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the layers of value in real estate

A Sacramento market slowdown and the shutdown

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Let’s talk about the Sacramento market briefly and then touch on the government shutdown. I know any topic involving Congress right now can be nauseating, but let’s hone in to consider the relevance to real estate.

sacramento county median sales price levels - by sacramento real estate appraisal blog

The local market is definitely slowing down as you can see with average price per square foot trends above and the median sales price below. When considering all the factors involved though, it makes sense. The formula is simple: More houses for sale + less investors + higher interest rates + onset of Fall = Values cooling off. I don’t know about you, but I am seeing many properties being priced more consistently with July and August instead of priced higher than the most recent sales. This is a tell-tale sign of the slowdown. At the same time, there are still properties that are getting multiple offers (when priced right) and I would still say the market favors sellers despite buyers gaining more power lately.

sacramento county median sales price levels - by sacramento real estate appraisal blog 2

cake-from-Joy-Yip

The Government Shutdown and Real Estate: It’s important to remember there are many different factors that help create or impact value in a real estate market. I talked about this recently with the Multi-Layered Real Estate Cake Analogy. The gist of this analogy is that any of a number of “layers” in the market can end up impacting the direction of values or how buyers perceive real estate. Things like the relationship between supply and demand, interest rates, the economy, cash investors, foreclosures, financing, affordability, loan programs, lending guidelines, jobs, consumer confidence and so many other “layers” end up playing a part in influencing the market. When it comes to the government shutdown, here’s my take. This is a bad situation and Congress really needs to bring their A-game to solve the problem. If the economy suffers and people’s perception of the economy changes, that can and will negatively impact the housing market. I don’t know about you, but I find it ironic that real estate saw exponential growth in large part due to The Fed’s manipulation of the market through historically low interest rates, yet here we see government potentially getting in the way of that “recovery” if they cannot get their act together.

Question: Any further thoughts? I’d love to hear your take.

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Don’t put all your eggs in the median price basket

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Median price figures can be helpful to understand the real estate market, but at the same time we need to be careful not to give them too much weight. Today let’s look at some of the pitfalls of paying too much attention to the median price level.

First off, what is a median price? Imagine lining up 50 sales and placing them in order from highest to lowest. The median price is the sale in the middle of the group. For example, when we hear that the median sales price in the Sacramento area is now at $203,000, that means half the sales are above that point and the other half are below that point.

Eggs in the median price basket - photo by Sacramento Appraisal Blog

Some pitfalls of relying too much on median price levels:

  1. Inventory: The median price is based on the number of recent sales. When there are few sales in a market, the median price tends to be less reliable because it can go up and down very quickly depending on just a few sales.
  2. what is the median price - by Sacramento Appraisal BlogSize: If there are more smaller-sized less expensive homes that sold recently, the median sales price will naturally be lower. But if there are a greater number of larger and more expensive homes, the median sales price could be higher. Thus the median price is strongly influenced by what types of property have sold in a neighborhood (see graph below).
  3. Big Market vs. Sub-market: City-wide median sales price trends may or may not apply to every single neighborhood in a given city. For instance, Midtown Sacramento may be experiencing a bit of an uptick lately in values, but my observation is that it is not the same as the huge increases we’re seeing in some newer suburban tract neighborhoods. Sometimes during the appraisal process I’ll observe increasing values for an entire city, but a more stable value trend for a sub-market.
  4. The Layers of Value: It’s important to know what is shaping the median price level for a neighborhood or market area. For instance, we might see the median sales price has increased by 20% over the year in a particular community, but when looking closely at the trends, there are less foreclosures at the bottom of the market, more flipped properties at the top and less inventory overall. These combined factors can help boost the median sales price to make a market look beefier than it really is.

square footage of sales in Land Park

Keep it in Context: Ultimately if you want more accurate valuation results, instead of only looking at market-wide median price figures, look at competitive data in the context of your neighborhood. What do I mean? Stay within the neighborhood boundaries and compare your property to other similar sales (instead of all neighborhood sales). When you begin to get median price figures or price per square foot figures for these competitive sales, you’ll likely start to get a more realistic value picture for your property.

The median price is one metric to help us understand the real estate market, and it’s definitely not the end-all lense to interpret the market. My advice? Know what influences the median price and take the median sales price for what it’s worth.

Any thought or stories to share?

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