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6 ways buyers have changed since the housing bubble

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There’s lots of focus on how home prices have changed since the previous “bubble”, but let’s talk about how buyers have changed. Here’s some observations. What else have you noticed?

1) More picky: During the previous housing “bubble” buyers seemed so desperate to purchase that they pulled the trigger on about anything, but they’re much more discerning these days. Of course let’s remember underwriting has changed dramatically though too. In the past many properties flew through the loan process without hardly any scrutiny, but lenders today are incredibly strict, which has certainly propelled a more picky feeling in the market.

2) More patient: Despite a housing shortage buyers aren’t willing to pull the trigger on junk. They’re simply more patient for the right house and they want to make an informed purchase (and even feel like they’re getting a good deal where possible too).

3) More informed: Just as the “bubble” began to pop we had companies like Zillow and Redfin coming to the forefront. Well, now they are household names and buyers are basically obsessed. Seriously, buyers scour these sites day and night, and they know about every single new listing, price reduction, and sale. This doesn’t mean buyers don’t make value mistakes still, but it does mean they are more informed than EVER about prices. At the same time, guess who is not looking at Zillow as much? Sellers. This is a huge issue because it means sellers are not as in tune with the market these days, which means they’re prone to overprice.

4) Financial mistakes: Buyers remember the pain of financial turmoil in the past, so they’re sensitive to repeating mistakes. For instance, I talked with a buyer considering purchasing the highest-priced listing in a neighborhood, but he’s concerned we’re at the top of the market. This buyer asked, “If a buy right now and the market turns, would it be possible I’d have to hold on to the house for 10 years before values come back?”

5) Higher expectations about condition: These days buyers have higher expectations about homes being in good condition. In other words they are much more picky about properties that are not in “move-in” shape or upgraded. Wait, there aren’t granite counters? What the? There could be many reasons for this, but I think heightened investor flipping activity played a huge role. In a fairly short period of time investors had a gluttonous real estate feast by purchasing an avalanche of bank-owned homes, rehabbing them, and selling them. This helped quickly upgrade the housing stock, and also widen the price gap in some areas. What I mean is values used to be very tight together as you can see in the graph below, but now the price spectrum is simply wider since buyers are willing to pay more for rehabbed homes in today’s market. I’m not saying this dynamic is in every neighborhood, but I definitely see it in quite a few areas.

6) Less cash-out refinances: Everyone and their Mom had a boat before the “bubble” burst because people were using their house like an ATM to buy toys. Well, today we don’t have that dynamic (image from Leonard Kiefer). Home owners are clearly cashing out less, which makes them sound financially wise, but let’s realize lending guidelines have changed to make it more difficult to ATM your house. Moreover, many owners are sitting on 3% interest rates, so why the heck would they trade pulling out cash for a much higher rate?

NOTE: I updated this post with “more informed” above after Peter left a stellar comment (thanks). This is such a big point. I can’t believe I didn’t mention it while writing this, but it didn’t come to mind at the moment. The irony is I’ve been talking about this in other posts and in person so much lately. Ha. Well, it’s fixed now.

I hope that was interesting or helpful.

MARKET UPDATE VIDEO: A few days back I did a screencast to talk through trends. Lots of people are wondering if the market is tanking or softening, so I wanted to pitch in two cents. Well, the video is actually 20 minutes (there’s lots to say). Anyway, give it a view if you’d like here (or below).

SPEAKING GIGS: If you’re around, I’m doing a blogging class on October 11th at SAR. I’ll be speaking at the AI’s 2018 Fall Conference in San Francisco on October 19th and AppraiserFest in San Antonio on Nov 1-3.

Questions: What else do you think has changed about buyers since the “bubble” burst? Any stories to share? I’d love to hear your take.

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The rage of Airbnb rentals (and stuff to keep in mind about value)

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The owner has a cash cow. Her second unit is bringing in $3,300 per month as an Airbnb rental, and it’s paying her mortgage. Since these types of rentals are all the rage right now, let’s talk about some important details to keep in mind from a value perspective. This isn’t meant to be exhaustive, but I wanted to share some things on my mind. I’d love to hear your take in the comments.

1) Airbnb rent vs. market rent: Having an Airbnb rental is really more like a hotel since the guest is only there for a short period of time. In the owner’s case above she was getting $3,300 per month for Airbnb rent, but market rent with a tenant would have been $1,900. In other words, Airbnb was renting 73% higher in this case. Granted, there are expenses and taxes to consider, so the owner is not actually netting 73% more.

2) Lenders and market rent: Typically lenders are going to ask residential appraisers to use market rent in appraisal reports instead of a short-term transient rent (“hotel” rent). Thus when appraisers do The Income Approach for a 2-4 unit residential property, you can expect the appraiser to use market rent instead of a short-term rent that might be much higher. We can also expect for the real estate community to keep thinking through how to value properties like this because it’s an emerging market. For appraiser colleagues, which rent do you use and why? How do you deal with highest and best use?

