The housing market for new homes is rebounding, but that’s definitely not how I’d describe the rest of the market. Today I have some thoughts about new construction, avocado toast, and positioning yourself for the market that is happening. Skim or digest slowly.
UPCOMING (PUBLIC) SPEAKING GIGS:
6/30/23 Halftime report with Ben Johnston 10am (Zoom)
7/20/23 SAR Market Update (in-person & livestream)
7/26/23 Fair Mortgage (details TBD)
8/18/23 Details TBD
10/23 SAR Think Like an Appraiser (TBD)
NOTE: This meme quotes a Blink 182 song. They’re playing in Sacramento on Friday (and I’m going to the show). Sorry if you don’t get it.
BUYING HOMES INSTEAD OF AVOCADO TOAST
Here’s the most stunning stat I’ve read this week. 51% of Millennials own a home according to First American. Do you remember when everyone was saying Millennials didn’t want to buy homes because they were more focused on avocado toast? Well, it turns out not all narratives are real. And for the record, avocado toast is brilliant (and I’m Gen X).
A BUILDER REBOUND IS HAPPENING
2023 has been a strong year of new home construction in the Sacramento region. The last half of 2022 was brutal for new homes, but it’s been a rebound so far this year. This year volume is up 37.8% from the pre-pandemic average (2016 to 2019), and volume is basically competing with 2021 and 2022 when we had low rates and extra migration. But today, growth isn’t seeming to come from a flock of eager Bay Area residents, but instead builder concessions are the tractor beam sucking in buyers. And it doesn’t hurt to have 40% fewer listings in the resale market to help buyer focus on new homes.
NOT THE SAME TREND FOR EXISTING HOMES
Now let’s look at existing homes (not brand-new homes). This year from January to May, volume has been down 34% from the pre-pandemic average (2016 to 2019). This is a sharp contrast from the growing trend we’re seeing with new homes. This is a good reminder that the housing market isn’t the same for every type of property (or price range and location). By the way, do you like these new visuals? I used North State BIA data.
DON’T WAIT FOR THE PHONE TO RING
For my real estate friends, in a market that is still struggling with lower volume in the resale market, it’s important to ask questions. Who is buying? Who is selling? How can you be a part of the transactions that are happening? What do you need to do differently today? What portions of the market are growing or contracting? What do you need to do to position yourself for earning business today? Who are the gatekeepers for business in 2023? You’ve got this. You can do it. Don’t wait for the phone to ring. Run to the market. And be okay with hearing NO more than YES.
PAYING ATTENTION TO THE NATIONAL TREND
For a national perspective, I highly recommend following Rick Palacios Jr of John Burns Real Estate Consulting and Ali Wolf of Zonda. Both are really smart and they focus heavily on new construction. I appreciate a focus on surveys too since their results often speak to the trend before we see it in published stats. By the way, here is builder market share nationally. Which builders are you most familiar with in your area?
APPRAISERS CAN’T TURN A BLIND EYE TO CONCESSIONS
In all the glowing news about new construction volume, let’s not forget to consider concessions as we value properties. Here’s the key. Did concessions affect the price of the comps we are using to establish value? In other words, if the comps have a 4.99% rate buydown and a credit for $20,000, did buyers pay an inflated price beyond what they would’ve had paid if there were no concessions? That’s a viable question, and it’s why we want to compare homes with and without concessions to understand if concessions had any effect on the price. I know, people say stuff like, “Bro, it sold for X amount, and that’s all that matters.” That’s not true though. Imagine a brand-new home sold from the builder, and the new owner listed it on the same day it closed without ever living there. Would the new owner be able to sell it for the same amount as the builder? That’s the big question. If the new owner can’t provide a rate buydown and credit back, could the same price be achieved? This isn’t the perfect example, but can you imagine a lender being interested in what a home might sell for without extra stimulus? That’s the issue here. Wouldn’t it be risky for a lender to lend on properties with inflated prices? In short, if a home only sold for a higher amount because of concessions, that smells like an important value consideration. Here’s more about why appraisers ask about concessions.
EXPECT A LARGER SHARE OF THE MARKET
New homes are becoming a larger share of transactions for the national market, and that’s definitely what’s happening locally too. For the time being we are seeing about 40% of local sellers sitting out of the resale market, so until we see a change with that, we can expect for new construction to be in a strong position for growth. Yet, the resale market is still massive compared to new construction, so we have to keep this in mind as we talk about trends. And there’s no way builders can build fast enough to make up for all the missing listings.
I hope this was helpful.
Questions: What are you seeing with new construction right now? And do you like Blink 182?
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I was expecting a pineapple meme for some reason.
I do like the new graphs on new construction. Nice way of showing the trend. And good contrast between resale and new construction.
Haha. I guess I could have brought some Maui vibes from vacation. Maybe I’m just shell-shocked at how expensive that was though, so I struggle to talk about it. 🙂 Thanks Joe. I really like this format. I might actually flirt with producing something like this for local counties too. It didn’t dawn on me to stack months, but it might be helpful. I have some other ideas too. I just need time….
The Millennials couldn’t afford avocado toast after the recent inflation. Once they cut their habit, they had plenty of money for a new home. Bro, in a year, 100% of Millennials will own homes and the avocado market will collapse. Buy more crypto to avoid the fallout.
