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Is the market so “hot” that we won’t have a slow fall this year?

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Values are going to keep going up. The market is so “hot” we’re not going to have a fall slowdown this year. I’ve heard this sentiment quite a bit lately and I’ve even thought it myself. Yet today let’s remember five things about the fall season. Then for those interested we’ll dive deeply into the latest Sacramento trends.

5 things to remember about the fall market:

1) A general truth: Unless we have reason to believe there won’t be a slower fall season, let’s believe there will be one because it’s normal for real estate to have seasons.

2) The typical signs are happening: When the market starts to slow we usually see certain symptoms, and we’re seeing those right now. Inventory has increased slightly, sales volume is starting to slough, and prices in the region dipped a bit last month. Yet Sacramento County stats are nothing but glowing, which makes it hard to believe a slowing could happen.

3) Slow vs. slowing: The market is NOT slow, but we’re seeing slowing. That’s a big distinction for many markets in the country right now. In reality it almost sounds offensive to say the market is slowing when we have multiple offers and bidding wars, but things right now don’t feel quite as aggressive as they did in April and May. We’re seeing slightly more price reductions, slightly less offers, and buyers more frequently not accepting counter offers like they did a few months ago. I know, this isn’t true in every transaction. All I’m saying is we are generally seeing more symptoms of a slowing market (but it’s NOT slow).

4) Not always dull: Sometimes the fall months can be really dull, but other times not so much. Thus even though the stats sag at the end of the year, it doesn’t always feel like the market is dragging. My guess is the fall softening this year will not feel as dull because of how low inventory is right now.

5) Rare: It’s rare to not have a seasonal market. The only time I can think of us not having a fall slowdown in recent years was in 2012 when investment funds and flippers were gutting the market. Values simply kept going up, and investors basically trumped the seasonal market that year.

I hope that was helpful or interesting. Any thoughts?

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

Glowing and slowing. That’s a good way to sum up the market. The stats are generally glowing, but we’re starting to see subtle signs of a seasonal slowing. Price stats in Sacramento County increased by about 1% last month and they’re up 8-10% from last year (that doesn’t mean actual values are up that much in every neighborhood and price range). Though if we look closely, especially in the region as a whole, prices dipped by 1% last month, inventory is up slightly, and sales volume sloughed off last month (which isn’t a surprise). Properties have been selling very quickly still in only 9 median days in Sacramento County and 11 in the region. For perspective, on average it was taking about a week longer to sell a home last year. The market actually tends to normally show a slowness in days on market between June and July, but we didn’t see that this year, which is a reminder the market feels a bit more aggressive right now compared to last year. Overall housing inventory increased last month, but the bigger story is it’s down about 14% in the region from last year. Despite all the glorious stats, the market is still price sensitive, which means buyers aren’t willing to pull the trigger at any price (did you hear that sellers?). Oh, and by the way, the median price in Sacramento County is now 10% from the peak in 2005. I could go on and on with words, but let me share some graphs to show the market visually.

DOWNLOAD 65 graphs HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

Sacramento County graphs this month (more graphs & stats here):

Sacramento Regional graphs this month (more graphs & stats here):

Placer County graphs this month (more graphs & stats here):

DOWNLOAD 65 graphs (and stats) HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: What signs of glowing or slowing are you seeing? Do you think we’ll have a fall market? Did I miss anything? I’d love to hear your take.

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When using older sales is the best option

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Let’s talk about choosing comps. I want to share an example of what I did not long ago when there were no recent sales for a unique model in a tract subdivision. Anything to add? I’d love to hear your take.

The situation: The subject property is a larger single story home with a casita. In this case the builder built only a handful of homes with a casita, so comps would be limited. If you aren’t familiar with a casita, it’s a term used to refer to an extra housing unit or detached area. I find it’s often interchanged with “in-law unit” or “accessory dwelling”, but we have to remember an accessory dwelling unit (ADU) actually needs a sleeping area, bathroom, and kitchen to be an ADU. In this case the “casita” only has a bedroom and bathroom, so while it’s tempting to call it an accessory dwelling, it’s really not because there isn’t a kitchen.

The problem: There are zero recent casita sales, so it’s not easy to readily understand what the market is willing to pay for one of these units. What do we compare the casita unit with in today’s market? How do we adjust for it?

What I did: In an ideal world I would’ve had a nearby neighborhood with casita sales, but I didn’t find anything, so I chose to study the neighborhood market by researching three casita sales in the neighborhood over the past ten years. As long as the data was good, I would use research from sales in the past to help me value a property today.

