Condos, halfpipes, & cooling 2-4 units

October 26, 2020 By Ryan Lundquist 32 Comments

I have two compelling trends to share today, but fist let’s talk about a concrete halfpipe at an investor flip. I’d love to hear your take in the comments.

An investor friend just bought a house in Auburn with a halfpipe in the backyard. I’ll admit the middle school skater kid in me is stoked while the middle-aged man in me wants to relive my glory days… But what should Erin do as a flipper? Should she keep it or rip it out? Is this an asset or a liability?

This is a fun conversation, but there is a serious element here because investors come across interesting things all the time and have to make real-life decisions like this. So put your real estate cap on and let me know what you think in the comments.

Check out Erin’s Instagram (thanks for letting me share).

TWO TRENDS TO WATCH:

1) Condo sales are down 14.1% this year: I mentioned last month that condos haven’t been as popular and here’s a brand new visual to show what I mean. In short, buyers have been more focused on detached homes, which likely stems from wanting more space, privacy, and a larger backyard during the pandemic. Of course in the background low rates are a big factor because they give buyers more purchasing power (and thus shape what they can buy).

2) The cooling 2-4 unit market in Midtown: The single family market has been showing huge price increases in the Sacramento region, but the 2-4 unit market in Midtown isn’t the same temperature. When looking at the graph below do you see a flattening of prices lately? Does this surprise you?

This is something to watch and we have to keep rent control and eviction moratoriums on the suspect list when trying to understand this softer trend. Yet one of the bigger issues is these units have had massive price growth in recent years while rent growth has been slowing lately. Thus at some point when investors crunch the numbers it doesn’t make sense to pay more. For reference there isn’t an oversupply of listings in this market and demand is still strong.

Keep in mind other portions of Sacramento with lower-priced 2-4 units have still been showing an increase. These other areas have rent control too, which helps me think the flattening in Midtown is more related to flirting with a price ceiling.

Anyway, I’m thinking out loud and we need more time to see the trend. By the way, thanks to Brian McMartin and Franco Garcia for having conversations with me this week about this sub-market. I really value hearing what others are seeing out there as I run stats and interpret them.

Big point 1: The market isn’t the same everywhere.

Big point 2: Don’t take the trend in Midtown and project it on other 2-4 unit properties in the region. See point #1.

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

Questions: Should the halfpipe stay or go? Why? Any thoughts about the two trends I shared? I’d love to hear your take.

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Can it count in the square footage?

October 20, 2020 By Ryan Lundquist 29 Comments

Can you include it in the square footage? I get questions like this almost every week. Is it okay to count an accessory dwelling in the living area? What about a pool house? How about a man cave or she shed? Let’s talk about this.

The straight dope: It’s tempting to lump something else in the backyard into the square footage, but that’s not appropriate per ANSI measuring standards. Basically if you have to walk outside of the house into something else that is not directly accessible to the house, we’re really dealing with something that isn’t considered to be a part of the main house. So we call that something else a studio, casita, accessory unit, pool house, she shed, or whatever. It’s just not the main house, which is why it’s not included within the square footage.

New video: I made a video to talk through some things to watch in the fall market. Enjoy if you wish (or watch here).

An Example: If you have a house at 2,500 sq ft and an accessory unit at 1,200 sq ft, it isn’t a 3,700 sq ft house. No, this is fundamentally a 2,500 sq ft house with something else. Could it be worth the same amount as a 3,700 sq ft house? Maybe. But if we only compare this type of home with other 3,700 sq ft units, we haven’t really proved what a 2,500 sq ft house with a 1,200 sq ft accessory unit is worth. The best comps will be other homes with accessory dwellings, right? Heck, maybe it’s worth even more. But we’ll never know unless we find the right comps to tell the story of value. The quick “comps” are all 3,700 sq ft, but those might not be the best representations of value.

The problem: If a property is priced based on a lumped square footage, what happens when the appraiser gets out there and needs to use smaller-sized comps that are consistent with the actual size of the main house? Is there going to be a difference in value?

The truth: It’s not an easy pill to swallow when the appraiser doesn’t include the extra space in the square footage, but just because it doesn’t count in the square footage doesn’t mean it doesn’t count in the value.

