A second wave of outbreak & the housing market

June 30, 2020 By Ryan Lundquist 19 Comments

What will happen to the housing market if we have a second wave of outbreak? Quite a few states are seeing an uptick in COVID-19 cases right now, so this is an important question to ask. This isn’t about politics or fear, but having conversation.

From V to W? The market has seen a “V” shape so far where we had a decline when the pandemic began and then we rebounded. Today I interview economist Ralph McLaughlin to talk about his concept of a Flying W. It sort of takes the “V” that we’ve already seen and talks about why we might see another “V”.

Market update: Here’s my latest market update where I unpack glowing stats from this past week and some things to keep in mind if we do see another outbreak. Watch below (or here).

Ryan: What is The Flying W?

Ralph: The “Flying W” is generally the shape of the housing market recovery that we’re forecasting at Haus, which essentially is a wavy one. You can think of it as really two “Vs” next to each other, where the initial drop in activity due to the pandemic is sharp and severe, followed by a rebound to near pre-pandemic levels, and then the process repeats itself until we’ve recovered sometime next year. We’re thinking the process will repeat itself for a second time for three reasons. First, we think the initial rebound is simply due to pent-up demand for home buying that would have otherwise occurred in March, April, and May but will simply be pushed to June, July, and August. But after that, we’re not expecting new demand to replace it at comparable levels, which will lead to another drop in activity. Second, and I think we’re seeing this already, is that the virus will make a comeback, which will lead to less demand for homebuying in the fall. Third, there’s a possibility that we’ll see a broader impact on housing demand (including rentals) if the federal unemployment insurance bonus runs out at the end of July.

Ryan: What sort of stats would you recommend following to know if a “W” shape was beginning to happen?

Ralph: The important thing to note here is that some indicators are likely to follow a W, while others might follow an additional path. We’re expecting employment growth, home sales, price growth, and housing starts to follow a “W’ pattern, whereas we’re forecasting refinance activity to be more waterfall shaped. Other indicators are likely to buck the trend. For example, if renters are hit harder than homeowners, then we could actually see an uptick in the homeownership rate.

Ryan: Do you have any advice for buyers and sellers as they consider a possible second wave of coronavirus?

Ralph: Sellers shouldn’t be too worried at this point. It appears in the aggregate, sellers freaked out more than buyers during the pandemic. We saw large decreases in inventory across the country. And though demand certainly fell, it didn’t fall as far as supply. So the result has been a surprisingly robust market in many markets across the country. I recently sold my home in Virginia and was pleasantly surprised to have multiple offers, so buyers shouldn’t be expecting to get massive, if any, discounts like they could 10 years ago.

Ryan: Any tips for the real estate community?

Ralph: Utilize technology. We’ve come a very long way over the past decade in how people search for, tour, finance, and close on homes. Those who can utilize technology will have a competitive advantage during a downturn and thus will be more resilient. Buyers are becoming savvier with narrowing down their search list using online search portals, agents are becoming more savvy with how they use tools to virtually show homes and hold open houses, lenders are findings ways to streamline document sharing and signing, and title companies utilize platforms that make closing more transparent and efficient. The more the real estate community can utilize these technologies, the more resilient it will be.

Ryan: Thanks Ralph. I appreciate your time today.

Closing Thoughts: I’m really careful about discussing the future, but today I wanted to talk with Ralph because I think we need to think through what might happen to the market with a second outbreak and plan ahead. In my mind the two big issues that could influence the market include people’s perception of safety and governmental regulations. If we go on lockdown again, for instance, that could be a huge factor in slowing down the real estate market. Would it be exactly the same thing we saw in late March? Nobody knows. For now though it’s fascinating to consider whether our “V” shape could turn into a “W”. Let’s keep watching…

Manage your mental health: One last note. I realize this is a stressful time for many (including myself), so my hope is that you would have a deep sense of peace no matter what happens. And if you’re getting triggered by so much virus talk, maybe tune out of social media. My sense is having peace is not going to happen by accident so we all need to figure out how to cultivate that. Know what I’m saying?

Thanks for being here.

Questions: How do you think a second outbreak might affect the housing market? Do you think we’re going to go on lockdown again? I’d love to hear your take.

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Lot size mistakes & pent-up demand

June 24, 2020 By Ryan Lundquist 54 Comments

Two things. Let’s talk about a very easy mistake to make with lot sizes and then let’s look at pent-up demand right now.

