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supply and demand

Crazy contracts & condos are less popular

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I have two things on my mind today. Let’s talk about condos and then some of the crazy contracts we’re seeing happen right now. Then I have lots of visuals for those who are interested.

CONDOS ARE NOT ALL THE RAGE:

It looks like condos aren’t so popular these days. During the pandemic buyers have been saying no thanks and instead focusing on homes with more space. No matter how you look at it there are fewer condo sales happening, and that’s telling. If you’re not local, what’s happening in your area?

MARKET NOT COLD: One thing I want to clarify is just because condos haven’t been as popular doesn’t mean the condo market is dull or cold. Inventory is still sparse among condos, so don’t expect to get the deal of a century. In fact, there is not an oversupply of listings among condos at this time. Inventory is really tight. 

CRAZY CONTRACTS:

It’s common these days to see the appraisal contingency removed and many buyers are even offering to pay above the appraised value (if it comes in lower than the contract price). Anyway, I’ve been getting lots of questions about this, so here are some thoughts:

1) Value is not found in the contract: The reality is value is found in the comps – not the contract. Technically the terms in the contract shouldn’t matter because the only thing that counts is comparable data. Of course I realize some appraisers are swayed by the contract, and that’s unfortunate. Ultimately if you find yourself worried about the terms, I’d recommend focusing instead on communicating well with the appraiser because the comps are the bigger factor.
 
2) Offering above the appraisal: When I see a contract that states the buyer will pay above the appraised value by a certain amount if the appraisal comes in lower, the practical part of me wonders if the buyer actually thinks it’s not worth what was offered. But since my job is to be objective, my curiosity about the buyer doesn’t mean anything for the appraisal. The bottom line is I cannot let that influence my perception of market value. Besides, offering to pay more might not be about the buyer’s perception of value at all. Instead it could be a strategy to get an offer accepted. And most of all, the comps are what matters – not what an individual buyer thinks about value.
 
3) Hiding information: I was asked recently if it would be OK to only give the appraiser the purchase contract without an addendum that had further terms. Look, I’m not a lawyer or broker, but from my perspective I’d ask that you please give the appraiser the entire contract instead of holding something back for whatever reason. In my mind when this happens it seems like the goal is to try to influence the outcome of the appraisal, and that doesn’t smell right. Let’s keep it transparent.
 
Anyway, this is a loaded topic. Lots of emotions. What are your thoughts? Any stories to share? Please do so in the comments.
 
MARKET UPDATE VIDEO: Here’s my latest market update where I unpack glowing rebound stats. Watch below (or here).
 

WAY TOO MANY VISUALS:

Here are some new visuals. You are welcome to use these in newsletters and social media with proper attribution. Scroll quickly or digest slowly.

I hope that was interesting or helpful. Thanks for being here.

Questions: What are you seeing with condos right now? What’s happening with contracts too? Anything you’d like to see change?

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5 things to consider about higher appraisal fees and longer turn-times

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Appraisal fees have been going up and turn-times have been getting longer. Why is this happening? Why is it taking longer to get appraisals done? Is there really a shortage of appraisers? Let’s consider a few points below to help think through some of the bigger pieces to this conversation. I hope this will help you better explain the issue to your clients also. Any thoughts? I’d love to hear your take.

appraiser-shortage-by-sacramento-appraisal-blog-image-purchased-and-used-with-permission-by-123rf

5 things to consider about higher fees and longer turn-times:

1) Appraiser “Speculators”: Did you know there are actually 45% less licensed appraisers in California today compared to 10 years ago? This sounds alarming, but is it a shortage? The number of appraisers climbed exponentially before 2007 because the market was good and it was fairly easy to become an appraiser in California at the time. This hefty increase was more about the market though rather than there actually being a need for more appraisers (key point). In fact, many of the appraisers who entered the field were more like speculators hoping for easy money –  but then the economy unraveled. We can’t therefore look at 20,000 appraisers as being a normal or healthy number of appraisers in California.

