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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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How much does a previous purchase matter to appraisers?

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How much does a previous purchase matter? Do appraisers give strong weight to the purchase price? Or do they completely ignore it? This is an important conversation, especially in the midst of so much talk about the market changing.

1) Meaningless: Sometimes a previous purchase is meaningless. That’s not always happy news, but if a property sold for too little or too much, it just might not mean much to us today. As an example, it doesn’t make sense to give any real value weight to a short sale that closed way too low or an inflated purchase that was clearly disconnected from the market and not supported by data.

2) Strong weight: If a property sold recently and it was a reasonable price, appraisers might actually give strong weight to the sale. If you didn’t know, appraisers are actually allowed to use a previous sale of the subject property as a “comp” in an appraisal report too (usually Comp #4). That might seem strange to do, but then again what is more comparable than the subject property itself? Of course let’s be careful about understanding exactly how the market and property have changed since the sale though.

3) Someone overpaid: One thing we have to consider before giving too much weight to a previous sale is whether it was a reasonable representation of value or not at the time. It can be dangerous to blindly accept a sale without understanding the full story of why it sold at the level it did. On that note, my observation is at times cash buyers fall prey to overpaying on the higher end of the market where comps are a little more sparse and it’s not always easy to see value. Here’s an example I just tweeted about this morning:

4) Seeing the context: Sometimes a previous purchase is an incredible way to understand how a property fits into the market. In the graph below I have three previous sales in the Stollwood area of Carmichael, and each time the subject property competed at about the same price position. That’s powerful, right? So in this case I would likely give strong weight to the previous sales because they help me understand value.

FYI: Here is a tutorial if you want to learn how to make a graph like this.

Quick closing thoughts:

1) The temptation: It’s easy to get stuck on a previous purchase price and not see the current market because we think, “It has to be worth at least X amount because it sold for Y amount in the past.” Be careful of that. We have to be objective by giving the most weight to the current market.

BIG POINT: As some wonder if the market will make a big turn at some point, this conversation could be very relevant if that did happen.

2) Ch-ch-ch-change: The market could have changed since the subject sold previously. Values could have increased or softened. The subject could have been in better or worse condition too.

3) Different trends: Sometimes I hear things like, “It sold in 2016 and the market has increased 15% since then, so it must be worth 15% more now.” The problem is market trends aren’t the same at every price level. Maybe the lowest prices in town have seen increases like that, but price changes could be more subtle at higher levels. So let’s be cautious not to project a more aggressive trend from a lower range on a higher one.

4) Distressed: I find looking to older sales from the foreclosure days isn’t all that helpful because the market was not normal then and properties were selling all over the place. I usually recommend researching previous sales, but when they’re from the distressed days we often have to take them with a grain of salt. The same thing is true for stuff that sold in 2005 at inflated prices.

5) Boldness: Appraisers and agents sometimes have to tell clients why value is actually lower than a prior purchase. That’s not always easy to hear, but we have to be bold and let the numbers speak rather than putting weight on a previous sale that might not reflect the market today.

I hope this was interesting or helpful.

Questions: Which point stands out to you the most? Any stories to share or other points? I’d love to hear your take

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Slumping volume, too many million dollar listings, & rising rates

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We love sensational real estate headlines, but here’s what tends to happen. We talk about something like it’s the biggest thing ever, it ends up being no big deal, and then we move on to the next thing. It sort of reminds me of Y2K because there was so much fear about worldwide chaos, but then nothing happened. All bark. No bite. Anyway, let’s talk about a few issues, and you decide if these are hyped-up “Y2K real estate trends” or not. Then I have a big Sacramento market update for anyone interested. Any thoughts?

Rising interest rates:

For years we’ve heard interest rates would rise, but nothing really happened. Well, now things have begun to change. It’s like Mom & Dad were threatening a punishment, but they never followed through, so we didn’t believe them…. until now. Interest rates are finally ticking up and it’s bound to make an impact on prices if the increase hits buyers in the wallet. What I mean is if buyers in mass can afford the increase, then it’s not a big deal unless buyers start showing resistance. An increase in rates won’t hit everyone the same either as buyers at the lowest price ranges will feel it the most. Keep in mind rising rates in the near future could actually lead to buyers rushing the market instead of withdrawing from it. What will happen? Nobody knows. Heck, rates are still incredibly low, and we don’t even know if they’ll continue to rise. But the Fed has been more forthright about coming rate hikes, so that’s why this feels like more than pure hype. Anyway, let’s see how this plays out and keep an eye on creative financing from lenders too.

Are there too many million dollar listings?

Headlines are talking about the high-end market softening in portions of the country. Locally I’ve heard that sentiment since inventory seems imbalanced at the top right now in the Sacramento region. It sounds alarming to think there is a year’s worth of million dollar listings, so it’s easy to conclude the high-end market is sagging. But last year at the same time we saw nearly the same number of listings. If you need to see the numbers, at the beginning of February 2017 there were 213 listings above $1M and this year there were 220 listings at the beginning of the month. It would be insanity to see twelve months of housing inventory at the lowest prices, but it’s actually fairly normal for January stats for the high-end. In short, it could be possible the million dollar market is softening, but for now let’s not use the number of listings alone as evidence.

Is sales volume slumping?

I’ve been noticing real estate headlines talking about slumping sales volume in many markets across the United States. For Sacramento County we actually had the strongest January since 2013, yet it is true that yearly volume is down 2.5%. This isn’t shocking news because nearly all of last year volume was down 1-2% depending on the month. Here’s the thing though. Sales volume in 2017 was slightly lower than 2016, but it was actually higher than 2015. This reminds us if we only look at one year of sales we might miss the bigger trend. Anyway, volume is also down in the entire region, though only by 1%. Overall it’s fair to talk about lower volume because that’s a fact, but it’s probably not fair to hype the issue too much – especially since volume is actually higher than 2015. Let’s keep watching though because it would be a huge deal if sales volume really did start to decline significantly.

Overpricing because the market is so “hot”:

In case you wanted some background noise while working, I did a Facebook Live Q&A last week with Realtor Justin Vierra and we talked about pricing for the “unicorn.” Overpricing is a real issue in today’s market. By the way, if anyone wants to do podcasts and interviews, I love that stuff. You can listen to our hour-long conversation here too in case you wanted more than just this clip.

I hope that was interesting. Anything to add?

–——-——- Big monthly market update (it’s long on purpose) ———–——-

Right now we’re in that weird place where sales stats are sagging from a slower fall season, but the market is heating up. For January stats we saw all the typical signs we’d expect to see. Sales volume declined, it took an extra day to sell, most price metrics sloughed, and inventory increased. The median price in Sacramento County actually has been fairly flat, but last week I talked about how the market really did slow down despite the flatness. Anyway, I have quite a few visuals below to help show how the market has moved in recent time.

Housing supply: Inventory is up a bit right now. It’s not much, but this January was up 6.5% in the region compared to last year at the same time. Over the past few months inventory has actually ticked up slightly, and that’s welcome news for the market. Yet before writing home to say the housing shortage is over (it’s not), let’s wait to see what happens during the spring market. I’m not overly impressed at a few months of slightly higher inventory around the slower fall months. Let’s watch the spring market, which will be the bigger test.

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

DOWNLOAD 62 graphs HERE: Please download all graphs in this post and more 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):

NOTE: I cut out a few graphs and data this month. If you miss something, let me know.

DOWNLOAD 62 graphs HERE: Please download all graphs in this post and more here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: What are you seeing out there in the market? Is the top softening? What are buyers saying about interest rates? Anything I missed? I’d love to hear your take.

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