Price reductions don’t mean the market is crashing

September 14, 2021 By Ryan Lundquist 12 Comments

We’re seeing more price reductions lately. Does this mean the market is starting to collapse? Are things beginning to turn? Is this 2008 all over again? I’ve been getting great questions like this lately, so let’s talk shop.

Teaching my favorite class: On September 28th from 9am-12pm I’m teaching my favorite class at SAR called How to Think Like an Appraiser. It’s three hours, which sounds painful, but I love this one because we have space to dig deep into comp selection and adjustments. Sign up here.

5 THINGS TO KNOW ABOUT PRICE REDUCTIONS

1) Price reductions are normal: It’s normal to see more price reductions from the summer through the fall season. The danger is it’s easy to observe normal trends through a doom and gloom lens. The issue is demand changes from the spring and there is less attention from buyers as people are focused on school, vacation, and getting into a fall rhythm. It then takes sellers a bit to adjust their expectations and find proper pricing in a cooler market.

2) Anything can be overpriced: Over the past week in Sacramento there were price reductions in every single price range. This tells us it’s possible to overprice at any segment of the market.

3) Technically the market is NOT way overpriced: The local housing market is seeing more price reductions, but I don’t think it’s fair to say we have an overpriced market. Like I said last week, stats are still not normal as the market is more aggressive than it normally is for the time of year. According to Altos Research 28% of recent listings have price reductions in Sacramento County. Anyway, check out Altos and see Placer, Yolo, and El Dorado too. I don’t pull stats like this regularly, but a figure at 28% sounds about right as it fits with other stats I do pull. I can bore you with details in the comments if you wish.

4) Be careful about judging: The danger in real estate is to think whatever we are seeing with a few properties is what the entire market is experiencing. Maybe. Maybe not. It’s like me noticing several people wearing overalls. Is it a trend or did I just happen to see a few friends reliving their glory days from the 90s? Look, personal experience is really valuable, but it’s important to be sure we’re looking at stats on a bigger level beyond what is in front of us.

5) A closing note for sellers: It’s critical to nail the list price right now and I advise being in touch with the current climate of fewer offers, taking longer to sell, and more price reductions. It’s easy to be infatuated with hot headlines or cling to the idea of fetching a massive cash offer from an out-of-town whale. My advice? Price for the market and see what happens. Don’t price for the unicorn. It’s still a competitive market, so you may be able to get a few strong offers, but it’s not what it was four months ago. Oh, one more thing:

Anyway, I hope this was helpful.

Thanks for being here.

Questions: What are you seeing out there with price reductions? What advice would you give for pricing a property right now?

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The housing market is trying to get back to normal

September 9, 2021 By Ryan Lundquist 24 Comments

Normal? That’s not a word we’ve used much to describe the housing market lately, but we are finally starting to see some normalcy. Many parts of the country are showing what looks to be normal seasonal slowing and that is a sight for sore eyes. Anyway, let’s talk about this and then I have lots of local stats.

The normal that should be happening: The market right now should be slowing for the season. That’s what normally happens and it’s what we are seeing in so many areas of the country too.

Sorta kinda normal: When a market cools for the season we tend to see some of the signs in the image below to one degree or another. Even though we are beginning to see many of these things show up in the market, we really cannot say the market is fully normal yet because supply and demand are still too imbalanced. But any hint of normalcy lately is actually a really good thing. Imagine the chaos of seeing another year like last year where the market just kept going up through the fall. That is exactly what we don’t want to see.

Anyway, which signs are you seeing or not seeing in your area?

Now let’s talk about slowing.

I’ve had a number of emails lately critiquing my use of the word “slowing,” so I wanted to talk about this openly. I hope that’s cool. If this isn’t your thing, just scroll down. By the way, I’m always good with constructive critique too.

Bro, don’t say slowing: Over the past few months the market has slowed. Or wait, it cooled. No, the temperature changed. I mean, it’s normalizing. Uh, it’s actually stabilizing. Thankfully there isn’t just one way to describe things. I’ve been talking about a seasonal slowing for months because that’s the story the stats are telling. But the word “slowing” almost seems offensive to some, so let’s talk about that.

The market isn’t fragile: The housing market is big and I feel like it’s splitting hairs to argue about whether we should use the word slowing, normalizing, or cooling. Here’s the thing. Use whatever word you feel best represents the market, but it’s probably going to take a few key phrases to do the trick. No matter what, recognize the market is NOT fragile (“fra-gee-lay“) and it doesn’t need you or me to protect it with glowing words. Look, I can think positive thoughts all day long about cryptocurrency, but that doesn’t change the value of bitcoin. In terms of housing, the market is dynamic, multi-layered, complex, and there is no such thing as jinxing the trend by using less-than-glowing words.

Moving fast & slowing: If you aren’t down with the word slowing, that’s fine, but in my mind it’s a reasonable way to describe the market. But to say slowing alone isn’t perfect either as I keep saying because the market is doing two things. It’s moving really fast. And it’s slowing for the season.

Okay, I won’t talk about this again for a while.

My commitment: I will never spin data or sugarcoat things to sound better or worse than they are. My goal is to be neutral while presenting analysis based on the numbers. I’ll come up with helpful word pictures to describe the market too (and sometimes crazy comparisons).

Respectfully,

Ryan

Any thoughts?

—–——– STATS SHOWING SOME NORMALCY ———––

Skim or digest slowly.

THE SHORTER VERSION:

The market is still moving faster than it should be for the time of year and stats are still just about at all-time high levels, but the market is hands-down cooler than it was a few months ago. That’s the story stats are telling and it’s absolutely what I’m hearing from the trenches of escrows. “The market is not slow, but it’s slower than it was” sums it up perfectly.

Overall it’s starting to take a little longer to sell, there were fewer multiple offers last month, and prices dipped from their peak in June. But overall stats from July to August were pretty flat, so if someone said the market felt a bit horizontal, I wouldn’t bat an eye. Of course we do expect some renewed attention on the market as the kids get back to school, so stay tuned for that.

One quick thing. I’m watching cash purchases and while we still don’t have much cash in the market, there has been a noticeable uptick these past two quarters.

Some visuals eh…

NOT AS MANY MULTIPLE OFFERS:

For four months in a row in the region we’ve seen multiple offers subside. Last month 62% of sales had more than one offer and that’s one of the most competitive months ever, but there is no mistaking a cooling seasonal trend too.

IT’S LESS COMPETITIVE:

The market is still ultra-competitive, but this image is crystal clear that the temperature of the market has changed in recent months. Even though prices were flat from July to August, this visual shows clear slowing from a few months ago. This is exactly what we should be seeing at this time of year. But here’s the thing. We should easily have half or more of sales selling at or below the list price, so this market is NOT normal yet.

This visual below is striking because it shows definitive change. A few months back I started to point out this change and it was incredibly minor then. I know at times it’s easy to scrutinize mentioning small changes and some people even get bent out of shape, but sometimes small changes are the beginning of a trend. That is EXACTLY why we pay attention to the small stuff (while not getting sensational).

PRICES PEAKED IN JUNE:

These visuals help show prices look to have hit their seasonal peak in June. This is pretty normal and historically August is sometimes lower than July and sometimes about the same.

VOLUME IS SLIDING (NORMAL):

The number of sales peaked in June and now we’re seeing fewer sales happening. This is exactly what should be taking place. The red line represents 2021 and it’s very consistent with the green line (which is the market average).

INVENTORY IS UP SLIGHTLY:

Monthly housing supply is still sparse, but it’s up from a few months back. It actually declined slightly from July to August in most local counties. Ultimately supply is still SO LOW. But isn’t it amazing how with even this slight uptick lately we feel a difference in the market?

IT’S TAKING LONGER TO SELL:

It took a few days longer to sell last month in Sacramento County, which is what we should be seeing at this time of year. Properties are still selling about as fast as they ever have, but clearly we’ve seen a softer trend over the past few months compared to the intensity of spring.

HOW PRICES ARE DISTRIBUTED (NEW IMAGE):

This visual shows how prices are distributed throughout the market. In other words, about 10% of homes last month sold between $300-400K (just to give a clue on how to read this one). This is a new visual. Do you dig it?

SMALLER HOMES ARE SELLING (HUGE POINT TO WATCH):

It’s normal around this time of year to start to see the types of homes selling change. We tend to see the largest homes in the market sell during the height of spring and then smaller homes for the rest of the year. There was actually a huge spike of larger homes selling during the first year of the pandemic, so it’s going to be interesting and important to watch how this trend unfolds. Keep in mind some of the massive price increases over the past year has to do with a focus on larger homes.

LAST YEAR VS THIS YEAR:

Year over year comparisons get a little weird these days because the market was so atypical last year, but in my opinion this is still worth digesting since we want to be good students of the market. I suggest taking these percentages with a grain of salt and recognize these percentages DO NOT actually mean every house is worth that much more either.

JULY TO AUGUST FEELS A BIT HORIZONTAL:

The market was somewhat flat month to month. Nothing too sensational. Keep in mind some of the smaller counties have fewer stats, so the numbers bounce around each month. This is why I would suggest giving strong weight to Sacramento County and the region as a whole to decipher the bigger trend in the market.

ONE LAST VISUAL:

Price per square foot as a metric has yet to soften. I think it’s going to take a little longer for that because smaller homes have been selling these past few months and since smaller homes tend to have a higher price per sq ft, it only means this metric is going to be a bit more inflated.

Anyway, this is getting too long…

Do you see what I mean about the market trying to get back to normal? What a different vibe from last year.

MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.

Thanks for being here.

SHARING POLICY: I welcome you to share some of these images on your social channels or in a newsletter. In case it helps, here are 6 ways to share my content (not copy verbatim). Thanks.

Questions: What are you seeing out there in the market? What do you think about my take on the market not being fragile?

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Fires, multiple offers, & new flooring

August 31, 2021 By Ryan Lundquist 40 Comments

It’s been a heavy week around here and I have a few things on my mind. Let’s talk about the fires, the new norm of fire season, and then I have some fresh stats to share.

Fire rampage: It’s been a brutal week in Sacramento. I think so many locals feel deflated as we watch the Caldor Fire rage. As of yesterday 471 homes are reported to have been destroyed and the fire is heading toward South Lake Tahoe too. It’s a gut punch to see local friends displaced and to hear so many stories of loss. Hang in there everyone and let us pray.

Fire season: We are getting used to regular catastrophic fires in California and it’s numbing to recognize that fire season is now a thing. I was just thinking how unfortunate it is to be in touch with Air Quality Index (AQI) numbers to the point where I have conversations about the daily AQI. In terms of real estate, the smoke is something affecting everyone and it’s now on the radar for people making decisions about where to live. While I don’t think smoke is the primary decision for moving out of the market, it’s at least somewhere on the list now for why people might move.

Appraisals after a disaster: I don’t cover the fire territory for work, so I’m NOT fishing for business. I just want to let you know I’ll be available to help answer questions and be a resource. People are definitely going to be dealing with appraisers through the insurance process as they rebuild. Anyway, here is an interview I did about appraisals after a disaster in case it’s helpful. Also, here is a post called “The real estate left behind after a fire” in case you’re wondering what happens to a market after a disaster. Keep in mind not every area is going to react the same exact way though.

Multiple offers: Okay, some quick stats. August sales stats show fewer multiple offers compared to July. On one hand the market slowed down last month, which isn’t surprising because that’s what tends to happen around this time of year. But on the other hand we’re still basically having one of the most competitive markets ever. I find some people tend to focus only on the fact that the market is still nuts while others focus only on the slowing. My advice? Pay attention to both because the market is experiencing both dynamics at once. In other words, don’t ignore one for the sake of the other. The market is both glowing and slowing.

What the market should have done: Here’s one more image. The blue line shows the market we’ve had over the past year and the gray line shows the market we should’ve theoretically had if the trend was normal. In short, the market in 2020 traveled way outside the lines of a normal trend and we’re still not even back to normal levels yet.

A message to the future owner: In lighter news, my family got new flooring this past weekend and here’s a message I left for the future owner under the new planks we installed. By the way, a previous owner clearly didn’t believe in drop cloths because nearly every room looks like this. It’s insane to me that someone would leave the wood flooring looking like this.

Covering wood: And yes, we covered the hardwood. Some people are offended by that, but I’m really happy with the luxury vinyl planks we chose. It was going to be too much work to sand, repair, and add wood to other areas of the house that did not have it. I prefer the look of a wider plank also. Anyway, not that I needed to say this, but I wanted to explain in anticipation of comments. By the way, it’s cool with me if you would’ve done things differently. You do you.

Be blessed.

Questions: How do you think we can help people going through the fires right now? In terms of multiple offers, what are you seeing out there?

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How bedroom value adjustments DO NOT work

August 25, 2021 By Ryan Lundquist 39 Comments

How much is a bedroom worth? What sort of adjustments do you give when looking at two houses with a difference of one bedroom? It’s always $10,000, right? Or wait, someone else said $20,000. What’s the truth? Let’s talk about this today. I’d love to hear your take in the comments.

SacBee presentation: This week I was honored to give a video interview for 30 minutes or so to The Sacramento Bee. Check it out (subscriber content).

THE BIG POINT: Don’t use one figure every time you see a bedroom count difference. That’s just not going to work. Thanks for coming to my TEDx talk.

FOUR REAL ESTATE TRUTHS:

1) There is no standard adjustment: There isn’t a one-size fits all bedroom adjustment. I know many of us were taught to adjust by $10,000 or $20,000 whenever we see a difference in bedroom count, but that’s just not how the market works. It sure would be easy if there was a quick adjustment to give any time we saw a difference, but the problem is canned adjustments won’t work in every price range, market, or location. I wrote about this more in, “Why a little black book of value doesn’t exist in real estate.”

2) Getting logical: The difference in value between a one-bedroom unit and a two-bedroom unit could be quite substantial, right? In contrast, the difference between a four-bedroom home and a five-bedroom home could be minimal. This goes to show there really isn’t a standard adjustment to apply for every single difference in bedroom count. Frankly when valuing a one-bedroom condo, I’m really looking at one-bedroom units for comps because I know there can be a huge value difference. In other words, it would be a massive mistake if I only used two-bedroom units and didn’t even look at one-bedroom units. In contrast, when pulling comps on a five-bedroom home there could be some four-bedroom units that really sell at the same level. The key is that we compare and contrast the comps to understand if there really is a price difference rather than imposing our preconceived ideas on the property. Sometimes we see a difference and there is obviously an adjustment to give because the market clearly paid more or less because of the difference. Other times we see a difference in bedroom count and we have to be bold enough to recognize that despite the difference there really isn’t any difference in value. So sometimes the best adjustment is giving no adjustment.

3) Exceptions to the rule: Sometimes modern units in Midtown only have two bedrooms despite a larger square footage and these units still command a price premium. The issue is the buyer pool doesn’t often need four bedrooms to fit a family, so it’s not a big deal to have fewer bedrooms compared to the suburbs. Or 55+ communities almost always have only two bedrooms and it may not be a premium at all to have an extra bedroom since usually just one or two adults live in the space. I recently met someone building a modern home in Sacramento and people are telling her to be sure to build at least three bedrooms. I mean, I generally like to see at least three bedrooms, but for this custom modern home the buyer pool will likely be good with only two bedrooms for the size of the home. Ultimately it’s easy to judge a home for not having enough bedrooms based on what we’d see in a typical tract area, but sometimes we have to back up and realize a lower bedroom count doesn’t always lead to a lower value.

4) Looking to the market: So what is the proper adjustment? Well, we have to look to the market to understand if there is a price difference. Ideally if I’m appraising a 4-bedroom home it’s best to use other 4-bedroom comps so I don’t even have to consider any difference. The problem is if I only use 3-bedroom sales as comps I haven’t really shown what a 4-bedroom home is worth. If I have some sales with varying bedroom counts though then I can start comparing and contrasting these properties to try to discern if there was a price difference because of having a different bedroom count. Of course the price difference might really be about the square footage, so I have to be careful not to double-dip on adjustments by automatically adjusting for square footage as well as bedroom count.

Okay, this isn’t a post on how to give adjustments because that could be a long topic, but here’s a piece I wrote called “4 questions to ask when giving real estate value adjustments” that might give some more insight.

Questions: How much were you taught to give for a difference in bedrooms? Anything else you’d like to add? What did I miss? I’d love to hear your take.

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