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An underrated metric & slumping volume

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There’s a stat that doesn’t get much love. It’s not sexy, nobody really writes about it in the newspapers, and most people don’t even know what it is. But it’s really important because it helps us tell how hot or cool the market is. I’m talking about the sales to list price ratio. Oops, did I lose you? I know, a topic like this sounds painful, but let’s consider why this actually matters. Then if you’re interested I have a huge local market update below to discuss slumping volume and slowing momentum. Any thoughts?

What is it? The sales price to original list price ratio is one of the best ways to gauge the temperature of the market. It’s the relationship between the final sales price and the original list price, and it’s expressed as a percentage.

If we only had one stat: We could likely get a pretty good understanding of how hot or cold a market is based on this metric alone. So without looking at price, inventory, or sales volume, if we simply saw a market had a 100% sales to original list price ratio, it tells us properties on average are selling for what they listed for. That’s a sign the market is hot or at least buyers are willing to pay what sellers are putting out there.

When we see this ratio moving up or down, it helps us get an idea of what the market is doing. For instance, over the past six months the sales price to original list price ratio has declined in Sacramento County, which tells us the gap has been growing between what sellers are asking and what they are actually getting. The most recent ratio is 96%, and that means on average properties are selling 4% lower than their original list price. That’s a powerful stat, right?

Not being anal, but ORIGINAL matters: It can make a huge difference if we’re looking at the original list price or the most recent list price.

Looking at the most recent list price makes it seem like the market isn’t cooling all that much. After all, a 99% sales to list price ratio still sounds pretty good. Yet this stat hides the real trend that properties on average are actually selling 4% lower than their original price. Thus if we’re not careful we can totally misunderstand the market despite good intentions. That’s sobering, right?

The “Bubble” years:

Right now 96% feels dull, but imagine 87%. Yikes!

Action Step: With so much talk about the market softening these days, it’s a good idea to pay attention to lots of different metrics – and especially the sales to original list price ratio. Keep in mind if the ratio isn’t available through MLS, it can always be run manually by dividing the final sales price into the original list price. For instance, all sales in Sacramento County this month totaled $512M while the original list price for all these sales totaled $533M. When I divide $512M into $533M I get 0.96 (or 96%).

I hope this was interesting or helpful.

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

Dull is a perfect word to describe this fall season. Actually really dull would be more accurate. Let’s consider some of the bigger themes happening right now in the market. 

DOWNLOAD GRAPHS FOR YOUR SOCIAL MEDIA: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy my post verbatim).

A week longer: It’s been taking about a week longer to sell this year compared to last year in the region (technically 8 days).

Prices softening: Prices normally soften during the fall season. If you don’t believe me, look at the graphs below. This year the median price is down by 6% from the height of summer in the region. This doesn’t mean every neighborhood or price range is down by that much, but there is a more defined softening present this year in many price ranges. Sellers would be wise to price according to listings that are getting into contract rather than the highest sales from spring. 

Sales volume slumping (please read): Sales volume is only down by 3% in the region this year, but the bigger stat is volume is down 11% over the past four months. This is definitely something we need to watch closely to see how it unfolds. In short, if volume rebounds to normal levels as 2019 begins, then we’ll chalk this slump up to a dull fall season like we had in 2014. If volume persists to decline though we’ll correctly call this a new direction for the market. So is this seasonal or not? I’ll tell you in a few months or so….

Momentum change: The rate of price changes has slowed lately. What I mean is in years past we’d regularly see 7-10% price increases when running stats, but over the past few months we’re starting to see only 2-6% increases instead. I talked about this last month, and the new stats show this same trend.

Ironic power exchange: There has been a power exchange lately where buyers have been gaining market share and sellers have been losing it. Of course we know sellers have struggled with being out of touch with the market as they’ve been prone to overprice. It’s been easy to point this out all year long, but ironically we’re starting to see something similar with some buyers thinking they’re completely running the show when in fact it’s not quite a full-fledged Buyers’ market.

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

BIG QUESTIONS:

1) How did the market change from last year?

2) How did the market change from October to November?

3) What’s happening with sales volume?

SACRAMENTO COUNTY VOLUME:

Key Stats:

  • November volume down 6.5%
  • 2018 volume down 1.4% (January to November)
  • Annual volume is down 2.1% (past 12 months)

SACRAMENTO REGION VOLUME:

Key Stats:

  • November volume down 12.1%
  • 2018 volume down 3.3% (January to November)
  • Annual volume is down 3.4% (past 12 months)

PLACER COUNTY VOLUME:

Key Stats:

  • November volume down 9.3%
  • 2018 volume down 5.6% (January to November)
  • Annual volume is down 6.1% (past 12 months)

4) MOMENTUM IS SLOWING:

November:

Past 90 Days:

Entire Year:

DOWNLOAD 100+ graphs: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

SACRAMENTO COUNTY (more graphs here):

SACRAMENTO REGION (more graphs here):

PLACER COUNTY (more graphs here):

I hope that was helpful.

