The market is doing great. It’s about to crash. Values are fine but they’re slowing. Actually, the “bubble” popped two months ago. Right now there are some strong opinions about real estate trends. It feels a bit manic to be honest as some say the market is tame while others say it’s beginning a downward slide. In light of this, I hoped to kick around some ideas together. What do you think?
A few things to consider when the market begins to slow:
- Don’t let headlines become your talking points: It seems like sensational headlines and stories can become our talking points if we’re not careful. It’s easy to let this happen in our personal lives, so two weeks ago we were offended by Ryan Lochte, this week it’s Colin Kaepernick, and next week it’s going to be some other person or situation. I’m not saying these things don’t matter, but only that it’s easy to get swept up in the latest headlines. The same thing happens with real estate articles and opinions. It’s easy to hear something and swiftly conclude “the market is doing this or that,” without really fact checking our local market. My advice would be to let local data inform our market statements.
- Be careful about predicting value: It’s really not the job of real estate professionals to predict what values will do in the future. If I asked you to predict exactly what Apple stock will be worth in one year, could you be precise? Or tell me how consumers will feel about Netflix in 5 years from now. Or let’s keep it simple. Who is going to be President in two months? You get the point. Everyone is asking where the real estate market is heading, but the most honest thing we can say is, “I don’t know what the market is going to do. My crystal ball is broken. But I can tell you in depth what the market is doing right now and what it seems poised to do in the immediate future.”
- Know the seasonal trend: Almost every single year in the later summer the real estate market slows down and the real estate community tends to freak out. What is happening? Has the “bubble” popped? Is the market starting to turn? It’s as if we are disconnected from seasonal trends and thus treat any slowing like it’s something totally unexpected. Like I said two weeks ago, weighing a slowing market is like stepping on a scale at the right time of day. Frankly, we have to be able to answer questions like this: What does the market normally do at this time of year or during this month? Does it take longer to sell? What happens with sales volume? Does monthly inventory usually go up or down? Do prices usually soften or increase? Answers to these questions can show us how the seasonal market usually behaves and then help us interpret whether a current slowing is something normal or not. Here’s a good rule of thumb: Unless we see something that indicates this is more than a seasonal slowing, it’s probably an okay idea to consider this a seasonal slowing.
- Preaching the market is going to change: For those preaching a coming change in the market, here are a few questions: What is going to cause the market to change? When is it going to happen? And by how much will values decline? In reality it’s a given that at some point in the future the market is going to change. Why? Because that’s what markets do. They go up and they go down. While I’m not a huge fan of predicting real estate, I guess if someone has a platform of change, I’d rather hear some specifics because otherwise preaching change seems like prophesying something inevitable. Know what I’m saying?
I hope this was helpful and relevant.
Video Market Screencast: In the following video I talk about seeing the seasonal market and what the market was like in 2005 when values began to decline. I hope this will be helpful and maybe even a game-changer for some. Watch below (or here). Yeah, it’s not short, but maybe watch it in the background while working.
Questions: What is point #5? Did I miss anything? Which point resonated with you the most? Do you think what’s happening now is a seasonal trend or is it something else? I’d love to hear your take.
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Ryan, this is so true about the seasonal trends. What strikes as funny is that we collectively forget that this happens every year.
What would indicate that any slowdown is not seasonal?
Well said Jana. This happens every year and we see it show up in the cycle of real estate articles too.
That’s a great question. I’d actually like others to pitch in some thoughts on the matter. I’ll mention a few things:
1) Inventory: In my area in 2005 the market began to really change in the summer of 2005. On one hand on paper values didn’t change that much for the remainder of 2005, so if we only looked at price metrics we might think the market was softening and doing what it normally does each year. Yet the huge difference was that sales volume sloughed off big-time and housing inventory shot way up. In a sense there were properties that simply were no longer selling and buyers were no longer buying. The market had changed. The thing is that sales volume normally softens and inventory goes up in the fall, so it can be tricky to tell the difference between a softening and a decline (this is why all of us are wise with hindsight). Yet there really was a very substantial difference in housing inventory, sales volume, and the feel of the market. To give you an idea of the change in housing inventory, it went from 1.7 months in June 2005 to 5.0 months in December 2005. Again, we normally see an uptick in inventory, but this was very substantial for the local market and a clear symptom of something not being right. Along that note, sales volume declined by 40% when comparing June 2005 with June 2006. Thus we are talking about a real noticeable change to go from 2400 sales to about 1300 sales (what a difference). When we look at pendings too, those also declined.