But they’re lumped together in MLS: I know, this happens all the time. A property will be sold with a lumped square footage of the main house and the pool house. We even see this happen at times in Tax Records. Let’s remember a few things: 1) The way a property is marketed doesn’t change what a property is; 2) As a non-lawyer I wonder if there is increased liability for representing a home at a larger size than it is (hopefully there is an asterisk that clarifies what the square footage represents); 3) The appraiser is very likely going to treat the two areas differently instead of lumping them together.

My advice? Instead of quickly pulling larger “comps” right away, try to isolate features such as a pool house, accessory dwelling, or outbuilding to determine what they’re worth in addition to the value of the main house. In other words, what is the main house plus the extra thing in the backyard worth? That’s the math market equation we have to figure out and it can be done by pouring through lots of data. Finding a few examples of homes that have sold with that feature is the ideal so we can try to discover what that feature commanded in terms of value. Sometimes we might even look through years of sales too. Remember we might not use really old sales as comps, but we can certainly use them for research.

Resources:
Q&A on accessory dwellings
Tips for valuing ADUs
Using older sales is sometimes the best option
Can a basement be considered square footage?

Anyway, I hope that was interesting or helpful. Thanks for being here.

Questions: Any stories to share? What follow-up questions or insight do you have? Did I miss anything?

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Six things to remember about crazy home price growth

October 14, 2020 By Ryan Lundquist 12 Comments

Price growth has been unreal lately in many parts of the country, but here are some things to keep in mind before pricing for the moon…

Six things to keep in mind:

1) County stats don’t translate perfectly: It’s easy to look at county or zip code stats and think, “Dude, my home is worth 14% more now because the median price is up by 14%.” But the market isn’t that rigid where price growth for a larger area applies equally to every parcel.

2) Picking and choosing: If we’re not careful we can pick and choose stats that benefit us the most. For instance, someone in Placer County this month could be tempted to focus on the region at 14% instead of Placer data at 6.4%. My advice? Look at all the stats instead of fixating on glowing numbers.

3) Larger homes are padding the stats: During these past few months we’ve seen buyers focus on noticeably larger homes, so it’s important to take this into consideration when interpreting huge price growth. At the least larger homes represent some of the heightened price growth lately.

4) Not every property type has the same trend: The truth is not every type of property is going to be showing the same price growth. Thus price trends could be different for vacant land, entry-level homes, the million dollar market, attached homes, 55+ communities, 2-4 units, commercial units, etc…

5) Hot Pockets: The real estate market is like a Hot Pocket taken out of the microwave a tad too early. Some portions are blazing hot while others are only warm or frozen. Like a Hot Pocket, we can say the real estate market is “hot” overall, but it’s definitely not the same temperature in every neighborhood or price range. For instance, the City of Davis seems to have very subdued price growth over the past couple of years, but East Sacramento has been a far different story with large increases. My advice? Price according to similar homes that are getting into contract rather than projecting zip code or county stats on a property.

6) It’s NOT all about prices: The question I get asked the most is, “What are prices doing?” I get it, but if we want to understand a real estate market it’s important to look to other metrics too like inventory, sales volume, days on market, SP/OLP ratio, etc.. Besides, sales are like historical artifacts that tell us what the market used to be like 30 to 60 days ago when these homes got into contract. If anything sales tell us more about the past than the present. If we want to understand the market right now it’s critical to see what’s happening with the listings and pendings (which will be future sales in about 30 to 60 days).

I hope that was helpful or interesting.

NEW VIDEO TUTORIAL: I made a graph last week to show the seasonal market and lots of people responded saying they’d like a tutorial. Here it is.

Thanks so much for reading my post today.

Any thoughts?

———————- (skim or digest slowly) ———————–

MARKET SUMMARY: For anyone interested, here are some tidbits for social media, newsletters, or in case you want to win the real estate category on Jeopardy.

– We have 20 days of housing supply in the region

– There were 41% more multiple offers this September compared to last year

– Monthly inventory is lower than it’s been in 15+ years

– There are 53% fewer listings in the region right now (not a typo)

– Sac, Placer, Yolo, and El Dorado counties all have less than one month of housing supply. Each respective county is lower than it’s been in 15+ years.

– We saw the highest number of sales for September in Sacramento County in 11 years (since 2009).

– The million dollar market has grown this year in the region. 3.3% of homes have been above one million in 2020 compared to 2.5% last year.

– It took 9 fewer days to sell this September in the region compared to last year at the same time.