DOWNLOAD 100+ graphs: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: Do you ever use the sales price to list price ratio? Why or why not? What do you see happening in the market right now?

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The Golden State Killer’s house (poll results)

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We recently talked about the Golden State Killer’s house and I put together a poll. If this house came to the market, what sort of price reduction would you expect if any? Let’s look at the results and talk through some ideas.

POLL RESULTS: There were about 400 votes. Thank you everyone for voting. I’ll actually leave the poll open for a couple more weeks and you can vote HERE.

KEY POLL TAKEAWAYS:

  • 37.6% said the impact would be 0-10%.
  • 41% said the price discount would be 10-40%.
  • 21% said there would be a discount above 30%.
  • Most respondents hovered between 0-30%.
  • Votes declined as price discounts increased. 

THOUGHTS ABOUT THE GOLDEN STATE KILLER HOUSE:

Minimal impact & marketing: Close to 1 out of 3 people said this property would sell with a price discount of 0-10%. Thus there are a good number of folks who think either there could be no impact to value at all (or a minimal impact). I wish I had narrowed the poll down to 0-5% and 5-10%, but I can’t go back now. This result doesn’t surprise me at all because many real estate professionals and the public have said, “It’s probably not a big deal.” Yet to be objective, let’s not forget this home has a potential marketing issue because it has a smaller pool of buyers even willing to consider purchasing it. I’m not trying to sway opinions, but only saying let’s think about how a more limited pool of buyers might impact value before we claim there is no value issue.

No bodies or crime: One of the big conversation pieces over the past two weeks was that no crime actually occurred at the home, so there really couldn’t be any damage to value. I understand that sentiment, but let me play devil’s advocate. Why not? Close to 2 out of 3 people on my poll said there would be a diminished value despite no crime taking place on site. Also, many locals have said they would not purchase the home at all. So it begs the question, do we need bodies or a crime for there to be a stigma? This poll is nothing scientific, but a lack of bodies clearly didn’t matter to some respondents. I find it’s easy in real estate to make sweeping value generalizations, but I guess this reminds us to be cautious about that.

Selling at a premium: A number of conversations have suggested this property could actually sell for a premium. I completely agree there are buyers out there who would pay more for whatever reason. Yet to be fair (and technical), do these buyers represent the market? Would the market as a whole pay more for this property? That’s the big question to ask when it comes to thinking through value.

Market value: If we lined up 100 qualified buyers to purchase this home, and they were informed that a notorious rapist and murderer owned the home, would it matter for value? There might be individuals willing to pay a premium, or some who wouldn’t care, but what about the market as a whole? That’s the big issue, and it’s frankly challenging to answer a question like this. In fact, there are entire books written about detrimental property conditions, so I won’t pretend this is an easy issue to dissect. Let’s remember banks lend on market value too instead of one individual buyer’s perception of value, which underscores the importance in thinking in terms of the market.

Housing shortage isn’t the trump card: We have a sincere housing shortage right now, so I’ve heard things like, “Because there is a lack of inventory, this isn’t going to be a big deal for buyers.” I think there is something to that because when inventory is low, buyers tend to overlook some negative issues. Likewise, when there are too many homes on the market, negative issues stand out like a sore thumb. So there’s some truth here. Yet my observation is that a housing shortage has not been the ultimate trump card for other homes with negative issues in today’s market. What I mean is buyers have exhibited sensitivity toward overpriced homes and properties with adverse locations or issues. Again, I’m not saying there is a price reduction for this property, but only that a housing shortage has not seemed to erase negative issues for other properties in the market. Yes, buyers are desperate to get into contract, but at the same time my sense is they’re not so desperate that they’re overlooking negative things either.

I know I sound like an advocate that there is a price reduction, but if you read carefully I haven’t actually said that. I’m only bringing up ideas to help us think critically. I welcome your take in the comments. And let’s hope we do get to see this property sell so we can see who answered correctly in the poll.  🙂 

I hope this was interesting or helpful.

CLASS I’M TEACHING: Next week I’m doing my favorite class at SAR called “How to think like an appraiser“. It’s from 9-12pm on June 1st. We’ll talk about comps, adjustments, value, etc… It’ll be fun. You’re invited.

NOTE: This is not a scientific poll. Take it for what its worth. Let’s think critically about value and have conversation. That’s the goal.

Questions: What do you think of the poll results? Would you buy this house? I’d love to hear your take.

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The Golden State Killer’s house (quick survey)

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The suspected Golden State Killer was arrested two weeks ago. This man is said to be responsible for more than 50 rapes and 12 murders throughout California. It’s crazy to think about the path of terror this monster blazed for so many years. Well, let’s talk about him, but from a real estate angle.

