Home prices are the holy grail in real estate, and it almost seems sinful or off-limits to say they’re going down. But let’s be real. That’s what is happening right now locally and in some other portions of the country. Let’s talk about what this means as well as what’s going on in appraisal reports.
UPCOMING (PUBLIC) SPEAKING GIGS:
11/4/22 Market update in Roseville (real estate pros only (details here))
11/15/22 Sacramento Bee Q&A at 12pm (RSVP here)
11/17/22 Fair Housing Lunch & Learn (RSVP here)
12/5/22 Safe Credit Union Lunch & Learn (details TBD)
1/18/23 WCR Market Update in Cameron Park (details TBD)
1/19/23 Big market update at SAR on Zoom (details TBD)
1/24/23 Market update with Joel & Mike (details TBD)
YES, THERE IS A BOX
If you didn’t know, there is a box on appraisal reports where appraisers can state property values are either increasing, stable, or declining. Here’s what the box looks like. I’ve been hearing about some appraisers checking the declining box lately and others not. It’s a mixed bag (rightly so).
THE MARKET ISN’T THE SAME EVERYWHERE
It’s really important to note the market is NOT the same in every location and price range across the country, so appraisers aren’t going to be checking the same box everywhere. Even in a local market, it’s possible different locations or property types are not experiencing the same trend. I mean, all ships tend to rise and fall with the tide, but we have to let the research do the talking instead of imposing a declining narrative on every portion of the market.
YES, THE MARKET IS DECLINING
In Sacramento, prices have clearly been declining as demand has changed sharply in recent months. In other words, buyers are hands-down paying less today than they did in previous months. We see this in lots of metrics I’ve been writing about for months, and even neighborhood graphs are finally starting to show a declining trend (it takes a bit for graphs to have enough data to show the trend). This is more than a modest seasonal dip as the median price is down about 10% right now since May. In a normal year we might see the median price down about 3-3.5% at this time of year. A few weeks ago I talked about the median price being very close to dipping below last year, and even Redfin is starting to show that for Sacramento (see this thread).
Example 1: Neighborhood Graphs
Example 2: County, City, & Regional Stats
BRO, THE MARKET IS JUST STABILIZING
To me the word “stabilization” is a bit rosy because price declines have been much more intense than usual. Stabilization or normalization would maybe resemble a more seasonal trend or a leveling off, but what we’ve experienced lately has been a sharp drop in buyer demand. Most counties are down in sales volume by about 25-30% over the past few months compared to recent years, so this has been a bigger shift in demand rather than a typical seasonal change.
BUT PRICES ARE STILL UP FROM LAST YEAR
Yeah, prices are technically up from last year when looking at September stats, but there is a clear declining trend happening right now too. It’s sort of like if I lost 70 pounds and then gained 20 back. I’m still down 50 pounds technically, but do you know what the real trend is? It’s me gaining weight lately. And just to be clear, I’m not sharing real stats from my body even though I have gained 20 this year. Haha. I’m just saying it’s a mistake to focus on year-over-year prices to the point of missing what is happening in front of us right now.
BUT WE NEED MORE DATA
How many months of data are needed before we can establish a trend? I’m not sure there is a specific answer that applies to all situations, but I would say having almost six months of slower data now is more than enough. I think we probably needed half or more of that to start seeing a clear trend. Even by June we knew volume was starting to take a 25%+ hit, so we knew there was a sharp change at hand. It just takes time for the trend to show up in actual prices to be able to make the call as to what is happening. It’s okay if you think we still need more data, but let me ask you this. What more do you need? I’d love to hear in the comments or an email (not interested in hate mail though).
Q&A HOUSING VIDEO I DID
I recorded a video with YouTuber Jeb Smith to talk about dynamics in today’s market. This was recorded about two weeks ago, and it’s all off the cuff (my favorite way to do things). Watch here or below.
