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Sacramento Market Trends

The problem of not listening in a slower market

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It’s not easy to listen when the market is slowing. This is true for sellers taking in pricing advice, and it’s also true for the average person reading national headlines. Let’s talk about this. Then for those interested I have a big market update. Anything to add?

Sellers not listening: All year it seems sellers have struggled to listen to pricing advice from their real estate agents. I guess I can understand because they’ve had nothing but “hot” headlines for six years. But I think there’s another issue too. Maybe we’re seeing some of the effect of sellers having more real estate data at their disposal than ever because of Zillow, Redfin, Metrolist, blogs… So right or wrong, we have sellers who now they think they know better than anyone. Whatever the case, sellers are making real mistakes out there by not listening to pricing advice and instead pricing for a much hotter market than we actually have. In case it’s useful, I wrote an article in Comstock’s magazine with some practical advice for sellers.

Listening to national headlines: There have been sensational headlines about the market beginning to crash, and it’s difficult at times to think past these headlines and be objective. Let’s remember though that headlines are designed to get clicks, and a headline may or may not mean anything for a local market. My advice? Don’t let any headline cloud your judgement of local trends.

Listening without enough context: This sounds like such a geeky point, but hang in here with me because it matters. Lots of times in real estate we end up comparing the current year with the previous year, and that’s actually a good thing. But my sense is we’re missing something if we pay too much attention to last year only and ignore prior years. In Sacramento at least it’s been a few seasons since we’ve had a dull fall, so it’s easy to forget what that feels like. Moreover, if we look at current inventory levels beginning to push a two-month housing supply, that looks huge compared to the past couple years. But if we look at inventory from 2014 when we had a dull fall season, it was hovering between 2 to 2.75 months at the time. This reminds us it’s possible to have higher inventory at this time of year without the market utterly tanking. I don’t say this to diminish the importance of rising housing supply right now, but only to highlight the need to look to a few more years of data as we interpret what is happening. After all, sometimes pulling stats is like pulling comps. If we only look at the past 90 days of sales, that might not be enough. At times we need a much wider view to really see the market. The same thing happens with real estate data. Know what I’m saying?

I hope that was helpful. Do you “hear” what I’m saying?

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

The market has been slowing. Duh, we know that. Everyone’s talking about it. Let me unpack what I mean below with some comments on some of the bigger themes right now:

Coffee vs. skimming: This post has lots of information. It’s designed to skim until you find something you want to read, or pour a cup of coffee and really spend some time digesting stuff.

BIG ISSUES IN SACRAMENTO:

Prices softening: Most price metrics in the region softened between 1-2% last month, though the median price in Sacramento County was flat. Around this time of year we normally see prices dip (as graphs show below).

Slowing momentum: We know the market is slowing for the season, but it’s also slowing down in terms of overall momentum. What I mean is in years past we’d look at stats and see price metrics were up a good 8-10% over the year, but these days they’re only up closer to 4-6% instead.

Slowing rent: Rent growth has been flattening lately, which is a good thing since rents sprinted way ahead of actual wage growth. Keep in mind this doesn’t mean rents have declined. It just seems the rent trend is flattening.

Sales volume is not crashing: One of the bigger issues to watch to know if a market is crashing is a change in sales volume. In other words, if properties stop selling, we have a big problem. Last month sales volume was down about 6% in the region and 2.6% in Sacramento County. Uh oh, is that a warning sign? Look, this is important to watch over time to know if we have a trend on our hands, but before making too much of one month of data, let’s look to the bigger picture. The truth is sales volume is actually higher so far this year in the region than last year and it’s up 1% in Sacramento County too. No mater how we look at it, volume has actually been strong. This isn’t spin, but fact. Please see my charts below. So on one hand let’s watch these next months carefully because it could be a problem if monthly sales volume does start to come in lower, but let’s also not give laser focus to a weaker August while ignoring the bigger context either.

