Sellers have been chasing the ball down the road. What I mean is prices have been going down lately, and sellers are trying to find the market through price reductions. I can’t speak for the entire country, but I’d like to talk about what’s happening locally. I’m not writing as a housing bull or bear either, but as a stats guy with the goal of objectivity. Anyway, some thoughts.
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Expecting to pay less: Before getting to any stats, I wanted to mention that most people I talk to right now are aware that prices have been dipping. Well, besides some unrealistic sellers right now… Haha. Just yesterday I talked with two homeowners who spoke about prices softening as if it was common knowledge. Or someone called a few weeks ago wanting an appraisal very quickly for PMI removal to lock in a higher value before prices dipped. Have you seen offers from Opendoor in the mail lately? They are definitely lower. And let’s not forget actual market stats, which I’ll get to below.
Here is a visual from Len Kiefer to get at what I’m saying. There is an expectation of softer prices ahead. We’ll see what happens of course, but we want to pay attention to the psyche of buyers and sellers right now.
The median price is down 7% so far: The median price has gone down about 7% since May in the Sacramento region and Sacramento County. This is a much bigger change than usual for the time of year since the median price in August is usually down about 2% or so from the height of spring. This isn’t really a shocker though because we saw such a dramatic change with mortgage rates. In short, a sharp change in rates is causing a sharp change in the stats (including prices). But to be fair, this year is a bit awkward since prices crested one month early in May (usually prices peak in June). This means we have one extra month of declines to pad into the stats.
Seasonal decline or new downward cycle: Is this only a seasonal decline, or is it something bigger? Look, the truth is we need time to see the trend and understand it. For now, we’ve clearly experienced a huge contraction where about 25% of buyers have stepped back from the market. Moreover, we’ve seen sharp price declines for the time of year, so at the least we are in the midst of heightened seasonal declines. Could it be more? Yes. But we need time to understand how the market is going to go. I realize this is frustrating for some people to hear, but let’s remember the future hasn’t happened yet. For now, we are living in the midst of change and uncertainty. Here is something I wrote six months ago to talk about price cycles in case it’s useful.
There is still competition: The market is completely different than it was earlier in the year, but there is still competition. In fact, 25% of sales sold above the original list price last month and 43% of sales in August had more than one offer. These stats are lower than normal actually, but I wanted to mention this because sometimes we hear about softening prices and think literally everything is tanking and selling at a severe discount. It’s a mistake to impose a doom narrative on the market. Remember, there are many stories in real estate, and the story isn’t the same for every seller, buyer, or escrow. In case it’s helpful, here is advice for buyers and sellers in today’s market.
Affordability: The market has taken a beating with affordability, so there are fewer buyers able to play the game right now. There is no such thing as rates doubling and prices remaining the same. The math just doesn’t work. Check out this Redfin visual to show mortgage payments being 37% higher than last year at the same time (or about $600 more PER MONTH).
Here are some affordability images I put together for local counties. In Sacramento County, 27% of households can afford a median-priced home. These images are based on CAR stats.
Appraisers saying “stable” or “declining” in reports: Appraisal forms ask appraisers to select a box to describe what prices are doing. Are they declining, stable, or increasing? I suspect these days we’ll have a mixture of some appraisers saying “declining” and others selecting “stable.” Honestly, at this moment in time I care way more about whether market change is accounted for when looking at the comps than I do about a box. In other words, I can see some appraisers checking “stable” since we are living in the midst of change and not certain yet about whether this is an inflamed seasonal trend or the start of a downward trend. However, I have a massive problem if appraisers right now are not adjusting comps down since we’ve seen clear price declines over the past few months. Again, I’m not talking about every market, so save your hate mail. But many markets across the country have seen more inflamed seasonal declines, which means some older sales need a negative adjustment since value is lower right now.
Commentary from an appraisal: Here is a bit of commentary in one of my recent appraisal reports. This is only part of what I say because I’m a man who needs a few paragraphs. One box just isn’t enough.