– Demand has increased dramatically lately from local buyers as well as Bay Area buyers. This is part of why we’ve seen heightened pending contracts, higher prices, lower inventory, more multiple offers…

– Normally the market at this time of year would be cooling more substantially by now, but the spring buying season has been sort of extended. Yet before saying it’s simply buyers making up for the sluggish pandemic market in the spring, let’s not ignore the power of low mortgage rates. It’s no coincidence we’re seeing a hyper-competitive market over the past 90 days as mortgage rates have gone below 3%.

– In the background it looks like sales volume and pending contracts are starting to flatten. I talked about this last week. Normally during the fall season we see a dip in all metrics. That really hasn’t been the case so far, but seeing volume flatten could lead to other metrics dipping at some point.

– So far this fall season reminds me of 2012 where the market was incredibly aggressive. Prices kept going up that fall, yet there was a hint of a normal seasonal trend too as there was a dip in sales volume. We’ll see what this fall holds. For now it’s anything but cold.

WAY TOO MANY VISUALS:

You are welcome to use these in newsletters and social media with proper attribution. Scroll quickly or digest slowly.

SACRAMENTO COUNTY:

EL DORADO COUNTY:

PLACER COUNTY:

SACRAMENTO REGION:

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

Questions: What are you seeing out there right now? Anything else to add about prices?

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The aggressive & slowing housing market

October 6, 2020 By Ryan Lundquist 25 Comments

Insane. Crazy. Irrational. The housing market has been described this way in many places around the country lately. But in the midst of freakishly high demand there is still a seasonal rhythm to see in the background. Let’s talk about that.

Today’s post seems long, but it’s mostly images.

BIG POINT: Understanding what the market normally does throughout the year helps us give good advice, make plans, do a better job with valuations, and spot when something abnormal is happening.

WHAT DOES THE MARKET DO DURING THE YEAR?

Seven years in one graph? Yep. This visual looks at the average of seven years worth of sales for each month, so even though there is just one line we end up with a solid visual of how the market behaves throughout the year. This is so important because being a real estate expert involves lots of things, but one big factor is understanding how the market moves.

Tutorial: I’m actually game to do a video tutorial on how to make this visual. If I get a number of people interested I’d be glad to do that. Let me know.

Here is 2020 showing an abnormal trend…

UPDATE: I think some people are caught on my title instead of what I am communicating in the body of this post. Look, the market is not soft. Prices have continued to rise and we’re having an abnormal fall season so far in many ways. Frankly, this fall is far more aggressive than it should be for the time of year. Yet sales volume is starting to flatten too, which is a sign of some slowing. That’s what the stats and visuals are indicating right now, so that’s the story we ought to understand and tell. When saying this though I think some people hear, “The market is dull,” but that’s not what I am communicating. The market is always changing and doing different things. Why can we not clearly and confidently say, “The market is white hot, but we’re also seeing sales volume slow down”?

NOT THE SAME:

Many markets have a similar pattern to the one above, but others look totally different because of weather, being a vacation destination, etc…

MARKET UPDATE VIDEO: Here are a few things on my mind right now.

ANOTHER VISUAL:

Here’s a different way to look at sales volume. Check out this year in black compared to previous years. What is volume doing?

THE TAKEAWAY:

The black line shows sales volume looks like it hit its peak for the year a couple months ago, so even though we are calling this market white hot, we can still see a slowing trend creeping in the background. This doesn’t mean the market is dull (I didn’t say that). In short, this year we’re beginning to see a change in volume, but overall the fall season hasn’t been normal because by now prices are usually cooling off and it should be taking longer to sell rather than fewer days.

Okay, two more counties…

PLACER COUNTY & EL DORADO COUNTY

Check out the rhythm of the market in these two counties. This is a really good picture for how the market tends to behave through the year.

Now check out the black line. Do you see the increase lately? Like I said a few weeks back we’ve seen a huge influx of buyers in Placer & El Dorado County. In other words, the black line shows an abnormal amount of buyers lately. Also, we see what looks like a seasonal slowing of volume as the black line looks to be curving down.

Anyway, I hope this was helpful or interesting.

Thank you again for all of your support in my life these past months. I am fully back to work and doing my best to pace myself.

Questions: Do you think this fall we’re going to see a big slowing or barely any slowing? What are you seeing out there? I’d love to hear your take.

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