Immediately I noticed the casita sales were clearly commanding a price premium. I thought that this might be the case, but it was still good to confirm instead of assume. Keep in mind if you don’t know how to graph, that’s okay. You can see the same thing when pulling a CMA or printing out sales. Here is a tutorial though in case you want to learn to make a graph like this.

The next thing I did was to research how the casita units compared with other specific models at the time of their sale. Being that most casita homes were somewhere around 2500 sq ft (without the casita), I wanted to see how these units competed with other homes that were around that size. The beauty of having three older sales was I could find what the price adjustment was in each of those situations compared to other specific models. This would prove valuable since I had three recent 2500 sq ft sales without a casita, and I would need to make a value adjustment for the casita in today’s market.

I won’t say exactly what my adjustment was, though maybe I will in the comments.

The big point: Sometimes we have to look back in time to understand how value works. Don’t be afraid to pour through many years of sales to help establish context. Spend time answering the question, “How does a property like this fit into the market?” We can do this by scouring years of sales in the immediate neighborhood, but we might also look to the surrounding market too for competitive locations. Of course just because we research sales that are many years old does not mean we will use them in a current valuation (or a listing presentation for agents). I really don’t have a problem with using older sales when appropriate because we can always make an adjustment depending on how the market has changed over time. But let’s remember FHA wants appraisers to use comps within 12 months, so I probably couldn’t get away with using a sale from three years ago in a lender appraisal. However, I could pull in research from the past to help support the value for what the casita is worth.

I hope this was helpful or interesting.

Questions: Anything else to add? Did I miss something? When have you used older sales to help see the context of value? I’d love to hear your take.

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Price ceilings & literal ceilings that are too low

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I have two types of ceilings on my mind. How do you know when a market begins to reach its price ceiling for the season? And how low can a ceiling be in a home and still be considered legitimate square footage by an appraiser?

I recently inspected a house where the ceiling was 6 feet 8 inches high. Is that tall enough to count? Is there such a thing as too low? Let’s talk about it. 

How low can a ceiling be? Lots of people think 8 feet is the minimum ceiling height because that’s a common height in most homes, but it’s actually 7 feet according to the American National Standards Institute (ANSI Z765). Technically ANSI says it’s okay to have a ceiling height at 6’4″ under beams though. Keep in mind sometimes a ceiling might have a downward slope like we see with a Tudor or the photo above. When ceilings slope really low, there is something called the “5 foot rule” where the appraiser can count any space above 5 feet as living area as long as over 50% of the ceiling area is at least 7 feet.

When appraisers observe houses with ceilings below 7 feet, they’ll typically email the lender and say, “Hey there, this property has a ceiling less than 7 feet, and that doesn’t cut it according to ANSI standards. How do you want me to proceed?” After hearing that there’s a good chance the lender might not want to do the loan. Of course a property with low ceilings can still have value and even be appraised, but it may need to be marketed to an investor paying cash instead of a buyer using conventional or FHA financing.

Market price ceilings: Switching ceiling gears, how would you know if the market was beginning to reach its price ceiling for the season? That’s a great question to ask since many markets in the United States are going to be doing just that over the next couple of months. As I said in June, the Sacramento market is beginning to slow down even though we don’t see it in the sales stats yet. This doesn’t mean the market is cold or values are declining. It only means we are seeing subtle clues to a slowing market as high altitude values from the spring are at the beginning of a downward seasonal descent.

Umm, please don’t say the market is slowing!!!

At times it’s not very popular in the real estate community to publicly talk about the market slowing, but it’s something that happens nearly every single year. I realize we have big headlines about the market being “hot”, and it really is in many way, but catching the symptoms of a slowing market is key for valuing properties (and it’s good for clients). I suggest starting to watch price reductions more closely because they’ve been increasing lately in Sacramento and this is one of the first signs of a slowing market. Also pay attention to days on market increasing in coming time along with some of the other factors above (including the sales to list price ratio). I highly recommend asking other real estate professionals the question, “What are you seeing out there?” It’s amazing the type of insight you can glean from title reps, loan officers, appraisers, agents, escrow officers, etc…

I hope that was helpful or interesting. Any thoughts?