“At the least we ought to describe the market as showing a downward seasonal shift, though it’s possible we can call this a downward cycle if the trend persists over time. For now, it is most reasonable to categorize the market as having growing uncertainty and blatantly inflamed downward seasonal price declines compared to a normal seasonal trend. At the least, properties are clearly selling for less than they did several months ago. The regional median price has ticked down about 7% since May, which is $45,000. This doesn’t mean every property is worth $45,000 less, but it’s been clear buyers have been resisting paying higher prices.”
One last note about home size: Keep in mind some of the price change lately has to do with smaller homes selling. I know the visual below is chaotic, but check out the dark blue line, which represents the average monthly square footage. Normally the size of homes peaks during May or June, and then we see smaller homes sell for the rest of the year. Can you see how when the dark line goes down, the lighter blue lines also go down (average sales price)? This is a good reminder that price change is also about what is being sold. And for the record, I’m not saying the median price is down by 7% due to size. I’m just saying some of the change lately has to do with smaller homes rather than only the market.
Okay, one last thing about size: During the beginning of the pandemic there was a blatant spike in home size due to a greater focus on larger homes at higher prices. This spike basically peaked one year ago as size has started to normalize. Now let’s keep watching to see what happens to size. Will we see smaller homes more often as first-time buyers flood the market? Will we see fewer sales at the highest prices? To be determined.
Closing thoughts: The market is always moving, and we are in the midst of change right now. Let’s keep watching the trend and being objective about the stats. It’s really easy today to get sucked into sensational narratives, so my advice is to stay grounded in the stats. And for my real estate friends, keep finding the players of the market. Who has incentive to buy, sell, and invest in today’s market? The key is to identify those people and support their goals.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Thanks for being here.
Questions: What are you seeing happen with prices?
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Here’s hoping everyone who got a mortgage is truly qualified and not overextended. I know there was a lot of speculation (including from lenders I spoke with) that the fed would raise rates but then within a couple years would be forced to drop them again to combat recession. If people bought into this narrative and purchased more home than they could afford, assuming they would “just refi in a couple years at a lower rate!”… they might be SOL.
Other than that, I’m still wondering WHO TF is SELLING? I mean, where do they go? Assisted living facilities? Renting? Or are they selling off second/vacation homes? …Cuz who wants to sell right now with crashing prices and have to buy while rates are so high as to make payments insane?
Ryan Lundquist says
Hi Joda. Thanks for the commentary. I appreciate it. I’m a big fan of being comfortable with the mortgage payment instead of banking on lower rates in the future. To each his/her own though. I get the real estate community saying “date the rate, marry the mortgage,” but there are certainly limitations with that. Are you comfortable with the mortgage payment right now? That’s the key. But let’s be real. Very few people stay in a home for 30 years, so if the rate works for a season, so be it.
Lots of people have incentive to sell regardless of what the market is doing. People are moving out of state, down-sizing, up-sizing, moving money in a 1031 Exchange, needing to buy something in a different school district, etc… Lifestyle, death, divorce, disease, etc…. Lots of reasons. The numbers certainly won’t work for everyone. Lots of people are sitting on such a low rate that there is incentive to stay put. 100%. And there is so much equity there too. This is what intrigues me as I wonder what we will see with sellers in coming years. Sometimes people online will say things like, “Sellers are flooding the market,” but it’s fake news locally and nationally. We are seeing a subdued amount of new listings hitting the market.
About 2 months ago my aunt and uncle (both retired) sold their home in Elk Grove with the plan of traveling and renting out Airbnb’s until they figured out where they want to buy next.
Curious to know if others are doing a similar thing.
Ryan Lundquist says
Thanks Maxwell. I’m sure others are doing that too, but it’s hard to imagine that’s a big sliver of the market since not everyone can travel in light of work and such. This sounds great though for your family. That retired life sounds nice… 🙂 I do know a couple who sold their home and bought a massive RV to travel around. The RV is essentially their new home (super expensive one).
