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Real estate trends to watch in 2020

January 7, 2020 By Ryan Lundquist 27 Comments

What’s the real estate market going to do in 2020? Let’s talk about some of the bigger emerging trends. Scroll quickly or digest slowly. Anything to add?

Class I’m teaching on Jan 16th: I’m doing a big market update at SAR from 9-10:30am. We’ll talk through where the market is at, tips for talking to clients, and ideas for where to focus business. I’d love to see you there. Sign up here.

TRENDS TO WATCH IN 2020:

Affordability: Buyers are struggling to afford higher prices. Despite positive economic news lately the truth is home price growth has outpaced wage growth and rents have also risen substantially. This means many buyers and renters are having a difficult time with higher prices.

Blue is the color of the year: This year the Pantone color of the year is Classic Blue. Does this mean we’ll see more blue? Maybe. Maybe not. In recent years we’ve already been seeing blue in kitchens especially. No matter what, when looking through home magazines there are many vibrant colors instead of just gray and white.

Sliding sales volume: A byproduct of shrinking affordability is a smaller pool of buyers able to handle higher home prices. This is something to watch and even more important than prices in my opinion. Often we fixate on what prices are doing, but the number of sales happening is the best indicator of the temperature of the market. Are buyers putting their foot on the gas or brakes? Show me the number of sales and I’ll let you know.

Addicted to low rates: We’ve had eight years of historically low rates and we’re now feeling the effects. Prices have risen dramatically, people are staying in their homes longer, and the market feels hyper-sensitive to rate changes. Thus what happens with mortgage rates this year will play a huge role in how the market feels and unfolds. Check out this mortgage rate table from Len Kiefer below (or here). Can you see why 2018 felt so dull? I know it seems crazy that buyers would freak over rates just above 4.5%, but that’s where we’re at (and climbing rates lessens affordability).

Ending single family zoning: There’s a movement to do away with single family zoning in order to help create more housing. In 2019 we saw Minneapolis do this by allowing up to three units to be built on a single family lot, and this is definitely something to watch in many markets across the country. By the way, if you own land, could it become more valuable if zoning changed?

Tech company invasion: It almost feels like there’s a tech bubble because so many companies are trying to get a piece of the real estate pie. On one hand some start-ups are going to fail because their algorithms are designed for labs rather than a relationship-centric real estate market. On the other hand some tech companies are poised to gain market share this year. In Sacramento Opendoor looks to have sold about 1% of transactions last year and they currently own 90 homes. I’m guessing Zillow is aiming for 1-2% of market share this year. Will they be successful? I’ll let you know next year… In all of this it’s good to remember the traditional model represents the vast bulk of the housing market despite the massive attention these companies are getting. Yet we can’t ignore this trend because it’s bound to spur the traditional model to become more efficient.

Overpricing will still be an issue: Price growth has clearly slowed, but sellers still think it’s super hot. This is a glaring issue because sellers tend to think they’re going to get ten offers at any price they choose from very desperate buyers longing for their home. It’s like sellers have shown up at the end of a movie and they have no idea what the movie is about (but they think they do). My advice? Price for the dynamics of the current market rather than a hot market from yesteryear.

Buyers grow even pickier: In 2019 there was a greater sense of hesitancy about the market. Lots of buyers felt leery. Am I buying at the top? Am I going to get stuck if the market changes? What does the future hold? These questions aren’t easy to answer of course until the future actually happens (sorry, but it’s true). The reality is uncertainty is bound to cause buyers to become even more discerning about condition, location, paying the right price and waiting for the right house.

Staying put instead of moving: We have a market of homebodies where nobody is moving. Okay, that’s an overstatement. It was reported recently that homeowners are staying put an average of thirteen years compared to just eight years a decade ago. There’s simply less incentive to sell in light of low mortgage rates and higher prices. Why move if you’re sitting pretty? This of course is one reason why we’re not seeing as many listings.

