Sacramento Appraisal Blog

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Taxing flippers 25% in California??

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There’s a new bill in California called AB 1771 that proposes a 25% tax on the profit of home flippers. This is worth talking about because laws can affect the housing market. This is NOT a political post, but I want to talk about some of the issues involved and offer perspective based on stats and expertise.

House made of dollar bills along with the statement, "Taxing flippers 25% in California?"

News piece with Fox 40: A few days ago, I shared some thoughts with Fox 40. And yes, I referenced mom jeans. New career high? Enjoy below (or here).

Anyway, let’s talk about this bill.

THIS BILL IS ABOUT FRUSTRATION:

1) Frustrated with home prices: People are frustrated with the skyrocketing price of homes and rents, so something needs to be done.

2) Frustrated with investors: There is no mistaking investor activity has been increasing nationally, and people are frustrated about that because they feel investors are squeezing them out of opportunities.

STATS:

a) John Burns stats: This visual from John Burns Real Estate Consulting shows investors purchased one out of every three homes in the United States in January 2022. This is definitely up from a decade ago, though it’s not clear how much of this represents flippers (not all investors are flippers).

A bar graph to show the percentage of investors in the United States since 2012

b) Redfin: Stats from Redfin show investors purchased 18.2% of the national market during the third quarter of last year. This is a much lower percentage than John Burns, so we’ll have to figure out which stats should be given more weight. Of course, Redfin’s numbers focus on Q3 of 2021 instead of January 2022.

Local: Redfin states 19.4% of buyers in Sacramento are investors, while John Burns says 26% for the same time period. Keep in mind about 15% of sales in the region are cash, which reminds us investors don’t always use cash. Check out investor activity in cities across the country.

A line graph to show the percentage of invetors since the year 2000 (by Redfin)

c) Sensational percentages: AB 1771 states there has been 51% growth in investors in Southern California since last year. I’m not sure where this figure is coming from, but the OC Register had a piece from November 2021 where this stat was mentioned. A couple of things. The bill is about flippers, and it’s doubtful 51% represents flippers alone (key point). Secondly, a focus on percentage growth is making this stat sound super sensational. This is a nerdy point, but it makes all the difference. Look at the Redfin graph above. There was a dip in investor activity one year ago, which means when we compare today with then, the growth stat this year sounds insane. Look, I’m not downplaying the trend, but I am saying we have to be careful with percentages (especially if last year was low).

THE PROBLEM WITH THIS BILL:

1) It’s easy to blame flippers: The real estate market has seen dramatic increases in value – especially during the pandemic. This is extremely frustrating to many consumers, but at the same time, flippers aren’t the big driver of price gains. Crazy low mortgage rates and incredibly anemic housing supply are the big culprit. I know it can sound triggering to hear this, but it’s easy to vilify flippers and pin the trend on them while ignoring bigger issues.

2) Flippers are creating housing supply: This bill targets home flippers, who are actually creating inventory for buyers. It’s true that these homes are going to be more expensive after being remodeled, but keep in mind some of these homes would not have been able to obtain traditional financing due to condition. And most of all, buyers are purchasing these homes, which shows the public wants them (huge point). Flipped units come in all sorts of price ranges, and there are many first-time buyers also buying flips.

3) Institutional investors are getting a pass: In the background, Wall Street investment funds are salivating over residential real estate, and the irony is AB 1771 doesn’t target them at all because they’re buying and holding instead of flipping. We’ve seen lots of articles about corporations like Invitation Homes or BlackRock. Sometimes these stories are blown out of proportion, but there’s no mistaking we’re seeing big entities trying to play Monopoly in real life.

4) This bill doesn’t treat the real issue: The real problem is we need more supply and more affordable housing. This bill will create a fund with tax revenue to benefit some, but it doesn’t help homes become more affordable, and it doesn’t lead to producing more inventory for consumers.