Neil Cowam says
Thanks again for the excellent information as always. I really appreciate you putting in the hard work to keep us all informed. Question, when would think we have a enough time and data to know if we truly are in a downward trend or if it’s just seasonal? Start of Q1? Or maybe come late November? Thanks again,
Ryan Lundquist says
Hi Neil. That’s a good question. I don’t know that I really have a cutoff date to be honest. I don’t want to box myself in because we will continue to get more clues as time unfolds (presumably). With that said, I think it will be very telling to see what happens with the remainder of this year. Words like, “market shift” and “correction” are okay to use right now though because that’s what we’re experiencing as the market is clearly having a strong reaction to doubling rates. I think seeing what the market is like during the first quarter would be an even stronger indicator. Keep in mind seasonality tends to happen in most markets – not just rising markets. What I’m saying is having increased attention on the market in January is to be expected unless we are super dull. Erasing all seasonality is hard to do. I’ll speak more to that as time unfolds because I think people are going to want a deeper analysis of declining markets and such. One factor here is what happens with rates. We’re experiencing a dramatic shift due to mortgage rates increasing. If rates go down again to 4.5% like some are predicting, that could change the feel of the market. So that’s an x-factor and worth considering that we are not locked into a trend.
Great writeup as always, Ryan!
Wow, what really jumped out to me (in a somber way) were the affordability charts. Essentially, around 75% of residents of Sac and surrounding counties can’t afford to buy a median-priced home.
That alone should exert some downward pressure on home prices, because it lowers the demand side of the price equation.
It’s also a sobering look as to the effects of inflation on the “average person”, that it has effectively boxed them out altogether from buying a home.
Ryan Lundquist says
Thank you ChrisBern. It really is sobering. Affordability has been heading in the wrong direction for years, but it’s been on hyper-drive over the past couple of years especially. The best solution for increasing affordability quickly is to see rates drop dramatically. Though that feels like a very temporary solution to me because it puts a bandaid on a huge issue – prices are high. The other strong solution here is to see prices drop. Wage growth, economic growth, new lender programs, etc… can all help alter affordability, but the bigger two issues are what I mentioned.
We are all looking forward to seeing inflation get under control. There was less-than-positive news put out yesterday unfortunately. We are still in the thick of this. Fingers crossed.
Carol Coder says
Thank you as always for your analysis. In looking at the affordability chart for Yolo County it looks like the drop in affordability must be due primarily to the rapidly rising prices. The rise in interest rates wasn’t a factor yet, right? If that’s the case I would think that to even maintain the affordability level we have the prices would need to go down to compensate for the increased interest cost.
Ryan Lundquist says
Thanks Carol. The drop in affordability during the past years is definitely tied to rising prices. You are correct about that. We are starting to see mortgage rates showing up in the data though as these images go through Q2 2022. By June 2022 rates were already at 6%. Here’s a chart to help show the history of rates since 2009. https://www.mortgagenewsdaily.com/mortgage-rates/mnd And yes, prices going down is one mechanism to help people afford the market. Right now we’ve seen buyers step off because they cannot afford. Some might feel uncertain about buying right now too. But I suspect if rates dropped to 4% tomorrow, we’d see lots of fresh buyers jump into the game. All that said, we are missing one quarter of the market, and we have to find a way to get buyers back into the game.
Brad Bassi says
Hello Ryan, well back on my ranch after the Fairview Fire down here decided to head my way. Mandatory evacuation order was received. Good news all is good, and we are back on the ranch, breathing a sigh of relief, so are the big animals.
Great Affordability Chart(s). Here is a funny HaHa and also sad comment. I am saying somewhat tongue n cheek. About 3 months ago I wrote up a lending report. I included a comment on affordability and in this world of shall I say hypersensitivity I received a call from an underwriter asking me to remove the comments about affordability. They claim my comments form a racially bias profile. Most of you Don’t know me, but Ryan does, so don’t send him hate mail just because he knows me. My comment back to the underwriter was please tell me what factual data I presented was incorrect. Her comment back was that “facts don’t matter”. Yes, after she said it, she realized what came out of her mouth. I thought of jumping on the comment and for some reason I let it pass by. So, I asked her again what was factually incorrect? She had no response, except that it can’t be in my report. The world of the Twilight Zone was just entered. I made no change to the report and told her to send it to her boss’s boss and to her congressman or congresswoman or Rep Ms. Maxine Waters and have them call me to discuss. So far, no call backs, hmmmmmm.