LOT SIZE MISTAKES: I’ve seen it happen twice lately where Tax Records lists the lot size, but it’s actually incorrect. In one instance Realist showed the lot was five acres when in fact it was only two acres. In another example it said two acres when it was less than one. Yikes.

My advice? Thankfully most of the time we can trust the lot size in Tax Records, but it’s still a good idea to quickly double-check just to be sure. After all, listing the wrong lot size in MLS or an appraisal could lead to litigation, right? What we can do is view the plat map to see if there is anything abnormal as well as try to piece together the lot size (easy to do if it’s a rectangle). Also, when viewing a property in MLS we can click on “See Map” and then “Layers” to view the lot size. All I’m saying is taking an extra minute to do these steps is a good habit that can be a safeguard. How would you handle it though if the lot size was different in Tax Records, MLS, and the plat map? Which one are you going with? I’d love to hear your take in the comments.

NOTE: A land surveyor is going to be the definitive source. I’m just saying my advice above helps give us clues into when something is not right with a lot size.

Moving on to trends…

WEEKLY VIDEO: I’m really excited for this week’s video. On one hand it looks like the seasonal market has begun to crest, BUT it’s as if real estate has sped up a little after slowing down. Watch below (or here).

PENT-UP DEMAND: Check out these visuals to show some serious pent-up demand being expressed. For eleven weeks now the market has been rebounding after an initial dip when the pandemic began. And for five weeks in a row we’ve literally had MORE pending contracts than new listings in Sacramento.

VOLUME NO LONGER DOING THE LIMBO: A big trend we’ve been seeing is sales volume is starting to come back. In fact, this past week is only down about 10% from the same time last year. This is huge because a couple months ago we were consistently down 30-40%. The x-factor is having more pending contracts from 4-6 weeks ago finally starting to close.

LET’S WATCH THE COVID-19 NUMBERS: Unfortunately we’re starting to see COVID-19 cases tick up again in quite a few states. As it relates to real estate it’s going to be important to stay in touch with the psyche of buyers and sellers since a trend of more cases can shape whether people engage or sit out of the market. Moreover, it’s a wonder if different areas and states will have some form of lockdown again too.

ONE MORE THING: If you need some background noise, here’s a 30-minute Q&A I did with Rachel Adams Lee to talk about the Sacramento market. And yes, I mentioned my love for Breaking Bad and that I don’t like Downton Abbey (sorry). Enjoy if you wish.

Thanks for being here.

Questions: Have you ever seen that lot size mistake in Tax Records? What are you seeing in the market right now? I’d love to hear your take.

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Don’t hold your breath for a Covid discount

June 17, 2020 By Ryan Lundquist 9 Comments

“Why is there not a pandemic discount? I don’t get it. The market has been going down.” Someone was angry with me recently after an estate appraisal didn’t come in low enough in his mind. The thought was prices should be dipping because we’re in a pandemic, but that hasn’t been happening.

The Truth: Lots of people expect the market to be weak right now.

The Takeaway: Let’s be careful not to impose ideas on the market about what we think should be happening. Instead, let’s look to the numbers to form our understanding. Likewise, it’s critical to be objective about the present and keep an eye on glaring uncertainties regarding the future. But let’s do this without viewing stats through a rose-colored lens or painting every conversation with a doom and gloom brush.

Anyway, that’s what’s on my mind…

———————— big monthly update below ————————

BIG MONTHLY UPDATE:

This is long on purpose. Skim or digest slowly. Your call.

FREE MARKET UPDATE: On Monday June 22nd at 10am PST I’m giving a one-hour free market update via Zoom through the Sacramento Association of Realtors. Please sign up here.

WEEKLY VIDEO: Here’s my weekly video update to talk through the latest trends (shorter this week too). Watch below (or here).

Now some big topics…

FLAT PRICES: When we look at the latest price trends, it’s pretty flat. As you can see, the stats show modest price gains since last year. Granted, this month was more subdued than last month, so before writing home about this trend we need a few more months of data to fully understand the market. Remember, this doesn’t mean the market is dull because it’s actually quite competitive. It doesn’t mean every price range and neighborhood are flat either. But it does remind us prices haven’t been going insane despite the market feeling ultra-competitive.

CRESTING FOR THE SEASON: Based on the next three images, it looks like the spring season has started to crest. We’re seeing a dip in prices and we’re having less multiple offers.