Checking out of California: Despite some residents staying put, this year there will be lots of Californians moving to all the usual places like Texas, Nevada, Arizona, Oregon, Idaho, etc… For the real estate community, I highly suggest you consider who has incentive to move this year. Remember, a California pension goes a long way in a lower-priced state. Check out a deep piece by CalMatters and you can dig around the U.S. Census Bureau site all day to try to find some data that might be insightful for your business. On a related note, let’s keep an eye on areas plagued with rising fire insurance too as that can unfortunately force migration.

More 1031 Exchanges: We’ll likely see more 1031 Exchanges this year as investors move their money. In my experience there are more in an up market than a down market, and we’re still going up, so be ready. I’ve seen quite a few Bay Area investors park their money in Sacramento, and I’ve seen some Sacramento investors move their money to lower-priced areas. That’s the dream, right? Cash out when prices are higher and buy something better elsewhere.

Consolidation in real estate: Having lower sales volume can be painful for both mortgage companies and real estate offices. Thus we’re likely to see some banks continue to lay people off, mortgage companies will join forces, and some real estate brands and brokerages will need to get creative about staying afloat and trimming the fat with less purchases flowing.

Election year hype: “It’s an election year, so it’s going to be a strong year.” That’s the sentiment we often hear in the real estate community, but an election year isn’t the silver bullet to alter the bigger trend the market is already experiencing. I have a deep blog post coming soon about this.

Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.

The narrative of Boomers & Millennials: Be on the lookout for Boomers who need to downsize and Millennials trying to get into the market. We’re bound to see lots of generational conversation this year as Boomers age and Millennials “come to age” so to speak to get into the market. One looming issue that’s been getting more press lately is there is an enormous Boomer population whereas GenX was a smaller generation. Thus at some point it makes us wonder who is going to buy the homes of aging Boomers in years to come. This is something to watch more thoroughly over the next decade. And to make a safe prediction, we’re definitely going to keep seeing “Okay, Boomer” references in articles.

Well, that’s what’s on my mind. I could go on and on, especially about things like fire insurance woes, PG&E, Prop 13 reform, rent control, cannabis laws, etc… But at some point I have to stop.

By the way, click to see 2019 market recap images for a few local counties.

I hope this was helpful or interesting.

Questions: What else do you think will be important in 2020? Did I miss something? I’d love to hear your take.

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Zillow has officially entered the market

October 9, 2019 By Ryan Lundquist 44 Comments

Zillow is here. As of two days ago they’ve officially entered the market in Sacramento and they have big plans to expand to other territories too. Let’s talk about this. Here’s what’s swirling through my mind. Anything to add?

Corporate flipper: Zillow is basically going to be flipping homes. Their website doesn’t use this language because “flipping” has a negative connotation sometimes. But they’ll be buying below market value, doing repairs as needed, and then selling higher. If it looks like a duck, quacks like a duck…

Narrow focus: Like many tech companies we’re going to see Zillow with a buy list. I’ve yet to see something published, but they’ll likely focus on conforming homes in a specific price range rather than unique or high-priced homes that might be more difficult to sell. This reminds us of Blackstone from 2012 and 2013 as they had specific standards for what they were looking to purchase. On a side note, if you work in real estate and you’re worried about the invasion of tech companies, then diversify into places and price ranges where iBuyer models aren’t going.

There is a place for tech: This may be an unpopular opinion and I may have a few people want to fight me, but there is a place for big tech companies in real estate. This doesn’t mean I’m excited about Zillow and Opendoor, but the world has changed and speaking objectively there are other models beyond the traditional model that will appeal to certain buyers and sellers.

Trust & getting a pass: Consumers tend to trust anything that’s online, so there’s already a high degree of trust with a brand like Zillow, and they’re now here to capitalize off of it. It’s as if they get a pass though because they’re not real estate agents or flippers (and they’re trying hard not to be seen that way). But let’s remember the obvious. They are here to work the system to their advantage and make money off consumers.

Tech is the minority: Tech companies are getting a ton of press, but these brands are the minority in the market right now by a long shot. For instance, Opendoor has 70 listings in the Sacramento region. That’s impressive for a start-up, but at the same time it’s only 1.4% of all listings. My guess is Zillow will be aiming to represent 2-3% of the market this year in terms of sales volume. Again, this is impressive, but let’s remember the vast bulk of sales in coming time are going to be sold traditionally.

