What’s the real estate market going to do this year? I thought it would be worthwhile to consider some of the emerging trends to watch in 2017 in Sacramento and beyond. What do you think? I’d love to hear your take in the comments.
1) Bubble conversations: This year we are going to have even more real estate “bubble” conversations. We’ll hear things like, “The bubble is going to pop in 2017”, or “Get ready for 2007 again”, or “It’s all going to crumble after this year.” As these conversations ensue, my advice is to sift through the headlines, pay close attention to actual data, know the limitations of your ability to predict the future, and be in tune with the way the seasonal market tends to behave so you can spot anything out-of-the-ordinary.
2) Creative lending: As interest rates presumably rise in coming time, it will make mortgages more expensive (duh). This won’t matter for some buyers because they have the money to afford the market, but others will need an extra edge to keep up with higher prices. This is where lenders can loosen up financing options so they continue to close deals and make as much money as possible (sounds healthy, right?). Keep in mind President-Elect Trump is talking about repealing Dodd-Frank too, and that could create waves in the market if it actually happened.
3) Housing inventory remains low: There isn’t any quick fix for anemic housing inventory, so we can expect to see another year of low inventory unless something drastic happens causing sellers to list their homes. That brings me to share something I talked about last month. In a video John Wake talks about San Francisco values and how sellers tend to wait to list their homes when values are increasing. The thought is, why list now when values are going to be higher next year? But then when values do eventually turn there can be a flood of houses hit the market as a “race to the exit”. That’s something to keep in mind.
4) Marijuana: It can be polarizing to talk about marijuana, but it’s definitely a market force since it is now legal in California for recreational use. Over the next year many cities and counties will be fine-tuning rules for grow operations, so be on the lookout for details. By no means am I glorifying marijuana, but I will be talking about it in coming years because it’s a force bound to impact real estate values.
5) Smart homes: With the advent of Amazon Echo and Google Home, consumers can now say things like, “Alexa, set the sprinklers for 7am tomorrow morning” or “Okay Google, turn the temperature to 68 degrees.” The huge popularity of these devices during the holiday season will only mean millions more households are now going to be making their homes more digitally connected.
6) Disappearance of the $100,000 market: There is definitely upward value pressure on the lowest end of the price spectrum. Other price ranges last year were much more flat, but not so much with the lowest prices in town. This year in Sacramento we are going to very likely see the disappearance of the market under $100,000. Each month lately we’ve had maybe 6-12 sales under $100,000 for single family detached homes, and after the next few quarters I expect that number might be down to zero. We shall see though.
7) Home flipping courses: There will be no shortage of “learn to flip” courses coming to a city near you. Friends, be very cautious about paying anyone to teach you “secrets” you can probably get for free online. You can read my open letter to celebrity flippers for more thoughts.
8) Custom woodworking: I’ve been seeing more and more custom woodworking in homes. I don’t mean really high-end craftsmanship per se, but rather the cool DIY stuff you might see on Pinterest or a show like Fixer Upper. I’m seeing more wood walls, large wood slabs, custom exterior wood accents on the exterior, etc…. As a dabbling woodworker, this makes me smile.
9) More agents will enter the market: When values increase and positive real estate news saturates the market, it tends to compel people to enter the real estate profession. So last month’s headline that Sacramento will be one of the “hottest market in the nation” in 2017 very likely sealed the deal for a number of folks on the fence about getting into real estate.
10) Multiple offers: We are likely to continue to see a climate of multiple offers in the Sacramento area. In a market like this I would advise sellers to be realistic about pricing their homes properly. What have similar homes actually sold for? What is similar and getting into contract right now? It’s easy to cherry-pick the highest non-similar sales in the neighborhood because “the market is hot”, but we have to remember similar homes are the “comps” appraisers are going to use (key point). At the end of the day appraisers have to support the value, so it may be best to be reasonable on the front end rather than run into all sorts of “appraisal issues” because the property got into contract too high. Remember, just because housing inventory is low does not mean you can command whatever price you want. That may have been more true in early 2013, but it’s not true right now.
11) The 2-4 unit market is heating up: These days in many areas it seems like the market is heating up with some surprisingly high prices again for 2-4 unit properties. Values were subdued for years after the housing crash, but news of increasing rents is certainly part of what’s helping drive 2-4 unit prices up. I’ve also observed some Bay Area buyers wanting to park money in Sacramento and overpay. Sometimes unrealistic cap rates are being used to justify value too (more on that in a few weeks maybe).
12) Appraisal waivers: Last month Fannie Mae rolled out an appraisal waiver program. They say this program is only for refinances, but it’s a pretty good guess we’re going to see some purchases waived too. On one hand this program can help offset slower turn-times by appraisers lately, but on the negative side of things it can lead to inflating values too. In short, let’s watch this closely and not forget important safeguards in real estate (like appraisers).
