The crazy market, bubble talk & crunching numbers

The real estate market has been screaming forward at an incredible pace. It’s been going fast. Maybe too fast. In fact, The Sacramento Bee reported median prices saw a 22% increase over the past year in Sacramento County, and the Sacramento Association of Realtors reported the median sales price is now back up to $200,000 after over four years of being below that point (see PDF report).

The market has certainly felt “on fire” lately, which has caused many to remember the “glory days'” of real estate a decade ago. I know when I’m making upward adjustments in my appraisal reports due to an increasing market, I can’t help but remember the “boom” years of 2003 and 2004. Yet at the same time we are starting to hear more talk about a real estate “bubble” forming. After all, there are definitely some elements helping to prop up the market.

Market Tidbits & Trends:

1. Jobs: It’s interesting to note during the “boom” years a decade ago the unemployment rate in Sacramento County was closer to 5% compared to 9.9% right now. This begs the question whether such rapid appreciation is sustainable since the job market still needs strengthening. In other words, if value continues to increase quickly, when will buyers (non-investors) no longer be able to afford higher prices? Equally important, will renters be able to afford higher rents on the plethora of available rentals?
2. External Forces: The market is being driven in large part by external forces (investors, low inventory and interest rates) rather than the local economy. Unemployment in Sacramento County has decreased from a high of 13.2% in July 2010, but 9.9% is still high, isn’t it?
3. Blackstone: Since August 2012 the private equity fund Blackstone has purchased 461 sales on MLS according to Tax Records. This represents 4.28% of all MLS sales during that time period. Other sources report they have purchased 1000 properties since August, but I’m going with what Tax Records says for the time being.
4. Crazy Pricing: It’s understandable to see price increases on listings, but it’s important to still look at other competitive sales in the neighborhood rather than simply apply a regional or county-wide metric to a specific property. After all, larger pools of data may not be indicative of trends in every neighborhood or every type of property either. Ultimately when we read that values have increased by 22% over the course of the year, we need to consider that ample investor flips at the top and a decline of foreclosure inventory at the bottom have surely helped boost up median price figures. Yes, the market has increased this year, but we cannot simply apply a 22% figure to each neighborhood without considering the aforementioned market dynamics that have given median price numbers a boost (this is especially true under $200,000).

Should this property be listed at $200,000? I recently came across a flipped house in Rancho Cordova that sold in August 2012 around $160,000 and is now pending at $200,000. It’s a sign of the times to see an investor wanting to flip an already flipped property in such a short period of time, yet when looking at the numbers, the market has not increased by nearly 20% since August. While I wouldn’t be surprised to see the property close well above $160,000, a $40,000 increase is still steep when considering the data.

Let me share some graphs with you as an example when considering price increases in Rancho Cordova (north of Highway 50).

This graph shows an increase in the market, but can you also see how less sales at the bottom can make overall price numbers look stronger than they are?

Prices in the neighborhood have increased over the year. That’s very clear when looking at data in the entire neighborhood. However, what do you make of listings being priced so much higher than the most recent sales? Is there justification for such an increase? Could the increase in list price be a result of legitimate market appreciation? Could some of the increase be due to fewer available listings as well as more listings in pristine condition? Might some listings simply be overpriced? There are so many factors to consider.

For further reference, here are all competitive listings to the property that previously sold at $160,000 (this property is slightly over 1200 square feet).

The property that sold in August for $160,000 is slightly over 1200 square feet, so let’s take a look at all competitively-sized sales in the neighborhood. There is one recent sale at $200,000, but this sale is actually newer in age and not competitive to the subject property. Does it look like values have increased from $160K to $200K since August?

This last graph helps illustrate a trend for a segment of properties over time. This is one of the ways I prefer to look at a neighborhood market because it helps give a picture for competitive properties instead of data from an entire county, city or zip code – which may or may not reflect trends for the property being appraised or listed.

What are you seeing out there? Anything you’d like to add?

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