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.
Thanks for being here.
Questions: What are you seeing happen with prices?