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The housing market is like a…

November 17, 2015 By Ryan Lundquist 11 Comments

I’m a huge fan of housing market analogies. Of course we can keep it plain by sticking to the numbers, but there is so much more flavor when we use a fitting comparison. Not only can analogies capture people’s attention, but they can also help break down complex ideas to communicate to the masses. Moreover, sometimes a funny or relevant comparison can open up the door to further conversation about trends. Today let’s take a look at some housing market analogies that complete the sentence, “The housing market is like a ….” Thank you to everyone who contributed to this post.

housing market analogies by sacramento appraisal blog - donut image purchased from 123rf dot com

Do you have any other analogies to add? I’d love to hear your take.

Donut
The New York City market was like a donut in 2014, strong on top and bottom and weak in the middle (Jonathan Miller).

Pizza
The Sacramento market is like a pizza. We are affordable, there is a piece for everyone, and even when we cool off a bit, we are still great (Barbara Lebrecht)

Matryoshka Doll
The market is like a matryoshka doll. Just as there are many little dolls within one large doll, there are many sub-markets within the larger market (Ryan Lundquist).

A market within a market - purchased and used with permission by sacramento appraisal blog

iPhone
The market is like an iPhone. Everybody has used it, some people use it too much, but few really know how it works (Gary Kristensen).

Coffee
Real estate is like a cup of coffee – too hot you’re going to get burned; too cold you don’t want to drink it; but when it’s just right you’ll probably have another cup or two (Michele Skupic).

Ocean Waves
The market is like ocean waves. There are many things that create the waves and their size, and it’s always changing – just like the many things that make real estate values move (Craig Dunnigan)

Stock Market
The housing market is like the stock market in that a home is worth what the market says it’s worth at a point in time; if a seller isn’t happy with the current value, he can wait and hope it increases, but as with the stock market, the value could also decrease (Dean Rinker).

Bubble
When real estate values are inflated, we like to say the market is like a “bubble” because we think at some point values will “pop” or correct. Interestingly enough, the National Association of Realtors used to describe the previous housing “bubble” as “a balloon with a slow leak” from 2003-2007 (thanks Jonathan Miller for that tidbit).

Roller Coaster
The market is like a roller coaster…and we are hanging on for the ride (Paula Swayne).

Teeter Totter
The market is like a playground teeter-totter, it likes to be in balance, but adults keep coming along and screwing things up (Gary Kristensen).

Parent who Threatens Consequences (and doesn’t give them)
The Fed’s talk of raising interest rates is like a parent who threatens consequences but doesn’t give them. We all know interest rates will eventually increase in the future, but we’ve been hearing about an impending increase for years now. All we know for sure is rates will definitely, probably, maybe increase soon (Ryan Lundquist).

Relationship
The housing market is like a relationship, meaning it’s full of ups and downs. Any meaningful relationship has both good and bad days, right? That is very normal, and the same exact thing is true in real estate. However, one of the temptations in the real estate community is to talk like everything is always good as if values are always increasing (Ryan Lundquist).

Multi-Layered Real Estate Cake
Value in a real estate market is like a multi-layered cake since there are many “layers” in the market that help impact or create value. When one of the layers changes, it can change the rest of the market. See more here (this is my favorite analogy to use). Source: Unknown (though I first heard it from Dennis Lanni over a cup of coffee years ago).

multi-layered-cake-analogy-cake-by-Joy-Yip-text-by-Sacramento-Appraisal-Blog-yellow-text

I hope this was a fun read. Thank you again to everyone who contributed some thoughts. On a serious note, analogies can be an amazing way to describe the market, and I hope you feel encouraged to use them even more.

Questions: Do you have any analogies or metaphors to add? Which one(s) work best for you? I’d love to hear your take in the comments.