2) Other Metrics: I have an article I wrote on identifying a softening market. We see a market soften in things like days on market increasing and the sales-to-list price ratio increasing. These are important metrics and when a market takes a decisive turn we might expect to see something more dramatic or at least something out of the ordinary of what we normally see. We also want to pay attention to price reductions as that can be telling.
For reference, here are two posts for any onlookers to be in tune with a market that heats up and one that slows down: a) https://sacramentoappraisalblog.com/2015/03/24/how-do-you-know-when-a-real-estate-market-is-increasing/ b) https://sacramentoappraisalblog.com/2014/05/20/how-do-you-know-when-real-estate-is-getting-soft/
3) Tone of the market: When a market takes a turn, whether up or down, the “word on the street” from real estate professionals (particularly agents and appraisers (but still others too)) is a key source of data. This can be very telling and help us gauge what is happening.
The interesting thing is that prices in 2005 in our area really didn’t tank. It seemed they were limping along and just a little lower the next year. But then 2007 happened and it really “hit the fan” so to speak. This is a reminder that a decline is not always easy to spot and sometimes it takes a while for a trend to really play out too. Lastly, not all market declines have to look the same or follow the same recipe so to speak, so we need to constantly keep our ears tuned to the market and watch the metrics carefully.
How else would anyone know if the market was doing something beyond a typical seasonal softening?
Your deer whistle to Sacramento Oasis fans heard loud and clear. I too “Wonderwall” the market might go next. Will it “Slide Away” or will it “Live Forever”? I totally agree the market is “Slowly walking down the hall / Faster than a cannonball”. Someday we may find it, “Caught beneath the landslide”. 🙂
Gary, I’m going to have to start framing your comments. Too good. Points for creativity my friend. +1 for you.
On a related note, I was once in a pub in Scotland in the later 1990s when Wonderwall came on. All the locals stood on top of the tables and sang this song loudly to close out the night. It was surreal.
Ryan,
Might be the best appraisal video I have EVER seen
in my 3 decade career.
Great job!
Stefan
Wow Stefan. That’s a high compliment. Thank you sincerely. I made this late last night after drinking a Starbucks cold brew at 7pm (I should have know I wouldn’t be able to sleep). 🙂
All great points Ryan. I guess sometimes we get the chicken little syndrome and think the sky is falling when in reality it’s just raining. You make some very good points about seasonality that we should all keep in mind. Great explanation in the video.
Thanks Tom. Great example with chicken little too. I love it.
Side note for any onlookers:
I’ll be honest, nobody ever talked me through the seasonal market or how to even identify it. In all my CE through the years I’ve never once sat through a class either where someone explained it. I am guessing many in the real estate community can relate to my experience too. It seems easy to give lip service to the reality of the seasonal market, but sometimes it can be a struggle to identify or explain seasonal trends in concrete terms (break down how the season changes exactly in light of inventory, sales volume, price metrics, sales-to-list price ratio, DOM, etc…). I know for me I had to start digging through the numbers and asking what the market normally does for the time of year. That’s really how I learned was to dig deep. I’m certainly not done learning either as I pick up something new about the market every single month (if not every week). There is so much to know. All we can do is be open-minded and start asking questions about how the market behaves and tends to work. I share this for any onlookers with a desire to learn and grow in your skills to see the market. There is hope. My recommendation would be to take time once a month to ask yourself this question: What does the market normally do this month? Dig through the most recent monthly data and start comparing it to previous months and most importantly to the same time last year (or even the year before). Locally we can do this with Trendgraphix and I also have quite a few graphs in by big monthly market update too.
I feel like any signal of “softening” or “bubble talk” gets such a freak out reaction because of how traumatic the 2008 crash was. It took many years to come out of that. Everyone remembers what it was like to lose their home or to watch their loved ones lose their homes. I remember a case where a home that sold for $250k in 2005 later sold for $35K in 2009. That will get your heart pounding for sure! And although current data paints a different picture, we have been conditioned to worry and watch cautiously.
That could be part of it Alicia. Great point. I appreciate you bringing that up. That was certainly a painful season in so many ways. I know I wasn’t immune to the damage.
Ryan, great video and thanks very much for the detail as always! Well done sir. Agree that it is the best around.
Disclaimer:I have strong opinions about the current real estate market. My opinions have been formed as a professional real estate investor and landlord and formerly a very high volume commercial real estate broker in CA.
I think your point about seasonality is good for the average person, most involved in real estate however are very aware of this phenomenon. I say that not to diminish your video/data in any way, just that the average person might see it and use it as fodder for a shifting marketplace not occurring. In other words, at some point this frothy real estate market will come back down to earth, and if the leading indicators start to emerge during a normal seasonal shift then they will simply attribute it to that.