NEXT MONTH THOUGH: When sharing about flat prices, I’ve been tending to get reactions saying price metrics in a couple months may show an uptick again because mortgage rates have gone down lately. Look, that’s possible and we can adapt our narrative if that happens. To be fair, there’s nothing normal about life and real estate lately, so anything is possible for the future and we’re certainly experiencing some abnormal pent-up demand right now.

SALES VOLUME DOING THE LIMBO: Here’s a brand new visual to show most counties in May were down 30% or more in volume from 2019. Do you like this one? Should I keep making it?

LEARN TO MAKE A GRAPH: In case you didn’t see this on my YouTube channel, I put out a new tutorial for how to make a graph with three price metrics. This can be made for a zip code, city, county, etc… My advice? Set aside an hour in your schedule to make learning this happen. Becoming more visual changed the way I see the market and it frankly changed my career.

LOW RIDING: We had the second lowest month of sales volume for May in Sacramento County over the past twenty years.

BUT VOLUME IS ACTUALLY INCREASING: When we look at sales volume by the week instead of the month, we’re starting to see more sales close. In fact, for four weeks now we’ve seen an uptick. This change reflects pending contracts from about 4-6 weeks ago finally starting to close. I suspect in coming months we’ll keep seeing volume increase since pendings have been on fire lately.

MORE PENDINGS THAN NEW LISTINGS: For the fourth week in a row we literally had more pending contracts than new listings hit the market in the Sacramento Region. This shows buyers have been coming back to the market more quickly than sellers. Let’s remember buyers have strong incentive to get into contract quickly to lock in a historically low mortgage rate, but sellers just don’t have that same sense of urgency.

CHANGE BY THE RANGE: Here’s a look at what’s happening with different price ranges. These two images compare the change in April and May from 2019 to 2020. I don’t know that there’s anything revolutionary here, but what we want to watch over time is whether different price segments are slowing or speeding up. I think with a few more months of data we might have more to consider.

INVENTORY AT DIFFERENT PRICE POINTS: What’s happening with inventory in different price segments? Well, it’s actually pretty tight, but let’s watch above one million closely because it’s trending a little higher. Granted, it’s pretty normal to have 8-10 months of housing supply at the highest prices, but still we’ve seen more of an uptick lately.

2,651 FEWER LISTINGS SINCE THE PANDEMIC: Over the past three months there have been over 2,500 fewer listings compared to the same time last year. No wonder why it feels so competitive…

Now here are more visuals. As if this post wasn’t long enough already…. See my sharing policy for 5 ways to share my content (please don’t copy my posts verbatim).

SACRAMENTO REGION:

SACRAMENTO COUNTY:

PLACER COUNTY:

EL DORADO COUNTY:

Okay, let’s wrap this thing up.

Questions: What stands out to you about the market right now? What are buyers and sellers saying? I’d love to hear your take.

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The skinny on accessory dwelling units

June 10, 2020 By Ryan Lundquist 27 Comments

I’ve been getting a ton of questions lately about accessory dwelling units, so I wanted to talk through some of the bigger issues. Skim to questions that sound interesting or take some time to read. Enjoy if you wish.

What is an accessory dwelling unit (ADU)?
There are lots of definitions out there. In short, an ADU is typically a detached or attached dwelling unit meant for independent living, so it includes a sleeping area, bathroom, and cooking area. California, Sacramento County, and other areas may describe ADUs a little differently.

If a unit doesn’t have a kitchen is it an ADU?
An ADU must have a cooking area. Otherwise we’d call it something else. Personally I’d probably call it a casita, but that’s just me. Anyway, if a builder constructs an “ADU” and it only has a bedroom and bathroom without a kitchen, we just wouldn’t call it an accessory dwelling.

WEEKLY MARKET UPDATE: By the way, here’s my weekly video market update called Why aren’t home prices dropping? Watch below or here.

Is my pool house an ADU?
Probably not. Remember, if the pool house doesn’t have a kitchen, bathroom, and there is no sleeping area, it clearly doesn’t qualify as an ADU. I think sometimes if we step back and recognize we’re calling something a “pool house” too, that’s probably a clue that it’s something else.

What other words are used to describe an ADU?
There are countless words such as granny flat, casita, in-law quarters, mother-in-law apartment, garage apartment, etc… This could vary from market to market and person to person.