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Speaking fluently in real estate cliches

November 11, 2015 By Ryan Lundquist 4 Comments

It’s easy to get stuck in a rut of speaking fluently in real estate clichés. While there’s maybe nothing wrong with saying, “The market is ‘on fire'”, or “It’s a good time to buy and sell,” there has to be more depth we can tap into, right? It’s almost like if I asked someone how they were doing, and the person said, “I’m on fire at work” or “It’s a good time to be alive.” Okay, that’s great to hear, but what does that really mean? I want to catch specifics because it’s in the details where I can really know a person. The same is true in real estate. When we step away from vague clichés and begin to speak fluently in current market trends, it can be very powerful. Whether you’re an agent, appraiser, or home owner, I hope you can glean something from this post as you tell the story of the market to clients and contacts, and I’d love to hear your take in the comments below. If you’re not in the Sacramento market, how would you describe your area? Are trends unfolding in similar ways?

CHALLENGE: Share one talking point below with a client or contact today (or include a point in conversation on Facebook).

real estate market cliches - by sacramento appraisal blog - image purchased and used with permission from 123rf dot com

Two ways to read THE BIG MONTHLY POST:

Scan the talking points and graphs quickly.
Grab a cup of coffee and spend a few minutes digesting what is here.

DOWNLOAD 62 graphs HERE (zip file): Please download all graphs in this post (and more) here as a zip file (or send me an email). Use them for study, for your newsletter, or some on your blog. See my sharing policy for 5 ways to share (please don’t copy verbatim). Thanks.

One Paragraph to Describe the Sacramento Market: The latest stats show a couple of things: 1) The market is slowing down as it almost always does during the fall (no surprise there); yet 2) The market is definitely not as slow as it was last year at the same time. For instance, last month in the region it took one day longer to sell a home than the previous month, which shows the market is cooling, but it’s actually taking ONE WEEK LESS to sell a home this year compared to last year. There is roughly two months of housing inventory in the Sacramento region, which essentially means there are only two months worth of houses for sale on the market. This is very low considering last year inventory was at 2.65 months at the same time. This might not seem like a big difference, but the market is actually VERY sensitive to increases in inventory, which is one of the reasons why the market last year felt much slower (and even sluggish) compared to this year. Many times we hear 5 months of inventory is normal, but keep in mind values have declined any time inventory even approached 4 months in Sacramento County over the past 15 years. Anyway, despite inventory being low right now, buyers are not pulling the trigger unless the price is right. In short, Sellers, if you want your property to sit on the market, overprice it. In terms of values, the overall median price in Sacramento County has been about the same for 6 months and the regional market has softened by 2% in recent months. By the way, if you missed my recent post, I gave some perspective on “real estate bubble” conversations, and it’s a very relevant conversation as we see price metrics begin to soften at this time of year (and people freak out about that).

Sacramento County Market Trends for October 2015:

The median price has been hovering around $290,000 for 6 months in a row.
It took an average of 38 days to sell a house last month (up 2 days from the previous month).
Last year at this time it was taking an average of 45 days to sell a house.
FHA sales were 28.5% of all sales last month.
Sales volume is 9.8% higher so far in 2015 compared to last year.
Sales volume was 7.8% higher in Oct 2015 compared to Oct 2014.
There is a 1.78 month supply of homes for sale (similar to previous month).
Housing inventory is nearly 28% lower right now compared to Oct 2014.
The average price per sq ft is 186.5 (7.1% higher than last October).
Cash sales were only 15.5% of all sales last month (18.5% last year at the same time).

NOTE: The graph below shows an increase in the average price last month, but keep in mind the median price and average price per sq ft were flat (this reminds us to not isolate one metric and make it all about that one point).

price metrics since 2014 in sacramento county

inventory - October 2015 - by home appraiser blog

seasonal market in sacramento county median price

seasonal market in sacramento county sales volume 2

seasonal market in sacramento county inventory 2

CDOM in Sacramento County - by Sacramento Appraisal Blog

layers of the market sacramento county since 2011 - by sacramento appraisal blog

Sacramento Regional Trends for October 2015 (Sac, Placer, Yolo, El Dorado):

It took 7 less days to sell a house this Oct compared to Oct 2014.
Sales volume was up 5.5% in Oct 2015 compared to Oct 2014.
Sales volume for the year is up 10.3% compared with 2014.
The median price at $326,000 is up 6.8% from last year, but down 2% from the past few months.
It took an average of 42 days to sell a house last month (1 day longer than last month).
FHA sales were 24.5% of all sales in the region last month.
There is 2.06 months of housing inventory (same for past 3 months).
The average sales price is $364,829 (7.7% higher than last year, but down slightly from $370K a few months ago).
FHA sales volume has increased by 30% in 2015 compared with 2014.
Housing inventory is nearly 22% lower right now compared to Oct 2014.