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

Values showed an increase again last month and sales volume was very steady compared to the past few Junes. Overall most price metrics were up 1-2% from last month, though the month prior they increased 2-4%. Inventory is still down about 20% from last year, and properties have been selling like hotcakes in only 9 days (that’s the median). In case you wanted to know, most price metrics are up about 7% from last year. One interesting thing to watch is FHA sales are starting to sag more noticeably as they ticked down a few percentage points to 21% of the market in Sacramento County. Granted, 1 in 5 sales is still quite a bit of FHA volume, but last year we were seeing 1 in 4 sales go FHA. It’s easy to think this means first-time buyers are getting squeezed out by Bay Area buyers, but that’s not really the case. My sense is the downtrend is due to more would-be FHA buyers using competitive conventional products instead of FHA. Lastly, it’s worth noting Curbed has a glowing article about Sacramento (cool that they quoted me too). This article is starting to go viral and it’s bound to get many locals pumped on how “hot” the Sacramento market is. Yet despite being “hot” in many ways, let’s remember to look for the signs of a slowing market because we have to realize the market usually hits its seasonal price ceiling right about now (but we won’t see it in the sales stats for a while). I could go on and on with words, but let me share some graphs to show the market visually.

DOWNLOAD 74 graphs (and a stat sheet) HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

Sacramento County graphs this month (more graphs & stats here):

Sacramento Regional graphs this month (more graphs & stats here):

Placer County graphs this month (more graphs & stats here):

DOWNLOAD 74 graphs (and a stat sheet) 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: Any low ceiling stories to share? Is the price ceiling for the season just about here? Did I miss anything? I’d love to hear your take.

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The fidget spinner “bubble” and softening real estate values

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I see fidget spinners everywhere. It’s incredible how popular they’ve become over the past few months, right? Though like any fad, the market is about to change. Well, that’s what my 11-year old son thinks anyway. He sensed a “bubble” brewing, so he unloaded some of his spinner inventory on the last day of school and ended up raking in $37 (little stud). 

Slower “spin” in real estate: About this time of year the real estate market begins to cool or “spin” more slowly so to speak. Though at times it feels controversial or blasphemous to say that because it goes against the grain of an ultra-positive real estate shtick. Yet no matter what, it’s normal for values to soften every year, and right now we seem to be in the beginning stages of that. This doesn’t mean the market is not incredibly competitive still or values have stopped increasing. It just means high altitude values in spring tend to subtly begin a downward descent right about now.

Pregnancy analogy: The problem is when the market slows we don’t see it in the stats yet for a couple months. It’s like taking a pregnancy test. You can be pregnant, but an over-the-counter test won’t tell you that for two weeks even though your body has 100% changed. Similarly, the real estate market may have begun to shift, but we might not see any difference in the stats yet. For example, almost every year July sales take longer to sell than June sales. It’s easy to then say, “The market changed in July.” But the truth is things actually began to change in May and June. After all, let’s remember the sales that closed in July got into contract in May and June. Thus when July sales stats show a slowing, it really tells us the market began to slow a couple months prior.

The Point: Whether spinners or real estate, let’s watch for signs of change so we can speak definitively about trends and give solid advice. Let’s be cautious to not talk about markets like they always stay the same either.

I hope that was helpful or interesting. Any thoughts?

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

If you didn’t know, sales volume last month was the strongest May we’ve seen over the past 4 years. But don’t get too excited because sales volume for the entire year is about the same as last year. No matter how we look at it, price metrics are up 7-9% from 2016 and they increased by 2-4% last month. One of the themes that won’t go away is we have a shortage of housing. In fact, housing supply is 22% lower right now compared to last year, and it’s been putting pressure on values to increase – particularly at entry-level price ranges. The tricky part lately is many contracts are getting bid up due to multiple offers (even beyond a reasonable appraised value). This can favor sellers accepting offers from buyers who have more cash to make up the difference between the appraised value and the contract price, though FHA sales stats show first-time buyers are still finding ways to close deals. In higher price ranges the market feels much softer, though we are still seeing multiple offers when properties are priced correctly. This is a good reminder that it’s possible for the market to feel more aggressive than actual value increases. In other words, having multiple offers doesn’t mean values are increasing rapidly or at all. Lastly, we are starting to hear more about lenders rolling out 100% financing to help buyers artificially afford higher prices (sounds healthy, right?). I could go on and on with words, but let me share some graphs to show the market visually.

DOWNLOAD 55 graphs (and a stat sheet) 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 graphs this month (more here):

Sacramento regional graphs (more here):

DOWNLOAD 55 graphs (and a stat sheet) 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: Do you think we’re in a fidget spinner “bubble”? What else are you seeing in the real estate market? Did I miss anything? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.