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Slumping volume & rising inventory

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Volume is down and inventory is up. Is that a problem? It sounds like a question for a high school Economics class, but here we are talking. Today I want to kick around two quick thoughts and then dive deeply into trends. I hope this helps – whether you’re local or not. Anything to add?

Here are the two big ideas to talk through right now.

This could be a problem: If sales volume continues to slump and inventory rises without buyers absorbing new listings, it could be a sign the market is changing in a big way. No matter how we look at it sales volume has been down lately in Sacramento. This was the weakest September since 2007 as volume was 14% lower than last year, and quarterly volume was down about 6% too. But keep in mind overall the year as a whole has actually seen strong volume, so it’s not like sales have fallen off the face of the earth (but it’s a concern we’re seeing the numbers change over the past few months). Housing inventory is also up and we haven’t seen it this high since 2014.

This could also be a dull fall: Despite the numbers seeming gloomy right now, they’re actually really consistent with what the market showed in 2014 when we had an extremely dull fall season. In fact, quarterly volume that year was down 6% and September volume was weak too. Does that sound familiar? Also, we have a nearly identical level of inventory right now compared to then too. I don’t say this to sugar coat any red flags in the market, but only to give pause and say what we’re seeing right now could simply be a very dull fall season.

We need more time: The truth is we need time to see how the market will pan out. For now we live in the tension of not knowing the future and interpreting trends for the present. My advice? Watch closely, be careful of hyped headlines, and be sure to take a wider view of the market too (let’s not forget 2014).

I hope that was helpful.

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

Prices actually went up last month. What the? Yes, the market is softening, but prices saw an uptick from August to September. That might seem confusing since we’re talking about the market cooling, but it highlights exactly what I’ve been talking about lately in that you don’t often see a market changing by looking at prices. You see change first in the listings and sales volume – and then prices eventually. This is exactly what’s happening right now. 

Normal fall stuff: Last month it took longer to sell, the number of listings increased, and we saw a dip in sales volume. This is what we’d expect to see at this time of year, though the dip in volume was definitely sharp, which is something we’ll watch over time to see if it’s a byproduct of a dull fall or the start of a bigger trend. Beyond volume being down 6% this quarter, all the metrics look fairly normal for the fall. Well, they look normal for a dull fall season, that is.

Momentum slowing: Beyond a seasonal slowing we’re also seeing momentum slowing. I explain it here in a presentation I gave yesterday.

Interest rates rising: One of the reasons why we’re seeing volume slough could be due to interest rates rising. Earlier in the year it seemed buyers ran to the market in light of news of rising rates, but right now it doesn’t seem like buyers have their running shoes on any longer.

Buyers have more power, but not all power: The market is shifting to favor buyers, though sellers still have lots of power. Some buyers hear about a softening market and think they can make lowball offers, but that’s just not realistic. For instance, last month 40% of all sales had multiple offers in the region. That tells us the market isn’t dead despite softening. Buyers, did you hear that? Enjoy your newfound power, but you still have to bring strong reasonable offers.

Listings may have peaked: Overall housing inventory is up as I mentioned above, but it looks like the number of listings is starting to crest for the year. I’ve been watching listings closely over the past few weeks and it seems like they maybe peaked. We’ll know for sure in a month or so. This is exactly what we’d expect to see happen around this time of year, but it maybe seems like more welcome news right now. Let’s keep watching to know for sure.

Being technical about weak volume and inventory: Here’s the thing, we saw a very weak sales volume in September, and it ended up really impacting inventory levels. In fact, when looking at graphs the trend line shot up dramatically last month (see below). But technically what happened was the sales that normally would’ve sold were basically piled on to the number of listings instead, and that’s making the housing supply figure look much more dramatic. Ultimately the number of listings isn’t all that abnormal for the time of year, though if sales continue to dry up over time, then it becomes a much bigger deal to have even this number of “normal” listings.

Pricing lower this fall: Right now at the least it looks like we’re poised to have a dull fall like we had in 2014. These past couple of fall seasons the market simply felt a little more flat, but this year I expect we’ll see a more pronounced price difference between sales in the spring and the fall. Remember, if listings aren’t attracting offers, it’s because the market is no longer biting at that level. What is similar and getting into contract? That’s the big question, and when a fall season is more dull it’s important to be realistic about the need to potentially price lower. In other words, it’s probably not going to be enough to price a property 1% below the height of spring and expect a flood of buyers. Remember, it doesn’t matter what other listings are priced at if they’re not selling. The only thing that matters is what is actually getting into contract. That’s where we see the market.

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

DOWNLOAD 63 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 August to September?

3) What’s happening with inventory?

4) What’s happening with sales volume?

SACRAMENTO COUNTY VOLUME:

Key Stats:

  • September volume down 14%
  • 2018 volume down 1% (January to September)
  • Annual volume down 2% (past 12 months)
  • Volume has been strong this year, but it’s definitely down lately.

SACRAMENTO REGION VOLUME:

Key Stats:

  • September volume down 16%
  • 2018 volume down 1.4% (January to September)
  • Annual volume down 1.8% (past 12 months)
  • Volume has been strong this year, but it’s definitely down lately.

PLACER COUNTY VOLUME:

Key Stats:

  • September volume down 19%
  • 2018 volume down 3% (January to September)
  • Annual volume down 3% (past 12 months)
  • Volume has been strong this year, but it’s definitely down lately.

SACRAMENTO COUNTY (more graphs here):

SACRAMENTO REGION (more graphs here):

PLACER COUNTY (more graphs here):

I hope that was helpful.

DOWNLOAD 63 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: What do you see happening with volume and inventory right now? What are you hearing from buyers and sellers? I’d love to hear your take.

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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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