We can make numbers say whatever we want. We see this all the time in the media, politics, and even in real estate. Sometimes it’s a matter of intentionally fudging the numbers, but other times we might be honest about sharing something but actually still get it totally wrong. Today I want to highlight a real life example how we can end up saying something totally different about the market depending on the numbers we’re looking at. Whether you’re local or not, I hope you can take something away from this post. Then for those interested we’ll dive into a big Sacramento market update. Any thoughts? I’d love to hear your take.
Example 1: Sales price to list price ratio:
The sales vs. list price percentage is the ratio between the sales price and whatever the most recent list price was before a property got into contract. For example, imagine a property listed at $100,000, was reduced to $98,000, and then went into contract at $98,000. The sales to list price would be 100% (98/98). If we look at this metric alone and see a county average of 100%, it looks like properties are selling for whatever they’re listed for. Woohoo, the market is hot!!!
Example 2: Sales price to ORIGINAL list price ratio:
The sales to original list price ratio is the relationship between the original list price and the final sales price. For example, imagine a property listed at $100,000 but was reduced to $98,000, and then went into contract at $96,000. The sales to list price ratio would be 96% (96/100). This metric takes into account ALL price reductions, and in my mind tells a more fuller story of the market.
KEY QUESTION: Which one above does your CMA report?
BIG POINT: If we look at the sales price to list price ratio the market seems like it’s NOT softening. But if we take a deeper look at the sales price to ORIGINAL list price ratio, we see properties on average sold for 4% less than their original list price last month. This is definitely a more telling stat because it reminds us how many properties have been overpriced lately. Remember, there were nearly 1800 sales last month, so an average 4% decline is a big stat. But it’s easy to miss that if we don’t know what to look for and end up reporting the first stat above.
—-—–—– And here’s my big monthly market update ———–—–
Two ways to read the BIG POST:
- Scan the talking points and graphs quickly.
- Grab a cup of coffee and spend time digesting what is here.
DOWNLOAD 70 graphs HERE: Please download all graphs in this post (and more) here as a zip file. Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.
Quick Market Summary: The market feels like it should at this time of year. It’s taking slightly longer to sell than it was a couple of months ago, the sales to original list price ratio has been declining, and prices are softening as the hot summer fades away. This doesn’t mean the market is dull at every price range though. In fact, the bottom of the market under $300,000 is definitely more aggressive than properties above $500,000. Right now housing inventory is 11% lower than it was the same time last year and a whopping 35% lower than it was in 2014. If you remember, two years ago the market felt extremely dull and there were about 400 price reductions every day when logging in to MLS (this year price reductions are hovering around 200 tops every day (that’s for the entire MLS coverage area)). This reminds us some fall markets are softer than others. Sales volume this year has been about the same as it was last year, though it’s important to note FHA is down 6% and cash is down over 8% so far. Celebrity house flipping seminars are coming to town frequently in Sacramento, but keep in mind only 2% of all sales in the region last month were bank-owned, which reminds us low-priced fixer deals on MLS are pretty much a thing of the past. Lastly, there has been lots of talk about the market having shifted or beginning a downturn, but right now the stats look to be showing a normal seasonal slowing. We often hear things like, “the market is starting to tank”, but unless we see a real change in the stats or hear something more definitive from the real estate community about values declining, let’s be in tune with the slowing seasonal market. In case it’s useful, here is a video tutorial I did a couple of weeks ago to walk through the slowing season and what it looked like in 2005 also.
Sacramento County:
- The median price is 102% higher than it was in early 2012.
- Sales volume was up 8.5% this August compared to August 2015.
- There were only 4 sales under $100K last month (single family detached).
- Sales volume is up about 4% this year compared to last year.
- Housing inventory is 11% lower than the same time last year (only 1.57 months of inventory).
- FHA volume is down about 6% this year compared to 2015 (though they were 26% of all sales last month).
- Cash sales were only 14% of all sales last month.
- It took an average of 26 days to sell a home last month, which is 1 day less than the previous month (and 8 less days compared to last year).
- REOs were only 3% of all sales last month and short sales were 2.8%.
