The market feels aggressive out there. I don’t know about you, but I’m having so many conversations about rising prices at the lower end, a shortage of inventory, and even low appraisals. So I wanted to share some of the talking points floating around out there and give some commentary too. Here’s a list of things coming up in discussion lately (it’s longer on purpose). Anything to add?
One buyer vs market value: Value is what a buyer is willing to pay. I hear that statement quite a bit, but what one buyer is willing to pay could represent an individual’s value rather than market value – which is what appraisers are gauging.
Front-loaded market: Most of the value increases are usually found in the beginning of the year. Thus if values went up 5% last year, that means we probably saw about a 1% increase per month during the first two quarters of the year. But if the bottom of the market increased by say 12%, then we saw a 2% monthly increase. Of course some months might see greater appreciation rates than others.
The need to respect pendings: Sales tell us about where the market used to be when they got into contract 60-90 days ago, but pendings tell us about the temperature of the current market. This is why we have to respect pendings. For instance, during a recent appraisal of a fairly original home in South Sacramento I saw some properties close around $230,000 less than six months ago, and now similar ones are getting offers galore at $245,000+. The tricky part is I don’t know the exact price and terms of a pending unless I call the agent (and he/she tells me).
One sale or pending doesn’t make the market: Let’s remember value in a market is not based on one high sale. In today’s market if a buyer paid $25,000 above appraised value, for instance, an appraiser has to consider if that property at $25,000 above everything really represents the market or just one buyer willing to pay more. This is a reminder that appraisers and agents have to “appraise the comps” so to speak. We can’t just blindly accept the final sales price of a comp without understanding the back story of why it closed that high. The same holds true with pendings as we can’t base an entire valuation on one “lone ranger” that is higher than anything else.
Upward adjustments by appraisers: Value adjustments can be given by appraisers to account for an increasing market. These adjustments can be figured out with graphs, analyzing sales and pendings, talking to real estate agents, etc… This is what I did with the South Sacramento property above as my comps were 2-6 months old, but the market was 4-6% higher easily because the pendings were all trending higher. The truth is if I didn’t give upward adjustments my value would have reflected the past instead of today’s market. Some appraisers might not give a specific upward adjustment, and I won’t split hairs over that so long as an increase in value is accounted for somehow in the appraisal.
Appraisers aren’t hired to “hit the number”: A lender hires an appraiser to assess whether a loan should be made or not. Thus if a buyer offers an unrealistic price, the buyer might be willing to pay that amount, but if the house cannot sell for that price to the rest of the market, it doesn’t make sense for the lender to make the loan at that level. In this regard it’s reasonable to see appraisals come in lower than some of the high offers we’re seeing.
Multiple offers don’t always mean aggressive increases: Just because there are many offers doesn’t mean values are increasing rapidly. In some price ranges we are seeing clear increases in value and other prices ranges feel a bit flat. Realistically though there are likely to be multiple offers in about every price range (more at the lower end). This is a good reminder that at times there is a difference between how the market feels and what it is doing (actual data).
Different trends different neighborhoods: It’s easy to project what is happening in one neighborhood onto another or use one sweeping cliché to describe all locations and price ranges, but we have to look at actual numbers in each neighborhood to understand what the market is doing there.
Informed buyers: Having low inventory is creating some aggressive offers out there, and while buyers are willing to overpay to a certain extent for the right property, they won’t literally pay any price just because “nothing is on the market.”
Not easy to interpret: If we’re honest it’s not always easy to interpret what the market is doing – especially when things seem crazy with multiple offers and bidding wars. This is a good reminder to be humble because the market isn’t always wrapped up in a neat little perfectly decipherable package. There are things we can expect of course and seasons of the year, but the market is still distinct and sometimes even surprising. Let’s be real about that.
A perfect season for communication: This is a perfect market to foster excellent communication between real estate agents and appraisers. Agents, sticks to the facts and tell the story of the marketing of the property when talking to appraisers. Feel free to use my Appraiser Info Sheet (local agents, I love when you use this). In any price range where values are changing quickly, insight from agents can really help appraisers. On that note, Appraisers, glean insight from agents by finding time to make phone calls and asking the right questions about comps and the subject.
Reconsideration of value: I did a presentation recently on tips when asking an appraiser to reconsider the value. If anyone wants a copy of it, just send me an email (lundquistcompany @ gmail dot com). You can also read this post.
Hindsight makes everyone sound smart: When in the thick of a “hot” market it’s not always clear what the exact trend is, but after a few months when more stats are published everyone and their Mom sounds like a real estate expert. #truth
Questions: Anything else to add? What else are you seeing out there in the market right now? I’d love to hear your take.
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Ryan, thank you for your excellent research and writing. After reading your blog today, I felt sad that fewer families can afford a home.
Question — given that the #1 reality rule from time immemorial that drives prices is Supply and Demand, what would YOU do if you were king of California to increase supply and overcome the current blockages and hurdles?
We need love and logic to be the basis of our ideas in order to again make this State a land of opportunity. Sixty years ago most people knew how to increase supply, and they did it in abundance. Back then, houses were so affordable that no one today can say “inflation” is why our current prices are so high. Supply and Demand ruled then as it rules now.