The irony of the Zestimate: Zillow won’t be using their Zestimate as a basis for making offers. I get it, but I also find it ironic since they’ve built their brand around the legitimacy of the Zestimate.

Affordability: The unfortunate thing here about big corporations entering local real estate is it doesn’t help affordability. I’m not saying tech companies are going to cause prices to rise, but when the focus is on flipping homes, this won’t help keep prices lower.

Service fee vs commission: Lots of tech companies say stuff like, “Hey, we don’t charge commissions like real estate agents,” but this is disingenuous because there is a “service fee” that is basically the same amount or even more than we find in a typical real estate transaction.

The narrative of convenience & profit: Like many tech firms, Zillow is preaching the idea of convenience rather than profit. Their goal is to make escrows easier and smooth rather than helping a seller net the most money. If you listen carefully, few of these companies are saying sellers will actually make more because it’s simply not true in most cases. Remember, these corporate real estate machines have to buy low in order to make a profit. They’ll also be asking for credits for repairs, which makes sellers net even less.

Doing math: I strongly recommend for consumers to do the math when it comes to selling to a tech company vs selling on the open market. You’ll likely yield more profit on the open market if money is your concern.

Data issues: The data geek in me is thinking about numbers. I’m worried about properties being listed off MLS and data being watered down because there are missing sales. The good news here is I’m told homes bought by Zillow are going to be listed for sale on MLS (fingers crossed this happens). By the way, Zillow is going to be using a local brokerage for their acquisitions and sales.

Small investors: Corporate flippers coming to the market will make it more difficult for small investors because there’s an extra layer of competition now.

The price cycle: We are closer to the top of a price cycle, so I find it ironic to see tech brands jumping into the game. My guess is it’s much easier to find success in an up market than a down one. We’ll see how it pans out.

Other: What else? Please comment below.

Closing thoughts for real estate friends: It’s not easy when change happens and I know lots of people are worried about the future of real estate because of what we’re seeing right now. If I could offer any advice though, I’d say to accept the reality that tech companies are going to be a part of the real estate scene. For now it looks like the vast bulk of homes are going to be sold traditionally though, so I recommend focusing your time and energy on the larger portion of the population that won’t be working with these tech brands. Most of all, prove your worth. Why should someone hire you instead of a tech firm? What is your value proposition in a changing market? Prove it with uncommon service, deep knowledge, and results.

I hope this was interesting or helpful.

MY COMSTOCK’S ARTICLE: I wrote a piece in Comstock’s magazine this month on the invasion of tech companies in real estate. I can’t believe it happened to be published on the same day Zillow made their big announcement.

Questions: What stands out to you most above? What are your thoughts about tech companies entering real estate? I’d love to hear your take.

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The invasion of tech companies in real estate

July 30, 2019 By Ryan Lundquist 28 Comments

Tech companies want a piece of the real estate pie. Amazon. Zillow. Opendoor. Rex. It seems like every week there’s a new company announcing its venture into the game. Here are some things swirling through my mind as I think critically about this trend.

1) Stress & real estate hold hands: Tech companies talk about real estate like it’s as easy as the click of a button, but it’s complicated because humans are involved. There are real people trying to negotiate, advocate for their interests, and navigate complexities in the housing market. Can we make things less stressful? I sure hope so. But are real estate transactions innately stressful because of all the moving parts? Probably.

2) The obsession with speed: There is space for escrows to be faster as tech firms say, but I hope we don’t lose sight of the importance of time. It’s okay to have space for necessary inspections, negotiation based on those inspections, and a reasonable contingency period so buyers and sellers are sure about their decision. There’s this idea that real estate should be instantaneous, and maybe one of these days it will be on the blockchain, but mistakes are easy to make if we go too fast. On that note, let’s be cautious about expecting too much from appraisers in this climate because speed can water down quality. Do you know what we need more than fast appraisals? Reliable appraisals.