brea-licensing-numbers-for-appraiers-sacramento-appraisal-blog

2) Rate of Decline Slowing: According to a phone conversation with the Bureau of Real Estate (BREA) last week, in 2009 the state was losing about 190 licensed appraisers each month, and that number is now 34 per month. It’s great news the decline has slowed, but it’s also going to be a big problem if we don’t see the decline stop at some point. The good news is last week BREA actually announced new rules that essentially make it easier to become an appraiser trainee. Now let’s hope lenders/AMCs will encourage trainees to be used in reports (this needs to happen). Of course one factor worth mentioning is we don’t really know how many of the nearly 11,000 appraisers are actually actively working. For reference, the average age of an appraiser in California is nearly 52 years old (73% male and 27% female).

3) Shortage: When talking with BREA on the phone, they said there is NOT an appraiser shortage. Their sense is there are enough appraisers to handle current appraisal volume, though they said certain markets definitely have a shortage (such as rural northern California), while other markets are still saturated with appraisers (they said Orange County and even Sacramento). This reminds us what Jonathan Miller says, that there is NOT an appraiser shortage, but a shortage of appraisers willing to work for low fees.

4) Not Getting All the Money: A loan officer I spoke with was frustrated that his Borrowers were paying $550 for conventional appraisals and $750 for jumbo appraisals – and still experiencing longer turn-times. When he told me the Appraisal Management Company (AMC) he uses though, that’s where the problem comes in. This AMC regularly pays appraisers $350, which means they’re pocketing 40% of the fee the Borrower thinks is going to the appraiser. A few days ago on Facebook there was an appraiser who had an offer from an AMC to appraise a property for $850, but the AMC was charging the Borrower $1,385. Let’s remember appraisers are supposed to be paid “customary and reasonable” fees under Dodd-Frank, but a reasonable fee is what the appraiser gets – NOT what the Borrower pays.

5) Markets Change: The market has been experiencing a correction after years of low-ball fees from AMCs. Maybe some of it is due to there being less appraisers, and we’ll feel that out over time, but before sounding the appraiser shortage alarm, we have to respect the reality that fee markets don’t remain the same forever. For instance, a local architect friend has been so busy lately that he’s been quoting much longer turn-times and “blow off” fees that clients wouldn’t possibly accept (but they are accepting them). We see a similar market change with contractors as they are incredibly busy right now and not taking the little jobs since the big jobs pay more. Keep in mind appraisers are juggling appraisals for purchases, refinances, and private situations. When things get busy, appraisers understandably gravitate toward clients who pay better. This means low-paying AMC clients get dropped and anything that is not a “piece of cake” valuation might struggle to be accepted unless the fee is reasonable. As a consequence this also means AMCs may have to shop for many extra days or weeks to find an appraiser to take on the assignment. It’s not easy to digest this, but we have to respect the way markets move and then change our expectations too. Otherwise we are left feeling entitled to the way things have been when the market is simply different now.

I hope this was helpful.

Recent Woodworking: By the way, from time to time I like to share some things I’ve built so you know I have a life outside of appraising. Yes, I’ve built a few skateboards recently with my oldest son. It’s like re-living the 80s for me.

ryan-lundquist-sacramento-appraisal-blog

Questions: Which points stand out to you the most? What else would you add? Did I miss something?

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An open letter to sellers about pricing during a slower real estate market

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Dear Sellers,

How are things? I hope all is well. I wanted to reach out and and pitch some thoughts your way about listing your property in a real estate market that is cooling off. I’m not trying to tell you what to do, but I figured this might give you some helpful context or conversation fodder with your agent. Here goes.