Hi Scott. Thank you for reaching out. I appreciate your comment. First off, I definitely don’t want to be “King” of California for the record. 🙂
I think the supply issue is a deeply-seated issue and there isn’t just one solution. I wrote a post about this last week and I actually did a YouTube video on the subject too yesterday in case it’s relevant for any onlookers (https://youtu.be/wIv8Mv9Rdf0). Anyway, we need more housing units to be built. Bottom line. So it sure would help if the permit fees weren’t so high on the local level (county / city). It would help too if investors sold some of their units instead of kept them as rentals. It would probably help if we didn’t have five years of ridiculously low interest rates too as it’s created an artificial situation where owners just don’t have as much incentive to sell. It would also help if the economy in California was more vibrant. Wage growth and economic growth for full-time salaried positions would be fantastic and a welcomed driving force in California. On that note, it would be great to see California be more business-friendly and to retain businesses instead of seeing them exported to Texas among other places.
What did people do 60 years ago? If you were “King” what would you do?
Nice post Ryan. I think the most important thing here is as you said, “Front-loaded market”. This time of year, particularly in a quickly increasing market year, it can be very hard for appraisers to estimate and support adjustments that keep up with what is actually happening. An appraiser needs to be really tuned in with the market and have plenty of statistics (particularly on listing and pending data) to back up the big adjustments for appreciation that are sometimes warranted and necessary in the spring bump when most of the sales data closed in the winter dip.
Thanks Gary. It’s easy to get locked into certain canned market adjustments too where an adjustment at 1% is given per month. Yet that doesn’t make sense for every market or every price range. I think your point of using sales from a fall lull is so key too. An even larger adjustment might be needed there.
Thanks Ryan. This is a timely post for me and my family. As an appraiser who is currently in the market for a new home, I am getting a first hand look at the aggressiveness of the market here in East Sacramento/River Park. We have now been outbid on three offers all over list price. Last week we offered approximately 3% over list price for a fixer which contracted nearly 10% over (with nine total offers). We probably lost out to a flipper on that one. This week we offered 8% over list price on a move in ready home which contracted more than 16% over list (with 7 total offers). It can be demoralizing and definitely puts pressure on the buyer to make a more aggressive offer in the first place.
Hi Scott. I really appreciate you sharing your story and my heart goes out to you. It’s really not easy and your story proves that perfectly. East Sacramento and River Park and not inexpensive areas either, so it goes to show multiple offers and pressure on values is not just below $300,000.
Hang in there. I hope something sticks soon for you.
Great article Ryan. I see that appraisers in every part of the country face the same challenges with regard to agents and consumers thinking the same thing. I love it when someone points out that one high sale to help support the value of their home. I turn it back on them by pointing out a low outlier sale and ask them if they want me to use that one sale to provide a value opinion for their home. I usually hear crickets after that. You speak the truth when you explain that the value one buyer places on a home may be different that what the majority would place on it, but the latter is what the bank wants us to come up with.
Thanks Tom. Well said. To be fair I would say the sin of agents is often overpricing and the sin of appraisers is often undervaluing (in an aggressive market). Respecting the pendings and talking to the agents is so critical in today’s market for appraisers right now. I find some wonky sales out there that just don’t seem to make sense too, and it’s surprising at times how much buyersa are collectively willing to pay. An agent the other day on Facebook said, “It almost looks like the comps don’t even matter.” While I think the comps do matter and buyers are still paying attention to them, I think there is something to what the agent was saying.
In 2013 the market was extremely aggressive in Sacramento. In fact, it was the most aggressive market we’ve had in recent time. I had agents saying, “I’ve been in the business 20+ years and I’ve never seen something like this”. They also would say, “I would hate to have your job right now.” As inventory declines I think we are starting to see some of the 2013 dynamic arise, so if this trend of low inventory persists too long at just one month, it could get really interesting around here.
I mention this because in a market where values are not wrapped up in a neat little 1% up each month sort of package, appraisers are really going to have to consider where value really is (and of course have the guts to recognize value is lower if there is a “smoking crack” (technical term) sort of offer that was accepted).
Value is not easy and it’s sometimes messy and confusing. We like when things are stable and easy to see, but right now the market is not like that in my area in certain neighborhoods and price ranges. It’s even worse two hours away in the Bay Area though.
Hi. I am a first time home buyer. Re your 4/26 post: In the paragraph beginning w/ the heading: Different T
trends different neighborhoods, you advised looking at actual numbers in each neighborhood. How can I (or my realtor) get ahold of this material? I am a single female looking in South Sac, Del Paso, Oak Park, West Sac due to my low price point of $230k.
Thanks and good luck w the knee.
Hi Maggie. Thanks so much. That’s a great question. It honestly comes down to looking up sales in MLS and knowing how to put together data. For me I like to create graphs as visuals. I actually tend to post graphs on Twitter here and there in case it matters (www.twitter.com/sacappraiser). Here is a recent one for DPH: https://twitter.com/SacAppraiser/status/858049078944567297. I’ll try to remember to come back and link to anything I do for Oak Park, South Sac, West Sac, or DPH. Though realistically a graph might not do much for you though because it represents many properties in a neighborhood. What matters most is keeping an eye on listings that hit the market. You are more limited at $230,000 unfortunately and the market is very competitive at that price point. I think your agent can simply keep an eye on listings for you and you’ll need to be ready in a heartbeat to make a strong offer.
If you are interested in data, your agent can run a CMA or use the statistics tab in MLS for even more information. Or your agent can look at graphs in Trendgraphix. Of course I have county-wide graphs here once a month and neighborhood graphs I post on Twitter and elsewhere. I even having graphing tutorials too, though I find most agents are not interested (which is fine).
I know it’s not easy out there. I actually wrote an article a few months ago to help buyers. In case it’s useful, here are some thoughts as you are in the trenches: https://sacramentoappraisalblog.com/2017/02/01/an-open-letter-to-buyers-in-an-aggressive-market/
Thanks for your kind words about the knee too. Thankfully I am back to work AND thankfully I start physical therapy next week.