sales volume 2015 vs 2014 in sacramento placer yolo el dorado county

prices in sacramento region - FHA and conventional - by appraiser blog

months of housing inventory in region by sacramento appraisal blog

days on market in placer sac el dorado yolo county by sacramento appraisal blog

median price and inventory in sacramento regional market

number of listings in sacramento regional market

Placer County Market Trends for October 2015:

Sales volume was the same in October 2015 compared to October 2014.
Sales volume for the year is up 14% compared with 2014.
The median price in Placer County is $397,500 (it’s been fluctuating up and down between $390-400K over the past 6 months).
Cash sales were 16.8% of all sales last month (very normal level).
It took 47 days on average to sell a house last month (1 day longer than the previous month month).
Last year at this time it took 7 days longer to sell a house.
FHA sales were 18.6% of all sales in Placer County last month.
There is 2.26 months of housing inventory (18% lower than last year).
The average price per sq ft is 201 (3.6% higher than last year at the same time).
REOs were 2.4% of all sales and short sales were 3.6% of all sales.

Placer County sales volume 2 - by sacramento appraisal blog

number of listings in PLACER county - October 2015

months of housing inventory in placer county by sacramento appraisal blog

days on market in placer county by sacramento appraisal blog

Placer County price and inventory - by sacramento appraisal blog

interest rates inventory median price in placer county by sacramento appraisal blog

I hope this was helpful. Thank you so much for being here.

Quick Pricing Advice:

Remember the market isn’t as soft this year as it was during the same time last year, but we are still seeing values cool during the fall.
Talk about the difference between actives, pendings, and neighborhood sales on your listing appointments and in your appraisals. If listings are selling for less than sales from the Spring market, that shows us the market has changed (and we need to price accordingly). See How to use a CMA to gauge the temperature of the market for a fantastic way to quickly explain what the market is doing to your clients.
The market has been very price sensitive all year, which means buyers are not biting on overpriced listings despite inventory and interest rates being relatively low.
Remember there are many markets within a market, so price according to the neighborhood market rather than county-wide trends since your neighborhood might be more or less aggressive compared to the entire county.

Questions: How does the market feel to you this year compared to last year? What are you seeing out there? I’d love to hear your take.

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Being a trigger-happy real estate adjustment giver

November 3, 2015 By Ryan Lundquist 8 Comments

It’s easy to get trigger-happy with making value adjustments. Appraisers do this and so do agents. This means whenever we see a difference between two homes, it’s tempting to give some sort of value adjustment. After all, there has to be one, right? Let’s talk about that.

being trigger happy with real estate adjustments - sacramento appraisal blog

My List of Adjustments (that I used to use): First off, here is the list of adjustments I used to give when I first came into the appraisal industry many years ago. Please DON’T blindly use these adjustments or any list of adjustments (unless they make sense to use). I’d like to say I was giving these adjustments because they were market-derived, but I was really giving them because that’s what I was taught to do. Are these legit?

the adjustments I used to give - please do not use these

The Problem: The problem with a list of adjustments is they won’t make sense for every house, price range, neighborhood, or market. Will the adjustments be the same at $100,000 as they would at $1,000,000? Nope.

Adjustments I would’ve given years ago: I did a condo appraisal recently, and here is an example of what my appraisal might have looked like years ago (unfortunately).

example of adjustments - do not use these - sacramento appraisal blog

I adjusted $5000 to Comp 2 for being located on the first floor since the subject is upstairs (it’s noisy on the first floor, right?). I also adjusted $500 for each year of age difference, a $30 per sq ft for square footage, and $5000 for the subject having a garage. What’s wrong with these adjustments though? Well, first off they are all made-up. Maybe they work, maybe they don’t. How do I know there is an issue with the adjustments in this case? Well, all other competitive sales besides the ones here are around $125,000, and the canned adjustments I gave make my comp adjust out to $136,500. That’s a tell that something clearly isn’t right. Most of all, let’s keep it simple. Do buyers really pay $500 for each year of difference in the age? Or do buyers really pay $5000 for the difference between upstairs and downstairs? In this case probably not.