I say this because affordability is one part of the puzzle not the whole puzzle, but it does matter and can explain some of what is going on with changes in sales volume and how interest rate changes do matter. My guess is that if more than 70% of the population, no matter their what religion or skin color, can’t afford to buy a home in a market that it might be an issue for the market, but what do I know.
Ryan, enjoy your great work and effort to get all this good stuff out among the cyberspace folks.
Great data as always.
Tip my Stetson to those agents that follow you as this market is nutty with nutty sellers who seem to have access to 2021 and First Qtr 2022 market data, but they stopped collecting after April 2022. Hope they start listening to the professional RE agent.
Ryan Lundquist says
Wow, Brad. I’m really glad you’re okay. Yikes. What a relief. I imagine that’s beyond scary to have to evacuate and get your animals to safety. I can’t imagine. Right now we have the Mosquito Fire locally, and it’s sad to see some friends on my Facebook feed evacuated. I think it’s only 20% contained too.
That’s quite a situation and I imagine you worded things very well and objectively. That’s who you are and I know your heart.
Now, just for the sake of discussion, let me play devil’s advocate… For any onlookers, I suppose it depends on how something like this is worded. If someone said, “And residents cannot afford properties in this neighborhood,” that sounds off because it sounds like a subjective judgment. But if someone said, “Affordability is declining as only 27% of households in the county can afford the median price per CAR stats,” that is factual and objective. Or something like is also factual… “The monthly mortgage payment is up 37% this year per Redfin, and we’ve seen a 25% drop in volume as buyers are struggling to afford today’s prices.”
When we think about the climate of today’s housing market, I completely agree with you that we have to be able to talk about affordability. This is a massive issue. It is the elephant in the room. What is the market doing? And why is it moving the way it is? If we’re to parse what is happening, it’s meaningful to discuss the trends and stats (while obviously avoiding any hint of bias).
The reality is we’ve seen lots of areas with contracting volume. In fact, CAR reported last month that every price point contracted in the state. And locally, some of the highest-priced areas have 20-30% lower volume this year, so it’s not just one type of neighborhood or buyer profile. Affordability has been growing in the wrong direction for years, and it’s on steroids right now in light of rate hikes. That 100% matters for the market and I will talk about this in my market analysis in an objective manner.
For any onlookers, see slides 15-17 in the CAR July report to show volume trends in the state. Hopefully they will publish August stats soon, and it wouldn’t be surprising if August stats rebounded a bit because lots of markets saw a bit of a rebounding dynamic (including Sacramento). https://www.car.org/marketdata/data/countysalesactivity
Thanks Brad. I appreciate your commentary. And I’m so glad you brought this up because it helps us intelligently parse through what it looks like to talk about trends. I hope it was okay for me to expand on the example here.
Take care. And yippee ki yay (not sure if real Cowboys say that, but Bruce Willis does…).
Brad Bassi says
Bruce does say it and it works for me. Although sometimes he is a little more graphic with his chose of words………..
You are absolutely right on with your comment. It is about the community. It is what the statistical mean and median show and what the average household income has to be in order to make a monthly payment. It is part of the reason why things are changing in a market. When you see spikes in monthly payments from $900 a month to $3000 a month (in less than 1 year) for the same property (depending upon interest rates and the crazy rise in prices), then you have a whole big mess that is part of the issue at hand.
Well said as always Ryan. Thank you, my friend, and last week was a very busy week. Funny how it only takes a few minutes to two hours to evacuate but it takes four days to move everything back in. Have no idea how that works.
Ryan Lundquist says
Haha. Good to know. Thanks as always. Now hang in there and get some rest to recover from this past week.
There’s a lot of talk on Reddit and such places about hordes of people “waiting on the sidelines” who have oodles of cash and are waiting for a crash to scoop up real estate. If this is true, then all those people buying as prices decline would have the effect of damping the crash and leveling off prices. I’m curious though how much extra cash is actually sitting around. And I’m not a lender, but I assume that even if (for example) prices drop 20%, and someone has 20% to put down, that doesn’t mean they qualify for the loan at the higher rates (the payments could still be very high).