BONUS: This is a quick (well, 12 minutes) walk through what it looks like to see the seasonal trend in real estate and what it was like when values began to decline in 2005. With so much “bubble” talk these days, it’s critical to be able to cut through any hype, focus on data, and be able to spot seasonal trends (and non-seasonal trends). Watch below (or here):
I hope that was helpful or interesting.
Questions: What else do you think will be important in 2017? Did I miss something? I’d love to hear your take.
If you liked this post, subscribe by email (or RSS). Thanks for being here.
I recognize all those offers! Good
article Ryan!
Thanks so much Lori. I hope 2017 is VERY successful for you. Happy New Year!!
Thank you for the great market discussion Ryan. I love it. We are so excited to have you come to Portland next month and speak on market analysis. Sacramento is lucky to have you local.
Thanks so much Gary. I’m really excited to fly up there and mingle. I’m looking forward to it. I’ll come as long as it’s not raining though… 🙂
Terrific post! All of these trends we are seeing in North Texas with the exception of #4. Happy New Year!
Hi Shannon. Thanks for the kind words. It’s always interesting to hear how different markets compare. I look forward to hearing more about North Texas on your blog this year. Happy New Year!
Great summary of what’s going on and what to look out for in 2017. Much of the article transcends the Sacramento Market. It would not surprise me if this gets some national attention.
Hey Mike. Great to hear from you. Thank you sincerely. I think you’re right in that many markets are experiencing similar dynamics. Let’s keep watching closely. Hope things are well in SoCal.
One of the major trends that we’re going to be seeing is a mass exodus from the Bay Area to cheaper surrounding counties. We’re projected to have 18,000 people move from the Bay Area to Sacramento this year, and the trend is expected to continue for the next 5 years:
http://sacramento.cbslocal.com/2015/10/21/report-bay-area-millennials-eyeing-sacramento-as-future-home/
In fact, I have two clients currently that match this criteria. One lives in Vallejo and the other lives in Martinez, and they are young professionals who are realizing how much further their money will go in Sacramento compared to where they’re living now, so they’re making the move. Boomers are selling and moving out of the state, and Millennials are buying their first homes in an area they consider more affordable than the Bay, it’s an interesting trend.
Another thing you’re spot on about in 2-4 unit properties gaining popularity. I work heavily in this market, and once again with investors from the Bay Area. Their high incomes don’t go so far locally, but if they’re willing to invest just a couple hours away here in Sacramento they can get great returns. Just the other day I was driving around Northern Sacramento with a couple of guys from Google showing them several 2-4 unit properties.
Great article Ryan, love the video too!
Thank you Wes. I really appreciate your take and the time you spent to craft a valuable comment. A friend calls these types of buyers Bay Area “refugees”. It would be startling to see that many people come to Sacramento as our inventory is already pinched. I get the allure though, and I certainly had several neighborhood-specific conversations last year with Bay Area residents looking to move to the area and telecommute. On a related note we really need to be able to get a few more tech companies to start or move their HQ here.
It’s good to hear your take on the 2-4 unit market. I was definitely thinking of North Sacramento too while writing that snippet. There are a few fourplexes I can think of that have been priced higher than other units and still attracted multiple offers (some from Bay Area buyers too). Later this morning I’m actually heading out to appraise a tri-plex in Oak Park for an out-of-town cash buyer from SoCal.
By the way, do your clients plan to work here in Sacramento too? Or are they going to commute?
Hi Ryan,
I really enjoyed your summary, especially the video at the end.
Also, I just recently had an appraisal waived for a re-finance, as well as, for a purchase so your guess was not just pretty good. It was excellent. :o)
Thank you!
Thank you sincerely Ray. I appreciate that. I’m so glad you enjoyed the video too. I’m hoping to do more of those in the future.
It’s interesting to hear about the waivers. Was the purchase waiver conventional, FHA, 10% down, 20% down? Let me know if you can.
The word is lenders will use an AVM (computerized valuation) during these waivers. I get Fannie Mae has ample data since they’ve been mining appraisal reports for a couple years now. But my big question is what sort of oversight will there be for AVMs? If an AVM is run, does that AVM have to be in the file for full disclosure? Can a lender keep running an AVM with different parameters in order to get the desired result? For instance, if you increase the square footage range or comp distance slightly it might give a better value. Can a lender seek out more aggressive or less aggressive AVMs in order to get the desired result? These are important questions.
It’s going to be interesting to watch this unfold. If the waived files sell right in line with others, then the system works very well. Bottom line. But if the waived files end up closing higher than anything else, we might have to really consider if the purchase price represents the market or not. In other words, if these properties sell at inflated levels, we might have to end up discounting them as “comps” because they sold too high and don’t really reflect the market. It could be like what we had to do with Fannie Mae’s REO inventory a few years back when they were selling at ridiculously high levels somehow. This was in 2013 or so and they were selling well above anything else. When that was happening I would basically ignore the Fannie Mae REOs because they were outliers more than real examples of the market.
Another important question: Will agents list “appraisal waived” in MLS (that would be great for the sake of data)?