Inventory is definitely up: It’s really noticeable to see more inventory right now. Even my non-real estate wife has said she’s seeing more listings when driving around town. Housing supply is actually up 25% compared to the same time last year, and it’s literally the first time in three years since we’ve had more than a two-month supply of homes for sale. Obviously if the rate of increase keeps climbing and the market doesn’t absorb new listings, we could have a problem on our hands. But let’s also remember when the market was very dull in the fall of 2014 we saw inventory hover between 2 to 2.75 months at the time.

Taking longer to sell: It took five days longer to sell last month compared to the month before. And this year it took 4 day longer than last year at the same time. So the market has slowed down from last year, but it’s definitely slowing from the past few months too. Sellers, did you hear that? You are losing power in this market and buyers are gaining it. My advice? Price according to listings that are actually getting into contract rather than the highest glowing sales from the spring. This week I talked with an agent about the market feeling really soft in a particular area because listings weren’t moving. But sometimes I wonder if it’s the market or just overpriced listings. From my vantage point almost every listing in the neighborhood was priced 5-10%+ too high, so it wasn’t a real shocker they weren’t selling.

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

DOWNLOAD 72 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).

BIG QUESTIONS:

1) How did the market change from last year?

2) How did the market change from July to August?

3) Is sales volume really crashing right now?

4) How does the current market compare to the previous peak?

2005 vs CURRENT: A few months ago I talked about peak prices because some metrics were showing 2005 levels. But with the market softening right now prices are growing 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 72 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: Do you think sellers are struggling to listen right now? What are you seeing out there in the market? I’d love to hear your take.

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Affordability in an increasing market (or lack thereof)

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Affordability is a huge topic right now. It seems like most real estate articles are talking about how insanely “hot” the market is and how much values have increased. But as much as the public eats up sensational headlines, we all know affordability is becoming an issue too for both buyers and renters. Today I hoped we could kick around some trends in the market when it comes to affordability. Anything to add?

Wage growth and values: One of the red flags over the past five years is having so much growth in home prices and rents without much wage growth. This is why we see some buyers technically affording the market, but at times they have several different jobs to help make ends meet. We also see multiple renters shacking up together to help afford higher rents.

Looking beyond single family detached homes: As values have increased, some buyers are starting to look beyond the single family detached market to something they might be able to afford. Other options include condos, halfplexes (attached unit), or even mobile homes. These properties represent affordability to many because they are often listed toward the bottom of the price spectrum. For reference, right now there are 27 mobile homes listed for less than $50,000 in Sacramento County (located in a mobile home park). I wouldn’t say the mobile market is “on fire” by any stretch, but I have heard more chatter about them lately, which is surely a sign of the times. I know, if you buy in a trailer park you’ll have to deal with “trailer trash” comments, though for some a mobile home is a viable financial option to help pay down debt and hopefully avoid some of the crazy rent increases lately. Ultimately let’s continue to keep an eye on what’s happening at the bottom of the market.

Unrealistic buyer expectations: My sense is some prospective buyers have unrealistic expectations about the type of house they can purchase in today’s market. For instance, I heard someone recently talk about wanting something under $300,000 that was modern, newer, eco-friendly, and located in Midtown. The truth is a property like that doesn’t exist right now in that price range in Midtown. But does it exist somewhere else? That’s the real question buyers need to ask. Coming to terms with locations you can and cannot afford is not always easy, but it is necessary for those who choose to buy.

Why tiny homes mostly don’t work: We see tiny homes on HGTV and like to think they are a viable option for many buyers or even a solution to the housing shortage, but they aren’t usually attached to the land, which means they don’t qualify for traditional financing. Of course you can obtain financing for a tiny home with an RV loan or personal loan, but that’s going to be more expensive. Even if you have the cash or financing to buy a tiny home, one of the bigger problems is the cost of land. We have to remember when a market increases in value, it’s mostly the land that is becoming more valuable. And when a market declines, it’s the land more than anything that loses value. The glimmer of hope though for tiny homes is that Fresno passed an ordinance last year that allows residents to put tiny homes on their property and consider them permanent residences instead of just temporary. This means for those who cannot afford higher prices in the single family detached market, this might be an option so long as they have access to land (maybe in a family member’s backyard). By the way, there is a 360 sq ft home listed for sale right now in the Elmhurst neighborhood of Sacramento.