Ryan Lundquist says
There is some really good housing discussion on Reddit for sure, but we have to look to the number of buyers playing the market right now too. There are certainly people waiting on the sidelines, but how many are engaging right now? As I’ve been saying, we’ve seen about a 25% hit to actual sales volume lately, though at times pending volume has been down closer to 30% down over the past few months. I’m definitely listening when people say they are sitting, and I’ve heard that quite a bit, but I’m also aware of what is happening with actual sales too.
The struggle is there isn’t just one story for the market. I think at times the assumption is that everyone is waiting, when that’s not what the stats show. I talked to an investor on Instagram who bought two properties cash last weekend, so some investors are buying right now actually (and some are clearly not doing so).
The trouble with waiting is market conditions and finances / lifestyle don’t always line up perfectly. Don’t get me wrong. I’m not saying people should or shouldn’t buy today. People need to make their decisions and be confident in whatever the decision is. No pressure from me. I’m just very aware that theoretically timing a market on paper is quite easy, but it’s not always so simple in real life. If it was, then everyone would have bought in January 2012 when the median price was $160,000 in Sacramento County. Why didn’t people do that? We were just getting out of a hardcore recession where people got financially destroyed. And lots of prospective buyers had a foreclosure or short sale on their record, so lenders would not allow them to buy until a certain time had passed. Ultimately, props to anyone who has a plan and executes it well. I’m just aware that plans on paper and execution in real life don’t always look the same.
I know, that was a bit of a tangent, but this is a great convo, and that’s what was on my mind. Thanks.
Tom Horn says
Great post, Ryan. I agree about homes selling for less due to the size of the home. There are a lot of factors taken into consideration when unpacking sales and what they sold for and a lot of times most people ignore them depending on the narrative they what to support. To really make sense of pricing trends it’s important to dig deeper like you do. Keep up the great work.
Ryan Lundquist says
Thanks Tom. I appreciate you so much.
Regarding the dramatic reduction in affordability—
A friend of mine who works for a new home builder in OC. He was telling me that a high percentage of his buyers are international, cash buyers. This has not been an uncommon phenomenon in California these past decades. But what I see happening is while international/cash buyers buy in CA, CA residents are moving to other states, driving those prices up, creating indirect price increases in other states. In addition to this, when you consider all of the corporate/private equity investment into SFRs these past years, it should be no surprise that affordability is so low. In an indirect way, when a foreign investor or an institution buy a home in the US, that process essentially takes away the opportunity for a first time home buyer to enter the market (again, an indirect effect).
Granted, on a macro scale, I do not know the numbers or proportions of institutional/international demand relative to supply. But I wonder…has there been any talk of policy adjustments to address these types of buyers? I know some countries do not allow foreign investors. (China, Singapore, among others). Some countries (European among others) impose excessive taxes on foreign investors.
I know that the implications of such policy would be a can of worms, and I do not trust the government to execute such a policy properly, because they never do. But we have a problem, and it doesn’t seem like we will ever get back to 74% affordability like 2011, given the current market players, and, in the mean time, first time home buyers suffer.
Perhaps my question is short sided, because markets and affordability do shift over time. But are you aware of any policy talk regarding this, and do you share my same concerns in the long run regarding affordability for first time home buyers while institutional investors and International buyers claim an unprecedented amount of supply?
On the one hand, it does not seem very American or free market to impose such restrictions. On the other hand, it is disturbing that the American dream of home ownership is becoming less and less attainable.
Ryan Lundquist says
Thanks for the comment. I’ve definitely heard of foreign investors in SoCal, but that’s not really a thing in Sacramento as far as I know. Institutional investors are going to vary also. Overall the narrative is that institutional investors are buying everything, but I’ve not seen any stats to substantiate that. But regular investors being 20%+ of the market here is a big deal. I wrote about some investment funds and shared some investor stats here in case it’s helpful. https://sacramentoappraisalblog.com/2021/06/21/the-invasion-of-institutional-investors-in-the-housing-market/
Here is a Freddie Mac article to help show iBuyer / institutional investor percentages throughout the country. https://www.freddiemac.com/research/insight/20220609-what-drove-home-price-growth-and-can-it-continue
No matter what the stats though, when investment funds and tech platforms come to the market, they are certainly squeezing out buyers in some ways. At least the iBuyer model sells the property back to the consumer, but other properties become rentals. Still though, the iBuyer model is only about 5% of the market in Sacramento right now and even less in the entire United States. With that said, the public needs to watch this closely, and I think we ought to be concerned when investors starting viewing residential real estate like real life Monopoly.