Ideas? All that said, I am not a policy maker, but is there a way to incentivize investors selling to owner occupants? What have we seen work in other countries? Can zoning be amended to help create more opportunities for building homes? Is it possible to lower exorbitant permit fees and/or streamline the building process? Moreover, a bill like this sounds like something born in an up market. Would we want this if prices weren’t rising any longer? Lastly, if you penalize home flippers, will this pave the way for more buying and holding, Airbnb rentals, and institutional investor activity?

Anyway, that’s what’s on my mind.

COMMENTS: I’ll only approve comments that add to the conversation. This topic can quickly become a cesspool, but that’s not the vibe here.

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 do you think of AB 1771? What did I miss? What are the positives and negatives?

If you liked this post, subscribe by email (or RSS). Thanks for being here.

Square footage, recessions, and gas prices

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I have a few things on my mind today. Let’s talk about square footage rules changing, crazy gas prices, and recession buzz.

A tape measure with the title, "measuring square footage is changing for appraisers"

1) NEW SQUARE FOOTAGE STANDARDS FOR APPRAISERS:

If you didn’t know, Fannie Mae is adopting some changes with the way appraisers measure square footage (pdf). In short, as of April 1, 2022, appraisers are going to be required to measure square footage per ANSI standards (American National Standards Institute). The idea is to standardize the way things are measured to help increase uniformity in appraisal reports. In my mind, this isn’t poised to revolutionize the way appraisers report square footage, but there will be some fine-tuning. Keep in mind this does not apply to private appraisals for tax purposes, divorce, etc…

NOTE: So far we don’t know for certain if FHA and VA will adopt ANSI.

Some things to know about ANSI:

  • Appraisers will now be required to round to the nearest tenth of a foot (basically, the nearest inch).
  • Below-grade area doesn’t count in the square footage (but it can count in the value).
  • There will be more of an emphasis on “below grade” instead of “basement.”
  • At least 50% of the ceiling height needs to be seven feet or above to count in the square footage (it can still count in the value as non-square footage if it’s below seven feet).
  • Area below five feet doesn’t count in the square footage (I have a blog post 10 years ago about this).
  • Stairs count for square footage for the level from which they descend.
  • The space below stairs also counts in the square footage. I completely get this if there is a closet with accessible space, but it seems illogical to me to count the space below if there isn’t any access. In my mind this can inflate the square footage by 30 square feet or so.

Keep in mind builders and public records may not use ANSI measuring standards, so it’s possible we can see more minor discrepancies between the square footage in appraisal reports and public records. Of course, Tax Records is not always right. Anyway, I’ll keep talking about this as needed.

2) GAS PRICES AREN’T DRIVING THE HOUSING MARKET:

Gas prices have been unreal lately, and all of us are feeling it (besides Tesla owners flexing right now). Anyway, what do gas prices mean for the housing market? Here’s an absurd graph to compare the median price in Sacramento with gas prices in the state. Honestly, this is a ridiculous visual, but I wanted to share it to say there isn’t likely a correlation between gas prices and home prices. In other words, people don’t say, “Gas prices are low, so I’m going to buy a house,” or “Oh dang, gas prices are rising, so I’m going to wait to buy a home until gas comes down.” I’m not diminishing the pain of the lofty cost of gas, but fuel prices aren’t likely the deciding factor on whether someone buys a home or not. Yet, if gas and other goods and utilities keep rising, that can start to affect buyer behavior.

A line graph showing the median price in Sacramento and gas prices in California over the past two decades

By the way, I went to Death Valley a few weeks ago, and here were gas prices at the time. I would guess they’re maybe a dollar higher now because this was before the war started. Keep in mind this station is in the middle of nowhere. Here are some pics of our trip.