- The median price increased by 1% from last month, is down 3% from two months ago, and is up nearly 12% from last year at the same time.
Some of my Favorite Graphs this Month:
SACRAMENTO REGIONAL MARKET:
- The median price is 98.5% higher than it was in early 2012.
- It took the same time to sell last month compared to the previous month (but 8 less days compared to August 2015).
- Sales volume is about the same as it was last year at the same time (very slightly more this year so far)
- Cash sales were 15% of all sales last month.
- Cash sales volume is 6.4% lower this year than last year.
- FHA sales were 22% of all sales last month.
- FHA sales volume is down nearly 7% this year so far.
- There is 1.77 months of housing supply in the region right now, which is over 13% lower than the same time last year.
- The median price increased last month, but it’s down from two months ago. The median price is up nearly 9% from last year at the same time. The average sales price and average price per sq ft are both up about 8% from last year too.
- REOs were only 2% of all sales last month and short sales were the same.
Some of my Favorite Regional Graphs:
PLACER COUNTY:
- Today’s median price is 70% higher than it was in early 2012.
- It took 4 more days to sell a house last month than the previous month (but 6 less days than last year at the same time).
- Sales volume was down less than 1% in August 2016 compared to last August and is down slightly for the year about 3%.
- Both FHA sales were 16% and cash sales were 19% of all sales last month.
- There is 2.05 months of housing supply in Placer County right now, which is down nearly 13% from the same time last year.
- The median price declined about 1% from the previous month, but for a better context it’s up 7% from last year at the same time.
- The average price per sq ft was $214 last month (was $202 last year at the same time).
- The average sales price was $472K last month (up about 4% from last year).
- Bank owned sales were only 1% of all sales last month.
- Short sales were 2% of sales last month.
Some of my Favorite Placer County Graphs:
DOWNLOAD 70 graphs HERE: Please download all graphs in this post (and more) here as a zip file. Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.
Appraisal Class I’m teaching: On September 29 from 9am-12pm I’m doing my favorite class at SAR called HOW TO THINK LIKE AN APPRAISER. This is a tremendous time where we’ll talk about seeing properties like an appraiser does. We’ll look at comp selection, using price per sq ft properly, and so many issues. My goal is to help you walk away glad you came and full of actionable ideas for business. Register here.
Question: Did I miss anything? Any other market insight you’d like to add? What are you seeing out there? I’d love to hear your take.
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Ryan, great comments on the original list vs just list price. I have a question for you. I know that we can’t predict the market but if you have to chose one statistic that will be a leading indicator for real estate prices, which one will you chose?
Hi Jana. Thanks so much. It’s actually really easy to miss the distinction at times between SP/LP and SP/Original LP. For years I had no idea of the distinction to to be honest. The default setting in MLS when running a CMA is actually SP/LP, which doesn’t really tell the story very well in my opinion. I’ll have to see if that can be changed in my settings (hopefully).
One stat as a leading indicator? That’s like asking me to choose my favorite kid. 🙂 I’m kidding. Actually though, there is some truth here since there really isn’t just one end-all stat to watch. Some people preach the stock market, Case-Schiller index, the luxury market, or some other metric or index out there. The thing is though the market is made up of so many moving parts that it’s not easy to boil things down to one thing. In short, there are many metrics that are key. This is why I love the multi-layered cake analogy https://sacramentoappraisalblog.com/2013/09/11/the-multi-layered-cake-analogy-in-real-estate/.
With that being said, if I had to recommend some stats to watch in a local housing market, I would say to pay close attention to changes in monthly housing inventory, monthly sales volume, and the sales to original list price. When these things begin to really change, we’ll likely see the change show up in prices. This is why we don’t necessarily have to just watch prices. While that’s important, it’s maybe more interesting or telling to think about other factors that are maybe driving prices to change. Moreover, when the market changes we’ll hear the real estate community talking about the change or how properties are no longer selling. Thus what we hear on the street from agents, appraisers, loan officers, title/escrow, etc… can mean something.
Thank you, Ryan! I usually look at the inventory and sale to list price ratio. I learned something new today. I have to look at original list price.