Is it okay to lump the square footage of the accessory unit into the square footage of the main house?
No. This happens all the time in real estate listings, but if you have to step outside the house into something else, it’s really not proper to include that other space in the square footage of the main house per ANSI standards. Think about it logically too. Imagine a 1,600 sq ft home with a 400 sq ft ADU. Is this really a 2,000 sq ft house? Nope. Maybe the market will pay the same price as other 2000 sq ft homes, but that’s beside the point because we’re fundamentally dealing with a smaller home with an ADU rather than one larger home. These are two different things, right? The problem becomes if we only choose 2,000 sq ft comps we haven’t really proved what a 1,600 sq ft home with an ADU is worth.

What if the square footage in a listing includes the ADU?
We see this quite a bit. I get it because the listing is advertising the total size of all structures on the lot. I just hope there is an asterisk or explanation somewhere in the listing that the square footage represents both the house and the accessory unit. This is important for clarity, maybe liability, and it helps appraisers be more informed when choosing comps. In short, just because it’s listed a certain way in MLS doesn’t mean the market or appraisers will recognize all the space as gross living area.

What if Tax Records shows the ADU in the square footage?
That happens. But just because Tax Records shows the property as 2,000 sq ft doesn’t mean that is what is legal or the way the market sees the units. If you want to know what is permitted it’s probably a good idea to rely on the building department (and hopefully they have good records).

It’s an ADU because it looks like one, right?
It’s key to understand what something is. I recall a unit permitted as a residential office even though it looked like a full-fledged second living space. It had a kitchen, bedroom, and bathroom, but the one thing it lacked was a permit to be an ADU and to be rented. This is where permits matter greatly. If it looks like a duck and quacks like a duck…. Well, it’s not always a duck when it comes to being an accessory unit. An owner might say, “This was fully permitted.” But the real question is, “What was it permitted as?”

How do you value a property with an accessory unit?
That’s a big question. I wrote a separate post about that. In short, I would look at it like a puzzle and consider lots of factors including comps, rental income, and lots of other logical points.

How many accessory units can one property have in California?
On a single family lot you are allowed one ADU unit as well as one JADU (Junior Accessory Unit at 500 sq ft max). Here is an informative piece from CA for Homes. Please check code in your local area of course too.

Is a single family home with an ADU considered a duplex?
No. There is a difference. I wrote about that here. The struggle is how the lending community and appraisers talk about accessory units vs full-fledged two-unit properties isn’t always the same as the way a city or county thinks about these units. There is also a value aspect to consider. Typically each unit in a traditional two-unit property contributes very significantly to the value whereas as an accessory unit is often “accessory” to the value. In other words, an ADU might not sway value as much for a single family home compared to say taking away one of the units in a traditional duplex.

How do you find comps?
This gets a little tricky because in MLS these units are often called a range of things. Personally I search the property description field and I’ll see what comes up when I type in words like granny flat, accessory unit, ADU, second unit, in-law quarters, etc… Sometimes I even search for two homes on one lot because these units are sometimes listed that way. However, in a map search in MLS you can go to the “other structures” field and then select “guesthouse.” That’s what I did in the image below and look how many properties came up when looking at the past five years of sales. Granted, some of these pins aren’t truly accessory dwellings because they’re a pool house, bonus outbuilding, she-shed, etc.., but this is a great start nonetheless.

What about CC&Rs and rent?
In some areas an accessory unit might not be able to be rented per CC&Rs. If California law has recently superseded this, someone can let me know (people have been emailing me to say California law has, but I haven’t seen anything definitive yet to show these units can be rented (I will update this portion of the post when I hear more)). Otherwise I’ve encountered scenarios where a neighborhood’s CC&Rs will mandate a guesthouse can only be occupied by family members and is not allowed as a rental. I’m not a lawyer, so I cannot speak to any legal issues. I’m just saying before advertising a structure’s rental income in a listing or appraisal, be sure you know the structure can be rented. This might affect value, right?

What do you think about an ADU assessed at the cost of the unit?
I see this happen quite a bit. This isn’t a knock at any Assessor of course. It’s possible that buyers would pay the full cost to build in the resale market, but very often the market doesn’t pay dollar for dollar. In short, if you feel the assessed figure is too high you’re going to need to find out the process to dispute the assessment and show market support for your value opinion. Keep in mind I’m talking about a brand new accessory unit because when it is built you’ll get a supplemental assessment in the mail. As always, if there is nothing to argue, don’t argue. If you do feel value is off though, then be diplomatic and support your opinion with data. Or hire a local appraiser to illuminate market data (the appraiser cannot be an advocate for you though).

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

Questions: What else do you wonder about ADUs? Or if you work in real estate, what do you get asked? I’d love to hear your take.

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