THERE IS STILL COMPETITION
Prices are going down because affordability has taken such a beating lately. It’s that simple. In recent months mortgage rates have changed faster than they have in forty years, so it’s not a shocker to see a quick change with prices. Do you know what would be shocking? To not see a change. But remember, declining prices doesn’t mean there isn’t any competition. It’s a mistake to say all buyers have left the market because that’s statistically not true. Keep in mind about 36% of pendings over the past two weeks in the region had multiple offers per MLS stats. Also, while we’ve seen about 3,600 fewer sales happen since May of this year, there have been nearly 11,000 sales that have happened. In other words, declining prices doesn’t mean the market has stopped. Bottom line.
NOT LOCKED INTO ONE TREND FOR SIX YEARS
The trend is declining right now, but that doesn’t mean we’re automatically locked into this one trend from here on out. It also doesn’t mean we won’t see some spring seasonality ahead either. When the market drops in Sacramento, it’s not uncommon to see about five or six years of a downward trend, but I’d be careful about stating we’re locked into that. Maybe. Maybe not. Keep in mind it’s not a sharp plunge for an entire downward cycle either. Ultimately, the verdict is still out on the future since we are just at the beginning of change, but right now prices are dropping in light of such a huge hit to affordability lately. In a sense it feels like a game though where the Fed could manipulate things and change the trajectory of the market. So, if rates go down sharply, that could alter the dynamic. Some like Ivy Zelman predict it’s possible for the housing market to move faster now in light of access to real estate data like never before, but that’s also to be determined.
WE NEED 12 MONTHS OF DATA TO SAY IT’S DECLINING (FALSE)
Sometimes I hear appraisers say we need twelve months of data before calling something a trend, but why twelve months? And to play devil’s advocate, when values started to really turn up in the summer of 2020, did we need to wait 12 months until we said the market was increasing? Absolutely not. In short, we do not need twelve months before making a call for the direction of the market. If that was the case, then appraisers would perpetually be far behind the trend in an increasing market and a declining market.
NATIONAL vs LOCAL
It doesn’t matter what the “national” housing market is doing because the so-called national market is really made up of thousands of local markets. Some experts project a declining trend that will start in 2023, but that means nothing for Sacramento and so many other locations. Remember, homes prices fell maybe 30% in some markets during the previous housing downturn (and far less in some areas), but the median price dipped by 59% in Sacramento County. This just goes to show a national projection or trend doesn’t mean squat for the local market.
DOES THIS MEAN APPRAISALS WILL BE COMING IN LOWER?
Just because the market is declining doesn’t mean every appraisal is going to be coming in below the contract price. Lately it’s been a mixed bag and there are lots of appraisals still coming in higher according to conversations with loan officers. I have definitely heard of lower appraisals, but that’s not a bad thing (unless the appraisal was deficient). An appraisal below the contract price could have been a deathblow to a transaction in 2021, but hopefully today it’s more of a bargaining chip (sounds healthier to me).
THE MARKET LOOKED “STABLE ON THE DAY”
I recall when the market was tanking in 2007 hearing some appraisers say they’d check “stable” because “the market was stable on that day.” This was basically to appease lenders at the time who pressured appraisers not to check the declining box. This is not legit though because appraisers are tasked with being a neutral party to the transaction, which means showing bias like this to clients is off limits. Besides, if an appraiser is not identifying the trends correctly, that could show up in adjustments that are not given to the comps, right?
DUDE, IT’S JUST A PERSONAL OPINION
A local loan officer told me an appraiser said it’s just a personal opinion as to whether this declining box is checked or not. I mean, I can understand the sentiment since there isn’t a rigid list for what appraisers need to identify before saying a market is declining. Thus, there really is an element of subjectivity here. But this is where the appraiser has to be the expert by considering all relevant issues and diagnosing the trend based on research, stats, and observations. In other words, this little box to check should be backed by stats and support for the conclusion. If it’s just a checked box without support, then the appraiser hasn’t done his or her job.
Okay, that was probably more than you wanted to read…
ADVICE FOR COLLEAGUES
1) Be the expert in your market by being on the cutting edge of the trend.
