Peaking prices & rosy real estate narratives

People tend to freak out when prices slow down. What’s going on? Is the market crashing? But every year around this time we start to see the market soften. Let’s talk about this, and then for those interested I have a big market update.

1) Slowing is normal: Prices have likely crested for the season in many areas of the country. What I mean there’s a good chance we’ve more or less seen the highest prices we’re going to see for 2019 as the market is starting to show its descent from the high-altitude spring season. This happens EVERY. SINGLE. YEAR. It doesn’t mean it’s not competitive either. It just means it starts to take longer to sell, the number of sales begins to shrink, and prices tend to taper.

2) The rosy real estate narrative: It can be a struggle for many people when hearing the market is slowing. It’s like we are only allowed to talk about real estate in glowing terms and our talking points must fit into a rosy narrative. So when there’s any hint of news that sounds even slightly negative, it feels like something is wrong. What do you mean prices aren’t going up? Wait, they’re softening? Does that mean the market is about to turn? Remember, just as it’s not always sunny outside, real estate isn’t always burning hot either.

3) The mistake of misinterpreting slowness: On the other side of the coin we tend to see lots of doom and gloom conversations around this time of year as the market softens. My advice? Know what is normal for the fall season so you can assess whether it’s a normal seasonal slowing or something more. In other words, let the stats speak to you and inform your real estate narrative. Otherwise you may be swayed by sensational headlines or get sucked into a real estate culture that sometimes struggles when things aren’t ultra-positive.

Any thoughts?

—–——– Big local monthly market update (long on purpose) —–——–

Now for those interested, let’s talk about Sacramento trends. If I had to sum up the market I’d say things have felt a little more normal lately. Granted, low mortgage rates are like a steroid helping the market feel normal, but nonetheless stats have been about what we’d expect for this time of year – which is unlike the dark season we experienced last year at the same time.

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THE SHORT VERSION:

• Stats feel mostly normal
• California will now have rent control
• Year-over-year price growth is stronger
• Don’t be like Michael Jordan
• Volume was down slightly in August
• Listings are seriously anemic
• Pendings are strong right now
• Sales volume is down 9% this year
• The market is slowing for the season

THE LONGER VERSION:

Here are some of the bigger topics right now:

Normal and cresting prices: We’re seeing about what we’d expect to see right now with prices starting to soften. I’d say prices have likely crested for the season. It’s possible we could see some price metrics bounce up slightly due to low mortgage rates, but that usually doesn’t happen beyond August much. Besides, any sales from September really reflect older pendings from July and August anyway.

Rent control: Statewide rent control in California was just passed by the legislature. There is going to be a learning curve for the real estate community on how to deal with this from a value perspective too. We may need years to really understand the effect on the housing market. Keep in mind this only applies to 2-unit+ properties built prior to 1995 (it does not apply to single family homes). Also, this doesn’t mean rents won’t increase either because landlords can legally raise rents 5% plus inflation each year.

14th bubble anniversary: The real estate “bubble” popped fourteen years ago in Sacramento in August 2005. In other parts of the country the market started to turn in 2007, but we started to tank in 2005. So happy anniversary, I guess.

Michael Jordan’s house: In 2012 Michael Jordan’s house was put on the market for $29 million and after seven years it still hasn’t sold. It’s now listed for about $15M. This just goes to show buyers aren’t willing to pay any price – even if the owner is famous. This is a great object lesson for sellers today who are prone to think they can command whatever price they want since inventory is low. Nope. Buyers are extremely sensitive to paying the right price and they’re more informed than ever. If you want to sell you need to price it right. Bottom line.

Slowing doesn’t mean it’s cold: The market isn’t slow, but it’s starting to show signs of slowing for the season as it’s taking longer to sell, most price metrics declined from July to August, and sales volume looks to be starting to slough for the year as it normally does. This doesn’t mean the market is cold though. Not at all. It’s just not as hot as it was during the spring. Over the next month I’d expect the market to heat up a bit though since kids are back in school and vacations are done. There is usually a last run on the market before the holidays arrive.

Almost 8 years of price increases: In the current real estate price cycle we’ve had about eight years of price growth so far. When I say eight, some people correct me with seven, but that’s not accurate if you count every year since 2012. I also have a chart like this for Placer, Yolo, & El Dorado County in my monthly download.

Stronger price growth: Prices are up about 4-5% from last year, which is a change from a more subtle 2-3% we’ve been seeing for most of the year. What’s going on? Part of the growth could stem from low mortgage rates fueling buyers to play the game, but let’s remember too last year was a dull time in the market, which means it’s going to be easier on paper this year to see glowing stats (more on that below). Let’s not make too much of one month of data.

Really sparse listings lately: The number of listings has been noticeably down. I mean, we’re seeing multiple hundreds fewer per month these days. Technically housing inventory as a metric is on the lower side of normal these days, but there have been fewer listings hitting the market (remember, inventory as a metric measures the relationship between listings and sales rather than the number of actual listings). I’ve been thinking about what’s going on here for a number of months and I’ll admit I don’t have it all figured out. Part of it of course is pendings have been stronger, which naturally means there’s fewer available listings. And maybe some would-be sellers refinanced into a lower rate rather than selling. I don’t think this is the byproduct of the iBuyer model with so many listings selling privately instead of coming to the market, but some properties certainly sold this way. Mostly I would guess this is related to sellers feeling uncertain about the market. Just as buyers had their moment last year where they backed off the market a bit, maybe sellers are feeling it’s their turn? There could be other reasons. This is something I’ll keep watching to understand over time. I’d love to hear your take here.

Warning about glowing stats ahead: Hey stat nerds, this is important. Over the next few months if we have fairly normal numbers they could end up looking glorious since last year the market was in a slump. If you remember, when mortgage rates shot up in 2018 buyers began to put their foot on the brakes and it felt like there was a dark cloud looming for about six months. Anyway, when you’re pulling stats over these next two quarters, just remember the numbers might technically look glowing this year compared with last year. My advice? Take stats with a grain of salt and compare multiple years of data rather than give laser focus to last year.

I could write more, but let’s get visual instead.

FOUR ISSUES TO WATCH:

1) SLOWER GROWTH: The market continues to show price growth, but the rate of change is slowing. This sounds offensive to some because the narrative in real estate is often that the market is always blazing hot. But let’s remember “slow” is not a dirty word in real estate.

2) A QUICK RECAP: All year prices have shown a modest uptick at about 1-3%, but this past month the stats look a bit sexier. Part of this could be due to lower mortgage rates, but some of it could be due to the market showing weakness last year (which helps pad today’s stats).

3) VOLUME SLUMP: Volume was lower last month compared to August 2018, but not by much. The bigger story though is volume is down in the region by 9% over the past year. Moreover, volume has been down in the region for 14 out of the last 15 months. Overall despite a lower year of volume, it’s still not outside of a normal low range (see 2014 and 2015).

4) PRICES SOFTENED IN AUGUST: The market generally slowed in August in terms of price growth. This is why I’m saying prices feel a bit flat (even though they’re up from last year). This is fairly normal for the time of year, and sometimes we see prices bounce up and down as summer comes to a close. Stay tuned. Let’s keep watching.

NOTE: Take El Dorado County data with a grain of salt. Stats change significantly month by month.

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SACRAMENTO REGION (more graphs here):

SACRAMENTO COUNTY (more graphs here):

 

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

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Questions: What are you seeing out there? What do you think prices are doing? What are you hearing from buyers and sellers lately?

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