Right on Jana. That’s great to hear. And don’t get me wrong, it can still be telling to look at SP/LP, but my sense is SP/OLP might tell us more of what we want to hear at times. If any onlookers love SP/LP though, let’s talk shop. What do you love about it? Why do you prefer it?
Ryan, enjoyed the article and your market stats as always. Your point about the list to sales price percentage has bugged me for years for the very reason you illustrate. Thanks for bringing the issue to light for others.
Thanks so much Chris. I appreciate it. I’m glad to hear you are bugged about that. 🙂 There has to be a way to change the CMA to show SP/OLP. It seems like we’d get a better picture of the market that way. I checked briefly but couldn’t figure anything out in MLS. If someone knows how to do that, speak on. Whatever the case, this underscores how important it is to know how to navigate through the numbers and metrics so we can explain the trends. Sometimes there are metrics we simply have to throw out too rather than give them weight. Thanks again Chris.
Great example Ryan of how the sales price to list price statistic can get distorted. In my market, I find a similar problem with the days on market statistics because of the practice of pulling properties off the market just long enough to reset the days on market calculation and relisting.
Tremendous example Gary. This is exactly why we have to know how numbers are being reported in MLS. CDOM clearly is the real trend. My MLS added CDOM around 2006 or so I believe. It’s amazing how we can pull a CMA and start looking at SP/OP and DOM, but we might not really be getting the full picture. Thanks Gary.
Great article Ryan. Gary made a great point, and one that I see in the Birmingham area as well. That is the practice of pulling the home off the market and then relisting so the DOM is reset. I tell agents in my area that the statistics that the MLS provides is only as good as the data that is fed into it. Same thing with gross living area and price per square foot. The old saying of “garbage in, garbage out” is appropriate here.
Yeah, if we can’t trust the stats, that’s not good for anyone. It’s tempting in real estate to want to beef up the numbers, but we have to let the market do what it does, understand it, and then explain it. I get where agents are coming from in wanting a fresh listing because there are likely marketing benefits to that. But it’s just too bad if that ends up impacting data in the neighborhood (especially if this happens on a mass scale). Data matters and if we’re not careful we can really screw things up.
On a related note, one thing that is starting to happen more in my area is a property getting into contract higher than the list price and then the agent changing the active listing to the higher amount before the status is changed to pending (at the higher amount). Previously it was normal for a property to go pending at the original list price and then when it closed we would see the higher price listed if it actually sold at that level. I’m not sure if MLS changed their rules, but this has really emerged quite a bit more over the past year. This is sort of a nod to appraiser that the property is in contract at a higher amount, but what does it do to data? If this is not done for all properties in the neighborhood, it can maybe lead to funky stats when looking at all the pendings. This could mess with the SP/LP ratio too on a CMA as it would essentially make the SP/LP ratio look more watered down. Moreover, this is not equally applied in the case when a property gets into contract lower. My question becomes, what reason is there for doing this only when it is higher? Is it about influencing an appraisal or is there a different reason?
To any onlookers, if an appraiser is appraising a home that is in contract, it doesn’t matter what it is pending at in MLS. Properties have different prices all the time for their pending status, so we know some will close higher and others will close lower. There is nothing definitive about a pending until it closes, right? Appraisers have to review the purchase contract anyway, so they’ll be able to see exactly what the contract price is when they are appraising your home. So changing it for the appraiser who is going to appraise your listing really doesn’t do anything. However, I will say it is a benefit to see a property pending at a higher level when choosing comps. While it doesn’t matter for a property I’m appraising, when I’m choosing comps and seeing 3-4 other neighborhood sales now in contract at higher levels than their original list price, that can be helpful. Maybe it’s indicative of a market that is increasing if it looks like homes are going for 101-103% of their OLP. Of course to be fair maybe it’s indicative of underpriced homes too. 🙂
Thoughts?
Good work again Ry Guy.
The average property listed right now in Sacramento is for the most part dog exrement with a pitched comp shingle roof and a spendy price tag.
The quality of inventory is offensive. There I said it. I am actually offended by the new listings coming online and I don’t think I am alone. I cannot believe what people are paying ‘top dollar’ for out there.