Storage container homes: The market seems hungry for alternative housing as long as it’s affordable, though the unfortunate thing about this type of housing is it’s not necessarily inexpensive because of the cost to build and the problem of finding affordable land. It may still be possible though to build a storage container development on tiny lots at a reduced cost compared to stick-built new construction. We have seen some storage container commercial developments come to town, but it seems pretty quiet as of yet for residential units. Anyway, this reminds us there is space in the single family market for someone to “crack the code” or think outside the box to figure out a way to bring alternative housing at a lower cost than stick-built new construction. The image below comes from a local storage container company called TAYNR.

The squeeze on supply: Some buyers really are getting priced out of the market, though the truth is we might not feel the effect of missing buyers dropping out of the game because of the reality of having a housing shortage.

Creativity: It seems like every week I’m hearing about a new 0% down or 1% down loan. Thus as affordability vanishes for some, lenders are slowly helping buyers artificially afford higher prices by making their loan products less expensive. Lenders have so much power right now to shape the future of the market by what they do in coming time. Let’s remember another “creative” aspect of the market is seeing appraisal waivers become more common. I get there is a place for that, though let’s be cautious. 

Questions: Would you ever buy a tiny home or a mobile home? What else are you seeing out there? Did I miss anything? I’d love to hear your take.

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5 things to remember about lofty list prices

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There’s huge buzz this week about a $4.1 million dollar condo that just hit the market. I know that’s chump change in other places, but it’s a conversation piece in Sacramento since we don’t see listings anywhere near that level in Downtown (or almost anywhere in the county). Anyway, there’s some good conversation to be had from this, so I hoped we could consider a few ideas and then unpack local market trends (for those interested). Any thoughts?

5 things to remember about lofty list prices:

1) Attention & buzz: A high list price for a luxury property is designed to get attention, create buzz, and help market a property. In this case the $4.1 million dollar condo listing is located in a development called The Residences at The Sawyer. This penthouse unit is 3323 sq ft and is located directly across from the new arena at 500 J St (killer location). 

2) Records & price context: When hearing of high listings it’s tempting to treat the list price like a record has been broken. But if we’re honest this list price doesn’t matter unless the property actually sells at that level. Last year in Sacramento we had a $5M listing, the year before it was a $7M one, and a few years back there was a $10M listing. None of them sold = No records. There have actually only been three sales on MLS in the past that have sold at $4,000,000 or above in Sacramento County. They include: 1) The Governor’s Mansion built in Carmichael when Ronald Reagan was Governor (sold in 2004 at $4.1M); 2) A property in Sierra Oaks in 2013 that sold at $4.7M; and 3) An estate in Elk Grove that sold at $4.6M in 2005, and then re-sold for $1.3M in 2011 after a foreclosure.

3) Marketing to non-locals: Most locals aren’t anywhere close to affording a $4,100,000 listing – not to mention the whopping $4,021 monthly HOA fee (that’s not a typo). But the thing is this property is probably being marketed to someone from the Bay Area, maybe one of the owners of The Kings, or one of the Kings players. The Beverly Hills firm who is running the sales office is likely focused on non-locals more than anything because this is the type of property that would appeal to a wider group outside of the region. In that sense the property is an anomaly of sorts. Of course there is no guarantee they can fetch a price that high. For reference, the highest condo price I’m aware of in Midtown is the L-Street Lofts penthouse which former NBA player Kevin Martin bought for $1.34M in 2008 (and it re-sold in 2014 for $1.3M). The location on J St is bound to fetch higher prices, but how much higher? We’ll see.