Here are the adjustments I actually gave:

example of adjustments - do not use these - sacramento appraisal blog 2

Why I gave no adjustments:

Square Footage: The slightly different square footage really didn’t matter for the value. As I compared the 836 model and 890 model, they were selling at about the same price. I know this is a minor example, but there is a very real temptation to try to fill any difference with a value adjustment because it seems like there should be one. Yet sometimes the best thing to do is give no adjustment if that’s what it seems the market does. See this graph to compare both models (pay attention to the most recent sales). A similar instance is when we see an open floorplan at say 1500 sq ft compete very readily with a larger boxy floorplan that is maybe closer to 1700 sq ft. Our initial instinct might be to think the 1700 sq ft home is worth more, but sometimes we have to look at the market and let the market speak to us about value instead of bringing in adjustments right away.
Garage Adjustment: It’s understandable to make garage adjustments any time we see a difference in garage count, but in this case properties with and without a 1-car detached garage were selling at about the same level. It’s easy to bust out a knee-jerk $5,000 or $10,000 garage adjustment, but in this case the garages were far away from the actual property, so occupants were using their nearby carports for parking instead, which seemed to lessen the value of the garage. The garage was probably still a marketing point, but I couldn’t justify giving a canned adjustment, so I didn’t give one.
The Big Picture: All the comps adjusted out to $125,000 to $127,000 whether they were slightly larger or smaller and whether they had a garage or not. In this case I reconciled the value to $127,000 because the subject property was on the second floor (generally more appealing) and it did have a garage (still a marketing point). I didn’t give any actual adjustments in the report, but in a sense I adjusted for the value of the components in the final reconciliation since a buyer would consider the subject property as more of a complete package, and thus pay toward the higher end of the market range.

Three Takeaways:

Would Buyers Make this Adjustment? I know the example above is an easy one, but even when a property is challenging we need to still ask the basic question of whether a value adjustment makes sense or not. If you lined up a group of interested and qualified buyers, would they really make the adjustment or not? One of the best ways to know is to begin digging into neighborhood sales. We might hear an owner say, “I paid $70,000 for the rear landscaping, so the adjustment is $70,000.” The key would be to find homes that are similar with decked-out landscaping. When sales already have similar features, they tell us what the market has been willing to pay. What we don’t want to do is guess by using only homes with very average landscaping. This is when we start to say, “Well, I think the adjustment is probably $15,000 or $20,000”. Maybe, maybe not. What have properties with similar features actually sold for?
Focus on the Big Stuff: I recommend not giving small adjustments and instead focusing on the bigger items that probably drive value more such as square footage, condition, upgrades, market conditions, and location. Let’s not get bogged down giving $500 fireplace adjustments, $500 year adjustments, and $1000 covered patio adjustments.
Your Canned List: It’s easy for any of us to get into a habit of giving canned adjustments. If you have a list of adjustments you tend to give, next time you are giving them, ask yourself if the market really behaves that way. If not, maybe it’s time to stop giving them?

Speaking at AI: I actually got to speak on a panel at the Appraisal Institute’s Fall Conference in San Francisco a few weeks ago about this very topic. What an honor!

me speaking at AI in SF

I hope this was helpful (I promise not all posts will be longer like this).

Questions: What else would you add? What is takeaway #4?

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Being realistic about a range of value in real estate

October 27, 2015 By Ryan Lundquist 18 Comments

If an appraisal came back at $327,462.44, would you be concerned? For starters, I think most of us would scratch our heads and wonder how in the world the appraiser got so precise at 462 dollars or 44 cents. Either the appraiser is an absolute value wizard or something else is going on. I can’t speak to why an appraiser would reconcile value that precisely, but I do want to kick around the idea of a range of value in real estate. I’d love to hear your take in the comments below.

range of value in real estate - image by sacramento appraisal blog

Sometimes we get so locked into thinking a house is only worth a certain amount. Most of us wouldn’t get so exact like the example above, but we do often say a house is only worth whatever the contract or list price is. Thus if the appraisal comes in lower, everyone is frustrated. Let’s consider the following points though.

