time about how to increase property value, but why not consider the issue from the other side? Here are 10 ways to help your property be worth less. Anything you’d like to add? Please comment below.

  1. Go with a “midnight” theme by painting all ceilings and walls black.
  2. Start a trend of bringing back popcorn-textured ceilings.
  3. Give your home a scintillating animal aroma.
  4. Let your sprinklers hit the exterior walls (which will damage siding).
  5. Replace your front lawn with nothing but dirt.
  6. Let your kids play “Bob the Builder” inside with a real sledge-hammer.
  7. Install a chain link fence and thick security bars.
  8. Get all of your neighbors to chop down their front yard trees.
  9. Make your house stand out by painting it a super bright color.
  10. Instead of a roof, make a helipad for Airwolf (do you remember that show?)

Honey-do List from Sacramento Appraisal Blog

What would you add to the list? If you’re in real estate, what things do you recommend a home owner do before listing a house on the market? I’d love to hear from you in the comments below.

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook