Everyone knows appraisers use sales during an appraisal, but how do listings fit into the picture? What can listings tell us about the market?
The Scoop on Listings: Paying attention to listings is critical for both appraisers and the real estate community because they can help us see what the market is doing. Think about it this way. Sales show us what the market used to be like 30 to 60 days ago when these properties first got into contract, but listings help us see what the market is like right now. In other words, sales are pieces of history to illustrate the immediate past, but listings more accurately reflect the temperature of the current market.
On top of using three sales, appraisers are basically required to use 1 or 2 listings for most lenders. This means appraisers will need to include a couple active or pending listings in the report that support the appraised value. Keep in mind appraisers may or may not use listings in private appraisals for divorce, estate planning, litigation… If a market is increasing, listings will likely be priced higher, and if a market is cooling or declining listings are probably going to be priced lower than the most recent sales. Sometimes though listings are simply pried too high as shown below:
This graph of neighborhood sales shows listings are priced significantly higher than the most recent sales. Part of the issue in this neighborhood is there are not many listings, which can skew the median price. But the thing is a number of neighborhoods in the Sacramento area are showing a similar trend right now with listings priced too high. As you can see, current sales are higher than they were during the beginning of the year, but the market has actually flattened out lately in many areas. This is why higher priced listings don’t always mean value is truly at that level. Sometimes when a market slows down it takes a bit of time for listings to get in sync with the change that happened. Are buyers actually making offers at those higher prices? Does it seem reasonable for value to be that high? Has something changed in the market so that current listings are legitimately marketable at higher levels? The same is true for low-ball listings or short sales. Just because a property is priced that low does not mean the market is that low.
A few thoughts about listings in Sacramento right now:
- Many listings are simply overpriced. The market is very price sensitive, so if the price isn’t right, it’s going to sit.
- Just as one sale does not make the market, one higher or lower listing does not make or break value either.
- There are lots of price reductions right now, but remember there are lots of pendings too, which shows the market is still competitive. Inventory may be higher, but it is still not very high.
- More housing inventory will slow down the market, which means it’s not the type of market to try to price it like it’s 2013 (when the market was really hot and inventory was declining). Buyers have more selection and they’ve become a bit more picky, which is something sellers need to consider.
4 temptations when a real estate market slows down:
- Use older sales that sold at higher levels to substantiate a higher contract price.
- Ignore current listings that are priced lower and might actually better reflect the housing market.
- Use listings that are priced higher to gauge the market even though these higher listings are not moving at that price.
- You get into contract at a high level and expect a higher appraisal despite data not supporting those prices any longer.
Question: Anything else you’d add?
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Great post Ryan. Your list of “temptations” is very important for agents or sellers to remember.
Thanks so much Tom. I appreciate it.
Good post. The real estate market up to 2008 reminded me of tulilpmania, speculation in Holland in the 1600s that drove up the price of tulip bulbs. Apparently you could buy a house in Amsterdam for what it cost to posses just one flower bulb — 53, 000 guilders or well over a million Euros now.
I mention this only because even today real estate agents are showing us overpriced properties and to overcome our resistance, are saying: ”You know, just a few years ago this was worth…”
Their implication is that housing will come back and regain “loses” since 2008. Tulips never came back.
During the height of the mania. a Dutch sailor came into an auction house for directions. He had been at sea for the duration of the mania, and did not know anything about tulip bulbs. He saw what he thought was an onion on a display case, and he ate the vegetable. He thought he could pay for it. After all, how much could an onion cost?
Thanks Ricardo. I always love the points you bring up in discussion, and the way you do so. I think you hit on something really important. Present value deals with what a home is currently worth rather than what it used to be worth. I sometimes hear things like, “I bought this house for $320,000, but some poor soul paid $520,000 for this same house in 2005. I’m so lucky”. The new owner of course is very fortunate to have bought in a lower market today, yet the owner didn’t buy a house that was really worth $520,000 in today’s market. The value at $520,000 or $320,000 is really relative to the dynamics at hand in each respective market.
The real estate community is fixated on comparing current values with the previous peak of the market, and sometimes we even hear conversation about values getting back to those levels. But let’s remember how unaffordable and unsustainable that market was. I do think there is value in knowing the peak of the market though and how far we’ve come since then, but what the house is worth right now and how trends may develop in the near future is probably more valuable for current buyers. Thanks again Ricardo.