Haha. Thanks Gary. On a serious avocado toast note, I know a local coffee house charging $12 for avocado toast. While I’m a huge fan, and I’m all about the avo-toast life, that’s getting up there. It’s wild to see some of the fancy coffee drinks at $8 or so too. What the?
Builders do make concessions and up their prices with every new release. My client just gave up his one-story that he was buying for a two-story a month before the one-story is delivered. They are now selling that same one-story for more that they offered to us. Some of the concessions my client had :
– Price reduction
– Upgrade package
– Seller credit
A low-rate program that drew my client away from his own lender to the builder’s lender.
Again, builders do give incentives, but get it compensated in a different way. E.g., when they offer the low rate programs, they do not give you any discount on the purchase price. Or they want you to use their lender and title company. Or, they give you a price reduction and take the windows out of the plans for the garage 🙂 These are mechanisms an individual seller does not have. Once you start the math, all this has to go into the equation – not easy!
Thank you Tarah. I appreciate you sharing. Yeah, the builders’ goal is to keep the price high. When they lower prices, it damages profitability on future sales, so they will keep prices as high as possible as long as the market will allow. Price drops are a last resort.
Okay so since I am NOT a Gen X, Y or Z. Shall I say Baby Boomer and leave it at that. I was at a hotel several weeks ago on the East Coast and their Avocado Toast was $19. Apparently, the Sourdough Toast must have been flown in from France and the Avo’s picked over night, ripened and flown in that morning (LOL). I have a hard enough time with $8 coffee (PS I don’t pay $8 for coffee) so $19 for Avocado Toast, Ugh. I ordered the Omelet for $18, go figure and that included sourdough toast. I am really confused.
As to the concession example, that is perfect example. I have had this conversation with multiple agents, and I they understand it, they just don’t want to hear it from me on their deal. But folks in our world (appraiser) it is important and must be discussed or handled or it will probably be kicked back from lender’s review. The concession world is really nuts on new home deals. It took me about 15 minutes to finally gently pry out of an agent at builders’ sales office about what they are giving away on their deals. The list was numerous and hard to be believe but she didn’t want to give me the whole list. Her discussion gave me a headache with all the items they are giving away to incentivize the borrower to buy. This is a very crazy world right now and it appears to continue.
You win at $19, Brad. That sounds like a whole different category though. Vacation avocado toast. As a guy who just got back from Maui, I cannot believe the insanity of food prices there. Too bad I didn’t find any avocado toast there. I have to think it would’ve rivaled your example at least.
Thanks regarding concessions. I concur that it’s not something some people want to hear about. I find there to be lots of confusion about why appraisers even ask about concession too. Just yesterday I saw a sale that closed 5-7% higher than it should have easily. I had to find out what the deal was. I figured it was likely concessions or the buyer paid more than anyone. In this case, I talked to both agents, and it was clear after conversation and crunching the comps that the right frustrated buyer paid more than anyone and removed the appraisal contingency too. While this might not be an example of concessions, I thought it might be. Moreover, we have to look at closed sales sometimes and not just blindly accept the closed price an indicator of value. Based on what I’m seeing in the listings and pendings, this one lone-ranger higher sale isn’t likely to pull the rest of the market up…
Ryan, As always, great stuff! I really like the stacked graph!
Thanks Cheryl. I really appreciate it. I think I’m going to experiment with this with a few other visuals. Keep me posted with what works and what doesn’t. Hope you’re well.
New home builder’s in Elk Grove are offering buyer incentives on their standing inventory( closing in the the next 30-45 days) in part because of buyers falling out of escrow due to interest rate increases for one and that’s really attractive if you don’t have a home to sell first. Resale can’t compete with the incentives.
Thank you Karen. And you are so right about resale not being able to compete with new construction. I wish I had stats on how many are falling out. Please keep me posted with the the types of concessions you’re hearing about. Most of the time it seems like a rate buydown with some other type of credit is commonplace.
Back in 2002 I bought our first move-up home in Roseville. After searching through all the resale inventory, including fixers, for six months, we chose a new Morrison home in the now bustling Blue Oaks neighborhood. The price per square foot was lower than any of the used comps, and roughly equivalent to the price of cosmetic fixers. Throughout my career I have often observed this kind of upside pricing of used homes costing more than used homes. Even after adding the after sale expenses like appliances, window treatments and landscaping. The new homes should always be part of the search unless there are none in the search area.
Thanks Jim. I always appreciate your input, and I totally agree about the search. And on a data note, I wish all new construction listings were input into MLS so it was easier to pull this off. I think knowing new construction will be really important for the real estate community ahead because it’s poised to be a larger part of the market.
Correction: “I have often observed this kind of upside {down} pricing of used homes costing more than —-{new} homes. “
Thanks Jim. I’ll watch that closely ahead.
Everyone, I forgot to share this image, but it breaks down the number of sales by city last month for new construction. North State BIA started pushing out some city data like this, so I plan to maybe package some of their stuff for consumption. It’s mind-blowing to see 30% of all new homes were in Roseville (12% in Folsom and 10.5% in Elk Grove). https://twitter.com/SacAppraiser/status/1671279305924435968