2) Reflect the market and support your conclusions. If you feel afraid a client won’t keep you around if you say the market is “declining,” that’s not a good client. But also, if we start to get more robust stats from big data companies that the market is declining, you’ll be really behind the trend if you’re saying it’s NOT when everyone and their mom knows it is.
3) If you don’t know how to measure prices, talk to colleagues and get up to speed as quickly as you can. Take a class, scour the internet, try to add some new skills to your bag of tricks.
4) Take the time to unpack the market in each appraisal report. I honestly don’t care which box you check, so there is no pressure from me. But support the trends you say exist with some commentary and rationale.
5) If you aren’t making scatter graphs like my neighborhood ones, maybe it’s time to figure that out (or use some other type of graph). I have some free graph tutorials in case it’s helpful.
Thanks for being here.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Questions: What stands out to you most above? What did I miss? I’d love to hear your take.
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Great timing. We were just having a discussion about this yesterday in our office. Personally, I hate misleading checked boxes and would rather just tell the story of the market in the narrative. Let’s get rid of the checked boxes. It sometimes gets complicated when you explain prices are up year over year, but down in the last few months so that’s why the box is checked declining.
Totally agree about the boxes, Gary. Preach. I’m not a huge fan. During a normal seasonal softening I have no problem if appraisers say the market is stable either. I think some simple commentary is in order to explain what is meant by “stable” or whatever an appraiser selects. Today is different though. We’ve seen a sharp change that cannot be chalked up to seasonality in my opinion (in Sacramento at least).
Great stuff as always Ryan. The last purchase I worked on had a price drop then went into contract at the original price with a credit to the buyer so the buyer net was the new price. I suspect you know which price I could support.
For appraisers, it’s clearly time to up our game. Every appraisal right now should have at least 1 market trends graph. Even if you don’t have the skills to create your own graphs, make use of the graphing tools built into your mls.
Seller net. Need more coffee
Thanks Joe. It gets iffy when the price is boosted by a credit. Inflating the price in a market with waning demand may not be able to work so well with the actual value of the house. It worked for the transaction and contract, but what will the appraiser say?
Agreed on upping the game. It’s not just about a box. We have to support the trends we say exist.
Great post, as always Ryan.
I agree 100% with you Joe that market trend graphs are a huge visual aid and should become a staple in appraisal reports. We are using them more and more in our reports (MLS generated ones or ideally self-generated with the local competitive market).
In my market here in and around Winnipeg, we have rarely seen price drops in the last 20 years (we grow slowly, and then go flat during downturns) so people are not used to seeing declines.
Like Ryan noted, we too are still up a bit from the beginning of 2022 but we are definitely down from about May (although this varies by area). Charts are the quickest way to show those kinds of trends.
Also concur on the checkboxes – market rose, and then fell, and now flat to rising – checkboxes can’t capture that well!
Thank you Jason. Please keep us posted with trends in your area. I’d love to have you pitch in thoughts any time. And now that you have an approved comment, you can do so without moderation. Thanks again.
Good narrative as always, Ryan. Thank you. When I was an Air Force instructor and evaluator pilot, we talked about a similar issue. When a student had something written up once, it was a dot. A second write-up made it a line and a third occurrence made it a trend. Seems like the same could be said about real estate appraisals / monthly area pricing reports.
Love it, Rob. Thank you. Tremendous example. And it underscores that it takes time to see the trend (and skill depending on what we’re talking about).
First of all, great overview and breakdown. Just subscribed. I’d only add or note some clients put pressure on appraisers to check the stable box as well as check declining in order to mitigate risk-which may be much more near than not. Again, not a great client in either direction but it happens. Secondly, I’d add realtors can be a great source for boots on ground day to day negotiations, buyer and seller insights. We make a point to return all appraiser phone calls/emails for insights as to day to day goings on. All fully engaged Realtors will. We’re in the soup together here. Cheers! PS. I haven’t bothered to change my twitter handle, but I’m Fields Family Wines…Realtor by day, wino by….any other time.