3) HOME PRICES DON’T ALWAYS DIP DURING A RECESSION:

I’ve heard some economists talk about a coming recession. I’m not making predictions, but I wanted to mention some thoughts about home prices. It’s easy to think real estate collapses during or after a recession, but that’s not always the case. The truth is not all recessions are created equally, so there isn’t any one rule for how the housing market will react. In short, if people start to struggle financially and uncertainty increases, that’s where we can tend to see an impact to home prices. Here’s a presentation I put together a few years ago called Deep Recession Thoughts (pdf).

A chart showing the Freddie Mac Price Index since 1975 in Sacramento with recessions in the background.

RECESSION VIDEO: Here is a video of my recession presentation too.


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: Have you started to drive less lately? Has your behavior been affected in any way by inflation? What do you think about ANSI square footage measurements?

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Starbucks cups & price per sq ft in real estate

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It’s easy to get into valuation trouble when we focus too much on price per sq ft. Seriously, this can be a massive problem leading to major heartache during escrows. Okay, that sounds so dramatic, but it’s important to know how to explain how price per sq ft works. Let’s talk about this by using my favorite analogy – Starbucks cups. I wrote about this six years ago, but it’s time to expand some thoughts. Here’s round two.

NOTE: These are Sacramento prices. Are they different in your area?

BIG POINT: The larger the cup, the less you pay for each ounce of coffee. Or let’s say it differently. Smaller cups of coffee tend to cost more per ounce. This is an example of economies of scale, and we see this principle all the time when buying products of different sizes. If you don’t believe me, check the labels when you go to the store. But this isn’t just about buying drinks or chips. This is also something to keep in mind in real estate.

BIG REAL ESTATE TRUTH: The larger the house, the less you tend to pay for each square foot. That’s a huge point, and let’s say it a different way. Smaller homes tend to have a higher price per sq ft compared to larger homes. This is a principle we see when looking at county stats, but it’s also something we tend to see in neighborhoods (assuming we have enough data). Just like coffee costs less per ounce the more you buy, it tends to cost less per sq ft for the more house you buy. That’s the big idea.

Price per sq ft scatter graph in 95757 zip code

95757 Example: This visual shows a ZIP code with conforming tract homes. Do you see how smaller homes tend to have a higher price per sq ft? And larger homes have a lower price per sq ft?  That’s the big point.

PICK YOUR POISON: This example isn’t intended to tackle all aspects of price per sq ft, but only help stir conversation. I’ve used Dad bods and Lamborghinis too. My advice? Use what works for you.

THE PRICING PROBLEM: We can miss value in residential real estate when we hijack a price per sq ft figure from a dissimilar house down the street. Imagine, for instance, using the price per sq ft from a 1,000 sq ft house to price a 4,000 sq ft property in the ZIP code above. After looking at the visual, we’d probably end up with a really inflated value, right?

A VIDEO: I forgot about this, but I made a video about abusing price per sq ft. Here’s some rationale and word pictures (added 3/30/22).

UNSOLICITED ADVICE: Pay attention to price per sq ft, but don’t forget to look at similar properties (comps) when trying to figure out value. And feel free to use the Starbucks cups analogy. I use it frequently in conversation to help paint a word picture when talking about real estate. Here’s 5 things to know about price per sq ft in case you wanted to read more.

REAL WORLD EXAMPLES: I’ve included some examples in various neighborhoods around the Sacramento region. The truth is there is always a price per sq ft range, size matters for value, and property characteristics can make a massive difference in the price per sq ft.

North Highlands scatter graph to show price per sq ft among recent sales

Price per sq ft - Oak Park

Price per sq ft - Rosemont

PROBLEM VISUALS: Okay, you might not care, but I wanted to mention that price per sq ft visuals can be problematic. When an area has a huge variety of prices or custom homes, this means price per sq ft can be ALL OVER THE PLACE (just like the comps are all over the place).