Here’s a Twitter pricing poll I ran yesterday.  🙂

4) Reductions and good deals: It’s tempting for sellers to list something at an absurdly high price level, reduce the list price, and still feel tied to the original list price. So the seller says, “Hey, we came down 30% in price already. The buyer is getting a great deal.” But the problem is the listing was priced 30% too high to begin with. We see this with outrageously priced high listings, but we also see it in just about every neighborhood too. Thanks Jonathan Miller for influencing my thoughts on this.

5) Freaking out: When hearing about a “4 million dollar” property, it’s easy to freak out and start saying, “Holy Batman, prices in Sacramento are now at LA and SF levels,” or “I cannot believe how high values have risen.” Take a breath though because this is just a listing right now. If it makes you feel better, remember that $250,000,000 listing in Bel-Air that garnered world-wide attention in January? Well, that one’s still listed for sale at the same price… In short, let’s give this one some space and see if this price pans out or not.

I hope that was helpful or interesting. Any thoughts?

———–——-——- big monthly market update below ——-———–——-

A LOCAL MARKET SUMMARY:

Values have continued to increase in the spring, though at the same time the market isn’t aggressive in every price range. When looking at Sac county and the region as a whole, both the average sales price and average price per sq ft saw increases last month. On the other hand the median price softened slightly (don’t make too much of that since the median can go up and down depending on what has sold). Housing inventory feels like it is doing the Limbo as it keeps going down and down. Seriously, inventory was already low last year, but it’s 20% lower this year. This is definitely putting pressure of values to increase in some price ranges. My sense is lower prices in just about every neighborhood are experiencing upward pressure because that’s what represents affordability to buyers for those areas. So buyers in La Riviera are feeling the pressure under $300,000, buyers in Whitney Ranch are feeling it under $400,000, and buyers in East Sacramento are feeling similar pressure under $450,000. Yet buyers at middle-to-upper ranges are not experiencing this same dynamic because the market is flat or soft in many areas at upper price levels (yet we still might see multiple offers though). As expected, last month it took about 5 less days to sell than the previous month. I could go on and on with words, but let me share some graphs to show the market visually. 

DOWNLOAD 53 graphs HERE: Please download all graphs in this post (and more) here as a zip file (including a quick stat sheet). See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

Sacramento County graphs this month (more here):

Sacramento regional graphs (more here):

DOWNLOAD 53 graphs HERE: Please download all graphs in this post (and more) here as a zip file (including a one-page quick stat sheet). See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

Questions: What do you think of the $4.1M condo listing? Did I miss anything? What are you seeing out there in the market? I’d love to hear your take.

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Some perspective as real estate “bubble” conversations emerge

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Lots of real estate “bubble” talk lately. Have you noticed? It’s a hot topic for the public and real estate community as housing affordability is becoming more of an issue since values have been on the rise for the past four years. Even Hollywood is getting in on the action with movies hitting the screen about the bursting of the “bubble” ten years ago (thanks Jonathan Miller for the heads-up). Anyway, this isn’t another post on whether we are in a bubble or not, but rather some things to keep in mind for the real estate community as bubbly conversations emerge. I’d love to hear your take in the comments below.

real estate bubble - image bought and used with permission from 123rf dot com by sacramento appraisal blog

Enjoy the tips. Anything you’d add?

Things to keep in mind during real estate “bubble” conversations:

  1. Predicting is Dangerous: Predicting the future of real estate is sort of like predicting what Justin Bieber is going to do next. What will the Biebs do next month or next year? Nobody knows. The same is true in real estate, and it’s okay for real estate professionals to simply say, “I don’t know what the market is going to do. My crystal ball is broken. But I can tell you what the market is doing right now and what it seems poised to do.” Seriously, if you work in real estate, this is probably the best and most honest answer you can give.
  2. Remember that markets change: At some point in the future values are going to decline, and at some point in the future they are going to increase. Of course we want to avoid incredibly steep declines, but otherwise it’s normal for real estate values to go up and down, and we should therefore expect that. We seem to have a mindset that prices should only increase, but that’s just not realistic. That would be like saying every day should be sunny or each day of a marriage should be only positive and filled with bliss (nothing is always positive).
  3. Be in tune with the slow fall season: When the market slows during the fall, it only exacerbates bubble talk. The past three years have seen a very definitive dull market in the fall (at least in the Sacramento area), and we need to respect and embrace that slow seasonal reality (and price accordingly). It’s sort of like when work is slow, it’s easy to get depressed or even think the business is going under. Well, it’s the same deal with the cyclical real estate market.
  4. Never promise equity: It’s easy to say things like, “This house will be worth much more in two years, so it’s a good time to buy,” but can anyone really guarantee that? If you never promise value to your clients, they can never come back and say, “You told me the market was going to increase and it didn’t”. This was exactly what many real estate pros told buyers using 100% financing last decade. “Hey, the market is going to increase, so don’t worry about that adjustable rate. You can refinance out of it in two years.” Interestingly enough, today’s FHA buyers are sometimes told, “You can get in the market with FHA now, and just refinance into a conventional loan when the market increases.”
  5. Focus on affordability: Everyone wants to buy at the lowest point in a market, but very few people actually pull that off. In fact, many times it’s simply an accident when it does happen. Ultimately people ought to buy when it makes sense for their wallet and lifestyle, and that is a fantastic point to emphasize because it respects where people are at in life rather than telling people when they should do something. If you have clients who want to buy, then honor their desires by helping them understand what affordability looks like with whatever market is in front of them.
  6. Become great at explaining the cake: Value in real estate is like a multi-layered cake since there are many “layers” in a market that impact prices. See my cake image here and use it (I love this analogy). It’s easy to think of real estate in terms of being only about supply and demand, but it’s also about interest rates, the economy, cash investors, financing, affordability, jobs, consumer confidence and so many other “layers”. In short, when one layer of the cake changes (such as inventory or financing), it can change the entire cake (the market).
  7. Hone your pricing skills:  How can you get better at pricing, pulling comps, or making value adjustments this year? It can be challenging to price when a market slows or declines because values might actually be lower than the most recent sales and listings indicate. Thus I recommend getting some training this year, taking some stellar CE, or connecting with some locals who you think are getting it right (By the way, if you’re local, I teach a 2 or 3-hour class called “How to Think Like an Appraiser”. May I do a training in your office?)
  8. Change what you say about the market as the market changes: It’s easy to speak fluently in clichés or say the same thing about the market for years. Agents do this by saying “it’s a good time to buy and sell” even if it isn’t, and appraisers do this by always indicating in their reports that values are “stable” with a “balanced” supply of inventory (even if that’s not the case). When we look closely at trends and begin to see what the market is doing, we can change what we say to our contacts and clients. Moreover, we might even price more effectively and give better real estate advice.
  9. Bubble Obsession: Values were massively inflated ten years ago, yet we still have this obsession about getting back to “the good ‘ol days”. Was it really that good to see huge price increases only to have the housing market collapse around us? Do we want to get back there? Nah, I think we can do better. This is why I recommend real estate professionals to be aware of bubble issues, but also find other interesting things to talk about and share. I’m absolutely not saying to ignore the market or be dishonest, but only find a balance so we don’t perpetuate a fear or worry about what may or may not happen to values in the future.
  10. Consider your future clients: One of the best things to do when considering the future of real estate is to think about who your clients might be as the market changes. Based on the way the market is moving, who do you think your clients are going to be in 2016 and 2017? What will your database need over the next two years? Are they going to be looking to buy, sell, rent, get married, get divorced, invest, do a short sale, get back in the market, remove PMI, sell a parent’s home, move up, build an accessory dwelling for an aging parent, downsize, settle an estate….?

I hope this was helpful.

Thank you sincerely for reading. I cannot tell you how much I appreciate you letting me share a few thoughts each week.

Questions: What is point #11? Which one resonated with you the most? Do you think we’re in a “bubble”? (I’ll share my thoughts if someone asks)

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