  1. Image purchased at 123rf dot com and used with permission - 14688774_s - smallerBe aware of change: Real estate markets are constantly changing. There are times when values increase and other times when they are flat or decline. This means it’s important to price according to how the market is behaving. Yes, values increased rapidly in recent years, but we’re not in that sort of market any longer. Moreover, the real estate market is cyclical where buyers tend to pay more in the Spring and less in the Fall/Winter.
  2. Know your competition: Price according to the most recent similar listings that are actually getting into contract instead of the highest sales from several months back. Remember that well-priced listings tell us about the current market whereas sales are more like pieces of history because they represent what the market used to be like in the past when these properties got into contract. The bottom line is if you want to sell, you need to be priced in the sweet spot where buyers are currently willing to pay. You can find that sweet spot by looking at sales, but don’t forget to give strong weight to similar actives and pendings.
  3. Be prepared for credits: It’s becoming normal for buyers to ask sellers for credits for repairs or even credits to assist with closing costs. This doesn’t happen in every price range, but it does tend to become more common when a real estate market softens.
  4. Listen to your agent: If your real estate agent keeps telling you the property is overpriced, is there a good reason why you are not listening? Your property might be incredible, but if it’s not generating interest or offers, something is wrong. What is it?
  5. Overpayment expectation: Don’t count on pricing your property really high in hopes of attracting that one magical cash buyer willing to pay extraordinarily more than anyone else. We are no longer in a market where buyers have to overpay since housing inventory is approaching normal levels.

I hope this was helpful. I’m around in case you have further questions or a story to share in the comments below.

Sincerely,

Ryan Lundquist
CA Certified Appraiser
Sacramento Appraisal Blog

p.s. Remember to pick up the dog mess before the appraiser comes  🙂

an open letter to sellers from sacramento appraisal blog - image purchased and used with permission

NOTE: This information was written in response to many overpriced listings in the Sacramento area. Your market may or may not be similar. Be sure to study the trends in your market so you can price accordingly.

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Remembering basic economics in real estate

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Have you ever watched the TV show Antiques Roadshow on PBS? Once in a while I’ll catch an episode since it’s always interesting to see what people’s stuff is worth. If only I had that type of “junk” lying around my house. While watching the other day with my sons, it was like a basic economics lesson for them. It seems other than the quality of the item, year built and person/company who made it, one of THE most important factors in the item’s value is scarcity. Pure and simply, if there are more of an item, it tends to be worth less, but if the item is scarce in supply, it tends to be more valuable. The same holds true in real estate.

housing inventory and price per sq ft in Sacramento County

As housing inventory has increased in Sacramento County over the past few months, values have been impacted. This is a basic outworking of the economic principle of supply and demand. As supply has increased, demand has begun to be slightly more satisfied, which has led to the market cooling off a bit (not to mention Summer is fading away).  As you can see in the graph below, prices tend to decline when inventory increases (it tends to take a number of months). Likewise, when inventory shrinks, prices tend to rise.

inventory and price in sacramento county

I know this is basic stuff, but there are a few reasons I bring this up:

  1. Caution – Economics at Work: There is something normal about what is happening, yet some people are either saying there will be little to no impact from rising inventory (and interest rates) or not seeming to embrace that it is regular for a market to chill out in August and beyond.
  2. Watch the Numbers: Consider how an uptick of 0.50 months of extra housing in Sacramento County has made a noticeable impact over these past months. We’ve seen Days on Market (DOM) increase, values have begun to cool and there have generally been less offers made on properties too. I think we’ve bottomed out when it comes to inventory, so this is an important time in our market.
  3. Layers of the Cake: Remember that value is like a multi-layered cake in that there are many aspects that create value in the market. Interest rates, inventory, the economy, cash investors, financing, affordability and so many other “layers” are what go into causing real estate values to rise or fall.
  4. Be an Expert for Your Clients: If you are in the real estate community, watch the numbers closely to be able to explain what is happening to your clients. Be careful about flinging positive spin that goes against basic economics and trends that seem to be unfolding locally. Show your clients graphs or learn how to make your own graphs. Do what your competition is not willing to do and know the numbers well enough to be able to spew them off at any given moment (this can only happen if you pay attention very regularly).

In short, let’s not forget Economics 101 as we see inventory increasing in the Sacramento area and many other areas throughout the country. Of course sometimes fundamentals don’t cause as big of a stir as we’d think because there are other factors (or “layers”) to consider, but keep an eye on what inventory does. This is important.

Question: By the way, do you watch Antiques Roadshow? Why or why not?

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