What are prices doing? That’s always the question, and I get it. But there are bigger fish to fry to understand what the housing market is doing.
Market webinar: On Thursday May 19th at 10am I’ll be doing a deep market update webinar through SAR to talk about the latest trends. We’ll have an hour, so we can go over a ton of stuff. Sign up here.
A shift: Over the past few weeks there has been a shift in demand, which is why this conversation is so important. This isn’t about doom and gloom. I’m just saying we need to look at other things besides prices.
The last time: Let’s look at what happened when the market changed in 2005. There’s some helpful insight here, even though what happened last time isn’t the new template for every future correction.
WHY PRICES ARE THE LAST PLACE TO LOOK
Not that much different: The real estate bubble burst in Sacramento County in August 2005, but prices were only down 4-6% during that first year. When thinking of a pop, that doesn’t sound like much, right?
TWO THINGS TO WATCH INSTEAD:
The real story was volume: Prices saw a modest dip, but sales volume was imploding. There was a 43% change in the number of sales between August 2005 and August 2006. Some could’ve said, “Meh, prices are only down slightly,” but the glaring issue was nine hundred fewer sales in August 2006 compared to August 2005.
The real story was supply: Prices dipped slightly, but housing supply increased by 207% in the background. In other words, housing inventory went from 2.6 months to 8.0 months the next summer. And this helped set the stage for a massive collapse in 2007.
THE BIG POINT:
Prices were about the last place to look to understand the trend at the time. The real story was seen when looking at listings and volume.
What to watch: If you want to see what the housing market is doing, I suggest giving strong attention to the number of listings, the number of weekly pending contracts, and the number of sales. There are many other things to watch, but are buyers willing to continue to play the market? That’s the big question, and we’ll see the answer in volume before prices. Of course, if you want to sound suave on date night, watch other things like price reductions, the number of offers, days on market, etc… I’m talking through lots of these things every week. If you’re not local, check out the Redfin Data Center for weekly stats.
Whatever you do, don’t get stuck on prices alone.
Getting buyers to walk: As I said last week, price growth slowed in April compared to truly exuberant gains between January and March. Today we are seeing slow traffic in general at open houses, more price reductions, and buyers having an easier time getting offers accepted (not always). This really happened quickly too over the past few weeks. Overall, buyers are far more sensitive to price, condition, and location, which means sellers need to be open to negotiation. I’ve heard a few examples of buyers walking after sellers said, “Yo, Bestie, thanks for the offer. Now give me $25K more and remove the appraisal contingency.” That might have worked in January, but this is May. It’s a different market today. I’m also hearing more examples of, “We priced it right, but we aren’t getting any action yet.”
Embracing stats: The other day someone wasn’t happy because I wouldn’t call this dynamic the start of a market correction, but the truth is we need time and stats to understand the longer-term trend. This is not me sugarcoating. This is me being objective. Let’s keep watching the numbers (by the week) and letting the stats form our narrative.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
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Questions: What stands out to you most in this post? What did I miss? I’d love to hear your take.
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Very interesting stats. New chart idea. I think the last time we had interest rates raise as much is clear back in the 1990s. Do you have data to compare how the real estate market reacted then compared to today?
Thanks Gary. I have price metrics from the 90s, but not volume metrics. I really wish I had that, but I don’t. I suspect volume took a hit when prices declined in the 90s though. I know volume dipped in 2018 locally when rates shot up. When looking at the mortgage spike in 1993 and 1994, it’s important to note prices were already declining in Sacramento. In this case at least the mortgage rate increase didn’t cause a change in direction for the entire market because the market was already going down.
For any onlookers, here’s a look at price cycles so you can see Sacramento was declining from 1991 onward already. https://sacramentoappraisalblog.com/2022/03/01/predicting-housing-price-cycles-isnt-so-easy/
And, if you want to see mortgage rates from the 1970s onward, here’s a great source. https://fred.stlouisfed.org/series/MORTGAGE30US
I agree it is great and necessary to analyze supply and demand. But how do you address market adjustments when the price continues to escalate while seeing slowing in demand?
Hi Dan. That’s a great question. I don’t know that there is a one-size-fits-all answer, but this is where we need to look at sold comps vs similar listings and pendings. What sort of price difference is there? If buyers are willing to pay more, then we can try to quantify that in an adjustment. If supply increases and demand shrinks though, at some point we should expect for buyers to pay less (and we’d recognize that in the listings and pendings). The market doesn’t all of the sudden typically stop though. We are seeing a change in demand right now for sure, but there has still been heavy activity. Even multiple offers are still higher than they normally are. But let’s watch for buyer resistance if supply keeps increasing and demand shrinks. In the midst of multiple offers, we’ve also seen pending contracts take a hit over the past few weeks in the region. But it hasn’t been an avalanche of a dip either (nothing remotely close to the 2005 graph I showed above). This is where we need to recognize the market is more like a thermometer with temperature changes rather than a complete on and off switch or some sort of only hot or only cold button. In short, I would have no problem giving upward adjustments in my appraisal reports today if that’s what the stats are suggesting. I also have no problem doing the opposite. In my mind this comes down to recognizing market temperature and trying to understand the temperature in coming weeks and months. One last thing. Demand has changed rather fast lately. While we don’t see a big dip in stats right now, this is something to watch.
It is easy to cherry-pick the stats we want, and that fit our narrative, however, appraisers must look at the market as a whole. Thanks for bringing this full perspective to everyone’s attention. If we keep our blinders on we may not see other stats that give us a better understanding of what may be happening.
Well said, Tom. Thank you so much. I find it can be easy to only see the trees instead of the forest too. If we’re not careful in real estate, we can make the mistake of only looking at what is on our desk to interpret the market. But that may or may not reflect the trend. It’s not easy to avoid sensationalism either, but it’s critical. Being objective is a tremendous asset for real estate – and life.