Right on Ryan. And thanks so much for the commentary. I appreciate you being here. Solid point too. I’d love to hear from any appraisers what they are experiencing in the trenches in terms of pressure. Agreed on Realtors also. I believe in forging good relationships with agents, and exchanging information. I learn a ton from local agents. Every. Single. Week.
If an appraiser checks the declining box, many lenders are required to get a second appraisal. No one likes paying for two appraisals…..
The loan officers I see engaged with the local realtor association understand we’re in a declining market. It’s a good reason for folks to work with local loan officers who understand what’s happening locally.
Thanks. Yeah, they absolutely understand. I’ve had that same experience lately with talking to LOs in person and online. And the public is also in tune. I guess this prods the appraisal profession a bit. If appraisers claim to be market experts, but they’re not really reflecting the sentiment in the market right now, what does that say about expertise?
Loan officers, please pitch in your two cents. What are the implications when the “declining” box is checked?
Thanks for your comment. I tried to verify a closed sale with three different agents yesterday and no one returned my calls/texts. It held up a purchase for someone else. Not cool.
I consistently speak with about a half a dozen different appraisers. I hear it often. Sadly, I hear it from other realtors. One of the upsides of this correction in the market will be to weed out some of the less professional folks. My normal response is , “we pay a lot of money to make the phone ring we would be foolish to not answer”. It’s part of the greater good, I’ve had many appraisers help me out with difficult or unique properties.
As long as everybody keeps the ego in check and are open with the exchange of information and ideas ultimately everybody wins. If you ever need any help in the Lodi-Stockton Market let me know.
Thanks Ryan. Well said. I appreciate it. I’m so with you. I find sometimes agents and appraisers get locked into an unprofessional mindset of thinking the other group is moronic. I cannot stand when either side talks down about the other either. I don’t subscribe to that. There are bad apples in every profession and blatant issues to deal with too, but we have to leave our appraiser or agent baggage in the past, and learn what we can in front us. And just be cool to people. That was my sermon for the day. 🙂
Thanks Ryan. I agree with you and the other Ryan that appraisers and agents need to treat each other with respect and work together.
I’ll reach out to you directly. I like wine a lot (too much) and am interested in your other gig.
Why would those agents care about the next guy? It’s dog eat dog and viceversa !! Agents owe their allegience (SIC) to their clients, not someone else!
Great Video, I am noticing the increase in active listings has began to stabilize and we are still technically in a shortage, however with demand dropping and sellers expecting an instant sale, they will continue to price drop to get under contract faster. They do not want to go back to the 90-120 days on market that was normal just a few short years ago.
Thank you so much Loretta. Yeah, it’s been interesting where we cannot rely on previous benchmarks. It’s tempting to say the market is fine because inventory is technically low, but prices have very clearly changed despite low inventory. So traditional metrics may not be as meaningful for interpreting what the market is doing. I’ve seen some housing analysts who have maybe fixated too much on a model with traditional definitions, and I’m not so sure that’s working perfectly right now. Please keep me posted with what you’re seeing out there. And yeah, 90 to 120 days is not something people want. This month pendings have taken 42 days on average to get into contract in the Sacramento region, and that feels like an incredibly long time because last year it was taking half the time (last year was really fast though). Let’s keep watching.
Thanks for another great blog this week…I think you’re spot on, as always, with data to support your narrative.
Thank you Janet. I really appreciate it. And my inbox is always open to hear what you’re seeing out there. My goal is to share the stats without spin and form perspective based on the way the market is moving.
Great market overview. Thank you for your perspective and the wide approach you take to analyse the situation. I agree that the Neighborhood One-Unit Housing trend boxes are not based on a specific rule. Therefore as you wrote the appraiser has the duty of explaining his/her findings. I usually look at this section with data over the past 12 months. Most markets still show an increase or stable sale prices from October 2021. But that does not mean it reflects the time of sale adjustments made to comparables. This depends on when they went pending. There is a decline since May/June 2022 and adjustments are made accordingly. However I have lenders looking at those boxes and want to see a direct correlation with time of sale adjustment on the grid. The current appraisal report forms are not ideal tools as they can be read differently depending on who’s reading it. Hoping the new forms will correct this and so many other ambiguous sections.