However, the thrust of this whole thing is not seasonality, it is that prices in the greater Sacramento have been on a meteoric rise for no reason other than asset distortion because of easy money (low rates etc.) The basic fundamentals which should include wages, have not been what is pushing this crazy boom in prices. Therefore since it is not true organic growth it is not economically sustainable. Anyone who does not see this lacks a basic understanding of the real estate market (not referring to you at all just the John Doe’s out there in this camp.)
This market will be correcting, whether it happens in 2 months or 8 months is impossible to predict. But it is an economic truism that it is going to happen. Like ten years ago, I am watching houses being purchased by “investors” (dumb money from refi’s etc.) then re-listed for $75k above the previous closing price after 30 days and go pending. It is insane. It is bad for our country, it is bad for the average homebuyer, and it will end badly as all times of froth do. One is not a ‘chicken little’ as stated above to see this, they are simply a realist. Have the bulls really not noticed that this is a global real estate bubble fueled by easy monetary policy? A 10 year old could see that.
Pretending to have a crystal ball is one thing, but knowing that this market will reverse is basic common sense. Wait until the rent bubble pops as well as the SFR bubble. It will be very interesting. Seems to me that trying to talk sense into this market by justifying values in any way is another way of saying, ‘This time it is different!’ It is not. People will lose houses soon, and values will get slashed as they should.
Always love seeing your new posts Ryan and appreciate your service in this area. I respectfully (and passionately) disagree with anyone who thinks this will last though! 🙂
Thank you Sensei. I appreciate your long and thoughtful comment.
The goal here is to give respect to the seasonal market by looking closely. The average person does understand there is such a thing as a season, but my sense is there is room for growth in being able to identify it, call something normal or not, sift sensational headlines, and talk about the trends (in residential real estate at least). In many conversations I’m hearing the market has already made a big turn, though I’m not sure the seasonal market has really been considered in some of these conversations. If the average person does look at the video and say the market has not made a big shift, there’s nothing wrong with that if that person is speaking from an informed place rather than what some dude said in a headline that may or may not actually be true for Sacramento. Like I said in the video, unless we are seeing signs that a big change has taken place, let’s call it a normal seasonal trend for the time being. If the market starts to feel funky (technical term) and do weird things (another technical term), let’s call it a big change in direction. That’s about as good as we can do.
The tricky part is not all real estate “bubbles” pop in the same way. While it’s valuable to know how 2005 unfolded in Sacramento (like I showed in the video), what happened then isn’t necessarily a recipe for how things would go in the future if the market did correct. Yet we would expect there to be a change in the feel of the market (properties stop selling), and maybe a more substantial change in inventory (up) and sales volume (down). I would expect these changes would be beyond the normal changes we see every year when the market softens, though maybe not. So let’s keep our eyes open and live in the tension of not knowing the future while explaining the present.
“Pretending to have a crystal ball is one thing, but knowing that this market will reverse is basic common sense.” Well said. I hope nobody walks away from this post thinking, “Ryan said the market is going to be good forever.” In fact, for anyone who got that, please re-read my last point in the post carefully. If I did make a recommendation though for the real estate community I would say to keep the future in mind, be realistic about values having been inflated for 4.5 years now, and get better at talking through specific trends instead of cliches. Let’s never wear rose-colored glasses in real estate (Pollyanna), though maybe we ought to avoid the other extreme of preaching hardcore doom & gloom (unless that is really where the market is at).
Thoughts?
Very well put Ryan, agreed. Sorry if I seemed like I was saying you were an uber-bull about this market, I was not. It was in reference people that call those with bearish sentiment (at this point in the market) ‘chicken littles’ etc.
To be clear, I am by no means a bearish guy, I simply try to call the market what it is. When the market is undervalued and cheap I will also be shouting that from the rooftops when the common man is bemoaning real estate and fleeing from it. I was a cheerleader for real estate in 2008-2012 as largely an excellent value and that is when I was last buying.
In my opinion somewhere around 2012 (just off memory here) deals stopped penciling and the old fear and greed demand drivers started to rear their heads. Now here we are 4 years later in a totally irrational market. Strippers again are getting real estate licenses and flipping seminars are being advertised. To put it very politely, I’ve seen a lot of dumb money enter the market recently. I believe it was maybe Peter Lynch that said, “When your barber starts talking about puts and options then it is time to sell.” Well, everyone I know is a realtor again, the fancy cars are back, cash out refis are happening, people are buying way beyond their means with high leverage debt structures, we have distorted values from Fed policy. This is a house of cards again, nothing more nothing less.