There is always a range of value: When we sell something on Craigslist, we list a certain price, and we’d like to get that price, but realistically we would probably be happy with an offer somewhere close to the price. For instance, I am trying to buy a drill press on Craigslist right now (for woodworking, which is one of my passions). I found one the other day listed at $150. I offered $100, and the owner said no. I then upped my offer and through conversation discovered the owner wasn’t really set on $150 at all, but rather $125 to $150. If we lined up other buyers for this drill press, they’re probably not going to say market value is exactly $150, but they might instead think market value was anywhere from $125 to $160. In other words, nobody would bat an eye if the drill press sold at $125 or even $160. This is exactly how it works in real estate in the mind of buyers. When assigning value to a property, buyers are going to look at similar homes, consider their budget and loan approval amount, and ultimately be comfortable with a reasonable price range. For instance, buyers might consider a realistic price for the house above to be $323,000 to $330,000.
Appraisal Comes in $1000 lower than contract price: So buyers make offers on the property, and the seller accepts an offer at $324,000. The appraiser comes out and appraises the property at $323,000. When this happens, many agents say, “This is ridiculous. Why could the appraiser not just give me $1000 more?” I get the frustration because if the contract price fits very nicely in a tight and reasonable range of value, it’s hard to see how the appraiser could argue against that as if the appraiser is an absolute value genius. I’m not arguing for the appraiser here in this example as you can hopefully pick up in the following comments. But I do want to remind us that appraisers cannot invent or give value – even $1000. If the contract price really is pushed above what the market would reasonably pay, and there is no way to really support that on paper (the appraised value has to be supported), it makes sense to see the appraisal come in lower. In this case it may be suspect, but I can’t say that for sure. For reference, it’s actually not fishy for an appraiser to reconcile the value at the exact contract price if the contract price is realistic. When the appraiser does this, the appraiser is simply saying, “Yep, the price is good, and I can’t argue against it.” The appraiser might say something like this in the report: “The sales price falls within the range of values indicated by comparable properties and represents a reasonable value for the subject property based on an analysis of comparable properties and market trends. Therefore the opinion of value in this report was reconciled to the sales price.” Of course this assumes the appraiser wasn’t “hitting the number” so to speak to make the loan work.
Reconciling to the Lower or Upper End: Despite there being a realistic range of value for a property, sometimes it’s best to consider where a property is going to fit on the value spectrum. I find sellers sometimes struggle with this because they always want top dollar. But sometimes fetching the highest price in the neighborhood simply isn’t possible. Maybe the house just doesn’t quite compete at the very top of the range of value because of slightly less upgrades or some other minor issue. So an appraiser might look at sales at $330,000 and give those sales less weight in the final value because they are slightly superior, but then look at sales at $323,000 and give them the most weight because they are the most similar in market appeal. Additionally, if all the offers on the property were coming in around $323,000 or lower, the market has probably spoken, and it likely makes sense for value to be reconciled around $323,000. Or if we have one high offer at $330,000 and all other offers were at $323,000 or less, this might also say something about the market. Not always, but maybe.
Willing to Budge on Contract Price: Sometimes it seems the real estate community gives too much weight to the original list price and the contract price. It’s as if the offer is made and then negotiation is over. There is no further budging. But there is still room for negotiation based on the pest report, home inspection, the appraisal, and a number of other factors. When new information is discovered through the course of a transaction, it should be okay to negotiate. Part of a lack of negotiation is the byproduct of a market with such low housing inventory. Sellers have been in the driver’s seat for years, so they have not had to negotiate as much. But as inventory presumably rises in years to come, this staunch belief about the contract price being holy is going to have to budge.

I hope this interesting and helpful.

A CHEAT SHEET FOR AGENTS TO USE: If you are a real estate agent, I highly recommend you communicate in detail about the property to the appraiser during the inspection (or before the appraisal is finished). Consider talking about any upgrades, the number of offers made on the property, price level of offers, and anything that might be relevant for the appraiser to know. Don’t pressure for a certain value, but help tell the story of how the market responded to the property. DOWNLOAD my “cheat sheet” for appraisers and please use it.

some of my recent projects

Questions: What else would you add? What is point #5?

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