Can I ask how on planet earth appraisers are allowing some of this to fly? I’ve been exclusively a cash buyer for about 7 years now so this is now quite unfamiliar to me. Back in the day I remember astute appraisers hammering values and really nitpicking deals they were underwriting. How can appraisers today truly be valuing this stuff without looking the other way? They must simply be going off comps?? I cannot figure out how on earth these deals are financeable unless appraisers are simply building value based on inflated comps.
It is truly getting nutty out there. The quality of deals closing relative to their frothy prices is far worse to me than 2006 now. I really mean that. Deals are that bad in my opinion. I cannot believe this is happening again. I would love to hear from someone who really thinks this is organic sustainable growth and not a tulip craze. Actually, I wouldn’t because if you do then your opinion is of little value to someone with brain synapses.
Hi Mr. Myagi. Thanks for the comment again. Sorry for the delay in response as I’ve been out of town visiting family.
It’s hard to respond to your thoughts because I don’t have a specific situation in front of me to say whether a particular property is wrongly inflated or not. Right now the market is higher though and people are willing to pay those prices in many cases. The same was true in 2005. Some would say, “Values were way too high,” but then you’d have multiple offers at those list price and the comps supported a value that high too. Granted, if there is only one inflated comp we shouldn’t be using that one for the basis of the value. After all, one sale doesn’t make or break a market. To be fair, many appraisers did turn a blind eye in 2005, but these days hopefully they are doing a better job. There are still appraisers out there who will “hit the number” (contract price) no matter what. But hopefully appraisers are doing better overall.
Let’s keep watching.
In all honesty that kind of sounds like there is no governor whatsoever again. In other words, appraisers are just going off comps, and buyers are buying whatever banks lend, and the circle goes round and round. It should be a bit alarming that there are no ‘whistleblowers’ so to speak. An appraiser just says, ‘well I’m going off comps so my conscious is clear.’ Prices are massively overvalued, we all know that, but very few of us are honest about it. This reminds me eerily of ten years ago. Slightly different, as is every market cycle, but the apathy about soaring prices built on no underlying fundamentals whatsoever is frightening. It is a ‘look the other way’ scenario again. Pay no attention to the man behind the curtain. Every day this continues my prediction of a larger collapse becomes more cemented in my mind. I’m not suggesting we need intervention on a regulatory level, I believe in the free market. But we do need more independent thinkers in the real estate community. The real estate professionals I know simply refuse to focus on anything but the next immediate deal. I did the same as a broker on some level so I get it. But my lord these arbitrary soaring values should be alarming more people. Bubbles build quietly though.
‘conscience.’ i swear i can spell, i just type fast and don’t proof read 🙂
Thanks. I appreciate your take. Here’s the thing though. Appraisers are tasked with measuring the market. Whether the market is inflated or utterly collapsing, an appraiser’s job is to determine market value. What is the most reasonable and probably price a group of buyers would pay for this property? Despite values being higher, buyers are willing to pay these amounts. Appraisers aren’t a brake pedal for the market or even a gas pedal, but rather a measuring stick. In some senses of course appraisers are like umpires because some properties simply get into contract too high. Appraisers do need to explain the market and support what they say the market is doing (increasing, stable, declining, etc…).
Unlike 10 years ago, underwriters are really using their red pen to scrutinize appraisal reports. Theoretically they aren’t letting the crap (technical term) get through that was present 10 years ago. 🙂
For reference, I describe the market in depth in my reports. I talk about the collapse of values and then the market that increased exponentially in 2012 and 2013 – mostly due to cash investors and historically low rates. I talk about the slower growth these past couple years and the ultimate need for the economy to drive the market. My closing statement is something to the effect of price growth not being sustainable over the long haul.
Those are fair points. Can’t argue with that.
And I don’t think you need a specific deal in front of you to underwrite..pick almost everything listed! 🙂 Price growth from artificial low supply and distorted monetary policy should alarm anyone who is supposed to be vetting deals for institutions that lend money. But it isn’t, because people have to feed their family.