It seems like maybe Ryan you agree with that sentiment on some level, but back to your main point, I personally have not seen the market shift yet. I am seeing more of a frenzy every day. I don’t have the hard data in front of me like you do, but every single deal I track (the ones that are even in the realm of reasonably priced which usually means it is only $100-200k over where it should be, all of the others seem to be priced at $300k plus over where they should be) has gone pending recently. I am not yet seeing a slow down, the fever pitch is alive and well!
Can I ask Ryan, those that you are saying the market has already “made a big turn,” what are they referencing as that big turn? Because candidly I am not seeing it yet. In the animal spirit sense I definitely feel (super technical) the market reaching critical mass, but I am not seeing a big shift in inventory and the quality of the listings out there are still all crap (technocrat in me) in terms of pricing. I’d love to hear what you have heard in terms of the marketing making a ‘big turn’ from others. Are you simply referring to some uptick in inventory, which as you accurately pointed out could simply be seasonal? As a side, I agree that your suggestion to wait to see if it is seasonal or not is prudent however seeing the direction of the market before it turns is the fun part and where you make money. Let us not only watch our next foot hit the ground while walking through the jungle, see the hungry puma in the tree ahead Danielson.
I don’t even mean slightly overpriced,the average Sacramento area home out there priced right now at $600k should be listed for $375k based on a myriad of factors including but not limited to local incomes. I am also willing to bet (cash or otherwise) that values will be back there. Are cash bets a violation of this site? Balk now if you wish. Haircuts of several hundred K are coming down the hall faster than a canon ball. The law of gravity is stronger than your raindancing young uber-bulls.
Finally, another age-old equity adage comes to mind…”Markets have 5 year memories.” Wow is that as true as ever today. The average buyer today must only be able to go back 5 years in time or they would not be buying at these inflated levels. Signing off my friend, it is time for some hot green tea and stretching. -MR. MIYAGI,
Arigatoo Sensei. There has been no offense whatsoever and I really appreciate your take. I’m not sure we’re really saying something different for the most part. I welcome hearing more in the commercial sector too, so please pitch in your two cents whenever you’d like.
“Those that you are saying the market has already “made a big turn,” what are they referencing as that big turn?” That’s the thing. I just hear “the market has turned” without showing any real substance to back that up. It is most likely a regurgitation of a headline or talking point from somewhere. That’s really one of the reasons why I wrote this post. I don’t think the market has made this turn yet either. We’re not seeing it in the stats yet. I’m with you too in that it is fun to see the market change before it shows up in the numbers.
I am interested to see what lenders do in coming time. I believe they have quite a bit of power for this market. As values have increased and wage growth has been more stagnant, at some point buyers are going to not be able to afford higher prices. This is where lenders may step in with more creative loan products. This goes along with your 5-year statement. Will we forget the carnage of “creative” loans in the past or not? We shall see.
I’m chasing coffee and deadlines right now. Enjoy your green tea. Just in case you need some inspiration for today too….. https://youtu.be/iBktYJsJq-E.
I appreciate the video clip but I can’t to watch myself on film. It is a chapter of my life that is behind me. I’m not ashamed of it but I don’t like to try and relive it.
Anyhow, I too am interested to see what lenders do. But then again I feel like the market will reverse though before they have a chance to butcher it further. The real estate market is already so overvalued even without their meddling I don’t see them getting the chance.
This Sacramento real estate party is stopping very very soon. This is a market that doesn’t reverse mildly either. Good Ol Sactown overshoots then corrects violently, has been for as long as I have been a sentient being.
Your blog is great Ryan, not a lot of Sactown-centric real estate sites out there anymore worth their salt. I think you’ll continue to go in prominence. Especially with special guests like Mr. Miyagi.
I won’t bring up the past again, though I’ll be replacing a fence soon, which means I may use the Myagi method if I choose to paint. Anyway….
Thanks for your take. We shall see. I would imagine at some point things have to loosen in the lending world as it’s very tight. Like the saying goes, “There is no such thing as a ‘rocket’ mortgage, but only a rocket mortgage application.” Okay, there is no such saying, but there is some truth to that since lending is so strict (not saying that’s good or bad).
I appreciate the kind words too. I work hard to bring value here and I always look forward to connecting with people. I’m already looking forward to next week’s monthly market update. I have some thoughts to share soon about the rental market meeting the 2-4 unit market too. In time.
Looking forward to your next post. And also seeing where the market is at that point and the following months. I truly cannot put a timeline on this market turn, but it feels very close to tapped out to me. Only time will tell, and good luck on the fence.