I didn’t mean to write novel here, but this is on my radar. For the record I’m not as concerned about losing business for me (but I am concerned for peers). My primary issue is this tool could be something that ends up inflating values if it is not handled properly.
For the purchase loan, it was a conventional loan with more than 20% down. And I do think this is interesting. I had the re-finance done first with a waived appraisal. The purchase transaction was in Reno and it was going to take over 30 days just to get an appraiser to the property. The lender that I used for the re-fi called the lender doing the purchase loan and asked them to check for a waiver. If we did not ask, I do not think we would have received a waiver. I had actually asked before my lender had called and was told that Fannie Mae would not even consider a waiver. It is always good to have smart friends.
Thanks Ray. I appreciate hearing this. Yes, smart friends are good to have for sure. 🙂 Congrats on the purchase and the refinance.
Part of me wonders why it would take so long to get an appraiser out to the property. Some markets really are struggling with an appraiser shortage of course, though I wonder sometimes if some lenders are using Appraisal Management Companies that pay too little (so appraisers won’t accept the work) or the AMC doesn’t actually usually cover that area (so they don’t have anyone on their list and therefore struggle to find someone to do the job).
Keep me posted with future waivers. I’d really like to hear the inside scoop of how they are being handled.
Interesting list Ryan. Regarding #4, have you connected with any appraisers in Colorado to see what you might expect in Sacramento? It’s going to be interesting to see what happens with #12 as well. Will this decrease the talk of appraiser shortages since they will not be using real appraisers as much? This year will definitely be interesting. Keep up the good work.
Hi Tom. I’ve talked with a real estate broker in Colorado a few times, but I’ve not yet talked with appraisers. Hopefully I can mingle with some soon (anyone out there wanting to connect?). That’s an interesting question. I imagine the appraiser shortage conversation will be used as justification for why this system is relevant and needed (and why it will expand to purchases). I suppose if the system worked well though and decreased turn-times, we would see a balancing effect maybe. When are things ever balanced though – especially in lending / real estate? 🙂
Thanks Tom. I appreciate you.
I just found this blog. What a great resource. Thank you for putting all the park into it that you do.
I’m in the Yuba City market and invest in SFR. What I have seen from the limited data that I have access to is that because housing inventory remains low, prices have held firm.
But what is interesting is that time on market has increased and discounts from list price to sales price have increased. This is telling me that if it wasn’t for the scarcity of inventory prices would actually be dropping a little bit.
I’d love to get your take on it of course. I’m okay to be corrected.
Forgive the typos. I’m on my phone. But sincerely, great work.
Hi Ryan. Thank you so much for the comment. I really appreciate it and I want to welcome your take whenever you have something to say. Nobody has a corner on the market and nobody is 100% correct, so it’s extremely valuable to kick around ideas together. Now that you’ve posted a comment too, you can post any time without being moderated. The initial moderation is just because of spam comments unfortunately. Just a heads-up.
Anyway, I think you’re right about low inventory playing a role in stabilizing prices. Good point. Regarding days on market increasing, I suppose the question to ask is what the market normally does in Yuba City around this time of year. In other words, how does the market normally behave during this season? If you have the capability of looking back to last year and a few years before, what would you see? If you see increasing DOM and a declining sales price to list price ratio, that would tell you it’s a seasonal dynamic you are seeing right now. If you see an entirely different trend then maybe we are looking at something a little funky (so we need to pay closer attention in coming time to see how the trend unfolds).
In my experience it is very common and normal for DOM to increase through the end of the year and then begin to decline early in the year as the market heats up. But then the increase in DOM starts again in Sacramento County usually between June/July (like clockwork). I also see something similar with the sales price to list price ratio. When the market is hot, this ratio tends to be closer to 100%, but when the market cools we might tick down a few percent. For instance, in Sacramento County this ratio increased through Spring and has now dropped to 97%. Over the next couple months it will likely start increasing again with the onset of the Spring market. Ultimately what you are seeing could be a normal seasonal dynamic, but I don’t really serve the Yuba City market though, so I would defer to those who do.
At the end of this post I posted a video to walk through what the seasonal market in Sacramento County tends to look like. If that’s useful, have a look and then let me know what you think.
Thanks Ryan. I sincerely appreciate you and I’m really looking forward to conversation and to hearing what you are seeing out there in the trenches. Good luck on all your current deals right now.
Hi Ryan:
Great articles and discussions, I really appreciate the time you put into creating the newsletter and answering posts. Have a great 2017.
Tom
Thank you sincerely Tom. Happy 2017 to you also. By the way, I hope you find a buyer for that $250,000,000 listing in your neck of the woods. 🙂
Outstanding article Ryan! You really summed upon the key items of importance for this year. I found the section about marijuana to be surprising, but it makes sense now that there has been legalization in CA. Keep up the outstanding blogging!
Thank you so much. Yes, MJ is a real trend we must watch. I’m always asking two questions: 1) What are values doing?; and 2) What is driving value? MJ is definitely a factor in various portions of the market.