Take a Quick Survey: I thought it would be interesting to do a quick survey to gauge public perception. If the Golden State Killer’s house was listed for sale, what sort of price discount if any would you expect to see? Vote below or HERE, and I’ll publish results in two weeks.

Create your own user feedback survey

Real Estate History: It’s sobering to think that Joseph James DeAngelo, the accused killer (aka East Area Rapist), was pursuing the “American dream” of home ownership all while destroying people’s lives. Here’s a history of his real estate happenings:

  • 1980: Bought a house for $77,000.
  • 1993: Refinance
  • 2003: Refinance
  • 2012: Refinance

The Golden State Killer’s Neighborhood: If you wondered what homes are selling for in the accused killer’s neighborhood, here’s a graph. The neighborhood is a well-kept area of Citrus Heights. I’ve seen a few national media outlets report the alleged killer lives in a luxurious community, but that’s not true. 

Dorothea Puente House: While we’re on the subject of mass-murderers in Sacramento, let’s talk about the duplex where seven bodies were discovered on F St in Sacramento in the late 80s compliments of Dorothea Puente. She lured victims to her “boarding” home, drugged and buried them, and then cashed their social security checks. This property has sold four times in the past, which is interesting as a case-study in terms of detrimental property conditions.

I look forward to more conversation in a couple of weeks. Thanks for voting in the survey above too. Fame and real estate can be complex and it’s definitely something to keep on the radar for this situation.

Questions: Would you buy this house? What advice would you give to a prospective buyer? I’d love to hear your take.

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Will it be an appraisal issue if there is pot growing at a house?

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Is it going to be a problem for a loan if the appraiser sees pot growing at a house? Well, it depends. Like many things in real estate, it’s not always a simple answer. Here are some things to consider.

Different opinions: There isn’t one definitive opinion appraisers have on how to handle cannabis, so seeing pot growing at a home can potentially be dealt with in different ways depending on the appraiser and the lender.

Not an agricultural specialist: Many appraisers don’t want to be put in the position of identifying plants, so some say, “I can’t tell if it’s Ficus or cannabis. I’m not an agricultural specialist. I don’t need to mention roses or peaches, so why would I call attention to a different plant?” Of course to be fair, roses and peaches aren’t federally illegal, so this might not be a perfect comparison.

It’s personal property: Some appraisers say, “It’s personal property, and it’s not my job to discuss personal items belonging to a seller or Borrower. I wouldn’t mention cottage cheese in the fridge or a Lambo‘ in the garage, so why would I mention a specific plant?”

Not a code enforcement officer: An appraiser in residential real estate shouldn’t be expected to confirm legality or count plants. Appraisers are not there to tattle, judge, or explain code.

One plant vs. farm: Let’s be real. There’s a difference between having a few plants for personal use and a full-fledged cartel “grow house.” Remember, it is never legal to use a residential house for a commercial cannabis operation. Yet here’s an honest question. How many plants are acceptable for a federally-backed loan? Is one too many? How about five, ten, or fifty? Ask a loan officer and see if you can get a definitive answer.

Bouncing the ball: When seeing “alternative agriculture,” an appraiser might email a photo to a lender client and say, “Hey, I saw some plants at the property. How would you like for me to handle this?” The appraiser in this case is bouncing the ball of liability to the client and allowing the lender to give direction. It is the lender’s decision and loan anyway, right? Some lenders might choose not to do the loan and other times appraisers might be asked to blur photos that clearly show a certain type of plant growing. In other cases lenders have asked for plants to be removed, so they might instruct the appraiser to make the value subject to removal of plants. The reality is most lenders have been silent about cannabis so far, but some smaller banks have been clear they won’t do loans with cannabis on site.

Would the loan have closed?: Here’s a question running through my mind. If I would have included a photo in my appraisal of cannabis growing somewhere on the parcel or in the house, would the loan have closed? Even if I personally think it’s no big deal to grow, if a loan only closes because I chose to ignore something that I knew would (or could) be an issue for a client, is that more liability for me as an appraiser? I know, it sounds like I’m overthinking the issue, but I’m actually doing critical thinking. This isn’t a statement on how appraisers should think. I’m only saying it’s a viable question to ponder in the midst of an emerging market. 

Closing Thoughts: Will it be an issue for the loan if there is cannabis growing? Honestly, there are many moving parts. I’m not trying to be frustrating, but it probably depends on the lender, how the appraiser handles it, and maybe even the number of plants. In short, this green issue is not black and white (sorry). Of course if there is obvious moisture or electrical damage associated with growing, then we can all agree that’s going to be a problem. The truth is some escrows with cannabis simply aren’t going to close since it’s an ambiguous world right now in lending due to the disconnect between federal and state law. Yet to be fair lots of people grow cannabis and they’re still getting loans. So clearly a few plants isn’t killing deals all the time either.

I hope that was interesting or helpful.

Questions: Did I miss something? Appraisers, how do you handle this? Lenders and Realtors, anything to add? I’d love to hear your take.

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