Thank you Diane. Love the commentary. And I think this could turn into a dissertation. What is the best way to see the market? How can we talk about the market? What does it mean to be stable or declining? So many questions. I’ll be curious to see what the new forms look like.
Spot on as always Ryan. I have a seller that owns a SFR and a 4-plex in Davis who now lives in Arizona. He is trying to decide whether to sell here and buy in Arizona. He points out( as you have) that prices are up month over year, so I sent him him a trends graph for the last 6 months showing prices are declining, while DOM and inventory are up. This was an eye opener for him. We must show the entire picture, not just a snapshot of the market.
This is such a great comment because it shows exactly what we need to look at. It’s easy to miss the trend if we fixate on year-over-year stuff. Granted, in a normal market it’s not really much of a danger, but it becomes a real issue for a market like today. I’m so glad you were able to communicate well with your seller. Kudos to you. And thanks for sharing.
As a side note for any onlookers, I have a poll on my Instagram stories to ask whether you’ve seen a big change in buyer demand since rates have gone to 7%. I’m wondering if we are seeing another inflection like we saw at 5%. Only time will tell, but today I had an agent tell me she started to see a major difference, so my ears are open. Anyway, if anyone wants to vote, this story will be live for 23 more hours. 🙂 https://www.instagram.com/stories/sacappraiser/2957141693175867073/
Thanks Ryan! Always great information. Real estate is local and even different price ranges make a huge difference!
Totally agree. Exactly. Thank you DeeDee. It’s a mistake to think the trend hits every price range and location the same. We’ve actually seen a bigger hit to volume below the median price so far in the region, which may possibly suggest buyers more sensitive to rate changes are getting hit harder. Time will tell. All that said, all ships do rise and fall with the tide, so the trend is affecting everything. Just not exactly the same.
Thanks, Ryan. Nice article, I am a big fan. So the old saying, “what goes up, must come down” is true. But we all live in different markets. I’m in rural northern Florida and this week the local newspaper had the front-page headline: “Local home sale prices continue to rise” They quoted the local realtor’s president saying prices continue to rise but he also said contract times have slowed down and list-to-sales ratios have dropped. What he said is very true according to my findings but his figures seemed a little inflated compared to mine. Our pricing didn’t shoot up as high as yours did so our drop will probably be very minimal. That’s what happened in 2008, when other markets were “crashing” ours was just a little dip. Have a blessed day! (as we say in the south)
Right on. Thanks Mark. I really appreciating hearing about your area too. The trend won’t be the same everywhere. Agreed. I feel like Sacramento has been standing out as a poster child for housing change lately. It’s been wild to watch and experience first-hand. I wonder which stats the association in your area used to show prices were rising. Year over year or month to month? Just thinking out loud. We can make the numbers say lots of things with a little skill. Or like the saying goes, if you torture the data long enough, it will tell you what you want. 🙂
Take care and please keep me posted with anything interesting you see in your area.
Best overview I’ve read/listened to in long time! Right on! Every Market area is not the same.
Thank you so much Tamra.
I agree, every market is different, especially mine because I am close to the beach and a lot of military. Different markets in different parts of the city!
Thanks Joseph.
Hi Ryan – always love your columns. Just one nit to pick. You wrote, “In other words, buyers are hands-down paying less today than they did in previous months.” That’s not actually true. Buyers are paying *more* than in previous months because interest rates are rising faster than home prices are dropping. That said, yes, prices are dropping and sellers are getting less. And that is what is crazy. Buyers are paying more and sellers are getting less, with the difference going to whomever holds the mortgage. I think this is important, because buyers and sellers both want the other party to “give more” but both parties are hurting a bit and have less to give.
Thanks Bruce. Fair enough. I agree with you too. Hopefully my meaning is clear in that the price is lower that it waas previously in raw terms. Affordability hasn’t improved though. I’m on board with that. Even with a 10%+ hit to the median price since May, it’s not easing affordability since rates have shot up so much.