3) Investors & seller expectations: In some cases investors can make more money with a residential property by doing a short-term rental. They can buy at fair market value based on fair market rents, but then attract higher-than-market rents through a short-term rental setup. Many savvy investors have been doing this by targeting properties near Downtown. Yet sellers trying to sell a property with a short-term rental would be wise to recognize that not everyone wants to run a short-term rental business. This means buyers are going to be looking at market rents instead of just “hotel rent” when assessing whether a deal works or not. So if you’re broadcasting the unit can rent for $3,300 as a short-term rental, but it’s market rent is $1,900, buyers can’t ignore the $1,900 (and the lenders probably won’t ignore that number either). Let’s not forget to look at similar sales too. It’s easy to say, “I have an accessory dwelling and it’s a cash cow because of Airbnb.” I get that, but what have other properties with accessory dwellings been selling for? Let’s look to the market for the proof of value.

4) The fine print and a 12% tax: Owners need to know the fine print. In the City of Sacramento a rental is deemed “short term” if an owner is going to rent to someone for less than 30 consecutive days, and a short-term rental permit is needed (cost is $125 per year). If you’re going to rent a house or room for longer than 90 days during a calendar year, you’ll need a conditional use permit. But if you live in part of the property as your primary residence you only need a short-term rental permit. Oh, and there’s a 12% transient occupancy tax that Airbnb (or sometimes the owner if not using a third party) will pay to the city. Lastly, the city will require the owner to have a business operation tax account because the residential property is being used like a hotel.

I hope that was interesting or helpful.

Questions: Anything else to add to the conversation? Did I miss something? I’d love to hear your take.

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The Art of Hospitality: Having Neighbors Over for Dinner???

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052108ins-182aI spend quite a bit of time each week thinking about houses and neighborhoods because of my chosen career as a real estate appraiser. But more than my job, I find myself often imagining how neighborhoods can improve and become more connected like they used to be. 

Below is an article I wrote in a series entitled “Community Building 101” (pdf file). “The Art of Hospitality” is the last article in this mini-essay series and I wanted to share it here on my real estate appraisal blog because life is not just about the value of our houses, but the quality and value of the relationships we have, even in our neighborhoods. Eating with neighbors is one of the the most profound but simple ways we can build a better community.

The Art of Hospitality by Ryan Lundquist

What is the best dining experience you’ve ever had? A few years ago I ate at a joint in San Francisco called Asia De Cuba. This fusion restaurant had spectacular ambiance and the feel of a hip club with its dim lights, pulsating beats, trendy décor, and exotic menu. Our group enjoyed four hours of eating and sitting together and we were never rushed to leave. The bill was substantial, but the unique experience was worth the high cost.

When guests leave my house after dinner, I want them to feel something similar. It would be great if they complimented the lavish food, stylish decorating, and festive atmosphere. That would be nice. I have a feeling though they’d more realistically say they’d eaten good non-gourmet food and felt mostly comfortable even though there were energized toddlers running around. Dining at the Lundquist home is not anything like an upscale restaurant, but that’s a good thing because practicing hospitality does not necessitate a gourmet experience.

There is something significant about welcoming others into our homes. When we ask people over we are giving them much more than a meal – we are inviting them into our lives. In an age of birthday card emails, drive-thru dinners, and brief cell phone interactions, it’s refreshing to sit down together for an unrushed hour or two and really get to know others. Sometimes though we think that being hospitable means we have to prepare the most scintillating dishes and spend all day cleaning the house. But it’s okay if the walls are not acid-washed, if toys are visible, and if there’s a stack of bills on the countertop. True hospitality is not about offering our guests perfection, but relationship. Sure, it’s nice to clean the house and spice up dinner a bit, but let’s remember that our guests are not customers to please but rather participants in a family meal. One of the most respectful things we can do is invite people into the life we really live. Besides, if we put so much effort into a meal we might exhaust ourselves and also cause our guests to feel intimidated about inviting us to their house.

Life is busy, so where do you find the time to eat a meal with others? Thankfully dinner is something that most of us do every night, so it’s just a matter of coordinating our schedules. If my household is eating dinner anyway and yours is too, it doesn’t seem all that overwhelming to combine efforts to dine together – especially on a weekend night. It always helps too to ask guests to bring a side dish or assist with preparation somehow.

The practice of hospitality is about sharing meals, but is more broadly about sharing our lives with people. This might seem like an odd topic to end a community building series, but by taking the initiative to invite other residents into our daily routines we can profoundly impact our neighborhoods. When we get intentional about helping our tracts become more connected like they used to be, we will begin to taste something wonderful – a sense of community.