3) The fine print: A company like Opendoor or Zillow can offer to buy a house at a price that seems reasonable on paper, but it can quickly become low when money for repairs is skimmed off the top – not to mention a higher commission than what is being paid during public sales on MLS. This is where sellers need to weigh how much they’re going to net with a tech company’s offer.

4) The narrative of convenience: Big brands are trying to capture consumers with the idea of making transactions easier. This sounds amazing and consumers certainly want convenience, but in my mind the bigger issue is money. Sellers want the highest price possible and buyers want to pay the least amount possible. I wonder at times if this idea is getting lost in the midst of clever marketing. Or are we as a society starting to value convenience more than anything? To be fair there is a segment of the market that will sacrifice profit for the sake of convenience. How much of the population will do this? We’ll see. The market gets to decide.

5) Models change: We no longer go to Blockbuster to rent videos, we use Google Maps instead of the Thomas Guide, and when booking a vacation most of us don’t use a travel agent. Thus when it comes to real estate, let’s expect to see change in the future. I’m not saying tech companies are going to take over and humans will lose to Skynet (a Terminator reference). But for anyone working in real estate, it’s a good idea to watch this trend, listen closely to the narrative being spun, show your value to consumers, and try to think ahead of the trend so you can position yourself for the future.

Anyway, that’s what’s on my mind. I hope that was helpful or interesting.

Bubble story on CBS: Yesterday I was interviewed for a piece on CBS Sacramento about Sacramento home prices being similar to the peak in 2005. Check it out if you wish. One quick note. The reporter said, “Have no fear” in the story. I wanted to clarify that those were not my words.

Questions: Which point resonates with you most? What did I miss? What are you most and least excited about with tech companies in real estate?

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Two things to understand about Zillow’s accuracy rate

May 1, 2019 By Ryan Lundquist 45 Comments

How does Zillow’s accuracy rate work? Let’s talk about two important points. I’m not writing because I’m angry, but only because the public places enormous trust in this brand, and I see this accuracy rate quoted everywhere. Well, let’s at least know the fine print so we can have informed conversations.

Two quick points on Zillow’s accuracy rate:

1) Median makes all the difference: Zillow says their median error rate is 5% for the United States. That sounds impressive, but we have to realize this is a MEDIAN error rate, which means the Zestimate is within 5% of the purchase price only half the time. So Zillow’s slogan could be, “We’re within 5% half the time.” But that doesn’t sound as polished as “Our median error rate is 5%”.

2) Zillow uses the most recent Zestimate: This is such an important point – even if it feels a little technical. I have an example to help show what I mean too. Zillow states “Zestimate accuracy is computed by comparing the final sale price to the Zestimate on or before the sale date.” Let me show you why this matters.

An example: Imagine a property listed for $380,000 and the Zestimate was also $380,000. But then after a series of price reductions, the home sold for $350,000. That would be 8 percent lower than the original Zestimate. That’s not very good, right? Well, now imagine as the list price was reduced, so was the Zestimate, and the most recent Zestimate was $353,000, which is only 1 percent higher than what the property sold for. Here’s the kicker: The home may have sold for 8 percent below the original Zestimate, but for its accuracy rate Zillow can claim 1 percent because it uses the most recent Zestimate instead of the original one.

In short, the most accurate stat here would be 8%. After all, the home literally sold 8% lower than what Zillow said it was worth. Thus when Zillow uses the most recent Zestimate instead, it’s a clever way to get much sexier stats.

One more thing.

Chasing the List Price & Fixer Upper TV show: What sort of effect does the list price have on the Zestimate? In other words, does the list price actually change Zillow’s value? This might not happen in all cases, but here’s a glaring example of the “shotgun” house from the TV show Fixer Upper. It’s a one-bedroom that was listed for $950,000 and didn’t end up selling.

In this example the list price was outrageously high, but Zillow’s algorithm looks to have simply matched the Zestimate to the list price. This might not happen in all cases, but it certainly did here.

I hope that was interesting or helpful.

Article I wrote: Here’s a piece I wrote about online valuation sites for Comstock’s Magazine last month.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: What do you think? Anything else to add?

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