Has anything been done? Their is talk about helping, and SB 1079 is an attempt to limit investor influence (ironically I’m not sure it’s going to limit investors though). Or I wrote about AB 1771 earlier in the year, but the bill seems like it is being pitched by people who aren’t in tune with how the housing market works. https://sacramentoappraisalblog.com/2022/03/28/taxing-flippers-25-in-california/
I’m really concerned about affordability. I suspect we’re going to need multiple solutions here. Right now it’s a massive problem on our hands that 16% of households in the state are said to be able to afford the median price. That’s a problem. https://www.car.org/en/marketdata/data/haitraditional
El Aurens says
I’m a Sacramento-area native that left when I was 18 and haven’t lived in the area for another 17 years. I’m planning to leave Texas to be closer to family (I know, I’m going the wrong way), but attempts to buy over the past few months in Sac-proper has been a huge PITA as the housing stock seems to have dried up.
I’m mostly seeing houses that people have lived in for decades that need a lot of work or overpriced houses purchased in the past two years with a last-ditch attempt to flip for profit at high prices.
We have the cash for a down payment, but there just aren’t a lot of options for a young-ish family trying to buy the first house. We are only getting MLS emails a few times a day for our chosen area, rather than the dozen or so just in July.
We’re starting to get worried that if we don’t find something by mid November we’ll be out of luck til February.
Ryan Lundquist says
Hi El. Thanks for reaching out. One of the struggles at this time of year is the market starts to feel like leftovers. In other words, it feels a bit stale as listings linger and buyers and sellers start to fade as the weather changes and holidays ensue. New listings by the week tend to climax in the summer around July in a given year, but this year it was actually June. We are still seeing new listings hit the market, but fewer listing basically will be coming each week through the end of the year. So in a real sense, you’re going to have fewer options. One of the things that happens at this time too is we start to see smaller homes sell. This means the biggest and “best” stuff so to speak tends to get listed during the spring. It’s just the rhythm of how the seasonal market works.
I know what I’m saying may sound discouraging, but a few things to consider:
1) There will be more listings ahead even though not as many will be hitting the market until an uptick in early 2023);
2) If a great property comes to the market in the fall, that seller really wants to sell. Keep an eye out for some gems that pop up. The ideal time for many would be to wait until the spring, so if something pops up in October or November, that could be a good situation. One of the advantages of buying at this time too is that you get to see if the roof is working as intended (assuming we actually have some rain (hit and miss));
3) Don’t be afraid to go after overpriced properties. We still have an overpriced market and literally half of all active listings have had a price reduction. At some point some of these sellers are going to come to terms with the market, so they’ll need to reduce the price if they are serious about selling. Some of these sellers of course aren’t going to lower the price because they’re unrealistic. But many sellers are starting to listen to the market. In fact, nearly half of all pending contracts have had a price reduction. This tells us many buyers are getting into contract on overpriced stuff. Granted, it’s possible the contract happens after the reduction too, so that’s a fair point. But like I said, sellers are in a place where they’re going to have to listen if they want to sell. You have much more power today, so don’t be afraid to make some offers. If a seller isn’t getting any, the worst they can say is NO.
That’s the straight dope. I hope it was useful to a certain extent. Please keep me posted with any questions. And I’m open to any observations you’re making as a buyer when it comes to the market. I appreciate hearing from people in the trenches.
Steve Owen says
Excellent commentary, as usual. I love the visual I got of seller’s chasing prices down, even before I noticed the one you put on the header. Locally, the effect is more a matter of softening numbers of sales and prices will surely follow. When California gets pneumonia, we catch a cold… but, what goes around usually comes around.
Ryan Lundquist says
Thanks so much Steve. It’s fascinating to watch what’s happening in different markets, and it’s amazing how we can keep tabs on different areas too with the advent of so much information online. Unreal to see 6.62% rates right now. https://www.mortgagenewsdaily.com/mortgage-rates/mnd