AN ASTERISK: Sometimes the higher end of the price market doesn’t always follow a perfectly predictable trendline for price per sq ft. What I mean is a 5,000 sq ft custom home won’t always sell at the lowest range possible just because it’s larger in size. I think some of the graphs below show this. But Gary hit the nail on the head in the comments as he said, “I think if a larger home doesn’t drop in price per square foot, then you’re likely seeing extras like view, site size, quality features like pools or elaborate finishes/design, etc…” Bingo.

TWO THINGS: 1) We need to be careful about imposing a trendline from tract homes on custom homes (preach it brother). In other words, the trendline for tract homes doesn’t mean anything for custom homes because these are two different products; 2) Sometimes buyers pay a higher amount per sq ft for larger custom homes simply because they recognize the quality of the home, location, view, etc… Of course, that’s something we would hopefully see in the comps too.

Here are a few examples where some of the larger homes have a huge price per sq ft. Do you see what I’m talking about? The largest homes still aren’t at the very highest price per sq ft in the market, but it does look like these homes are able to command a higher price per sq ft than the overall trendline from all other sales would maybe suggest.

Price per sq ft in Folsom (scatter graph)

FREE MARKET UPDATE NEXT WEEK: Next week I’m doing a free market update on Zoom for SAFE Credit Union. It’ll be one hour and I hope everyone leaves with lots of nuggets. This will focus on the Sacramento market, but you don’t have to be local to attend (sign up here for free).

An image to invite people to a free market update I'm doing. See link below.

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 is the best way you’ve found to explain how price per sq ft works or doesn’t work? What sort of problems have you encountered with price per sq ft in real estate?

If you liked this post, subscribe by email (or RSS). Thanks for being here.

Freakish home price growth so far in 2022

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Freakish price growth? Yes. That’s exactly what we’ve been seeing. Here we are again with what feels like a carbon copy of last year, which was our most aggressive market ever. In short, 2022 is doing its best to crush 2021. Let’s talk stats and perspective. I’d love to hear your take.

UPCOMING PUBLIC SPEAKING GIGS:

  • 3/15/2022 NARPM Luncheon (details)
  • 3/22/2022 SAFE Credit Union market update (details)
  • 4/28/2022 SAR Think Like an Appraiser (details)

WHAT IS HAPPENING?

Buyers are essentially running to the market to get in before rates spike more. On one hand affordability has declined as rates have risen substantially lately, but so far this has only created a frenzy to buy. At some point theoretically we’d expect to see demand soften due to rate increases, but we haven’t hit any sort of inflection point yet where buyers are backing off the market. That’s something to watch though with the number of purchase mortgage applications, pending contracts, and sales.

FREAKISH PRICE GROWTH:

Below I’d like to show a few examples of what price growth looks like in the Sacramento region right now. I suspect many markets across the country look something like this too.

A QUICK RECAP:

Some quick stats. Feel free to share some of these images on your social channels too. But please see my sharing policy. Thanks.

1) MASSIVE MEDIAN PRICE GROWTH:

This visual shows the median price in February in black, and this year is so far above others. It’s normal to see prices rise in February, but this is massive growth – especially in the eleventh year of this price cycle.

2) RECORD-BREAKING DOLLAR GROWTH:

This year the median price ticked up $31,000 from January to February. This is essentially the largest dollar gain we’ve seen in the Sacramento area between these two months. From a percentage standpoint this was a 5.56% increase. This isn’t the highest percentage ever, but it’s the second-highest percentage gain from 2004 (2015 saw a larger gain).

3) WEEKLY PRICE GROWTH HAS STARTED TO RAGE:

Check out the black line. That’s 2022, and it’s been raging higher. Until the last week of February it looked like the median price for the month was going to be strong, but nothing too crazy. But then stats starting coming in, and we see a much different trend. Remember, closed sales from last week really represent the market from about a month ago when these properties got into contract.

4) BUYERS PAID WAY ABOVE NORMAL:

On average buyers paid nearly $16,000 over the asking price last month. This is far above a normal February where buyers tend to pay closer to $10,000 BELOW the list price. It’s important to note February 2022 was about twice as much as February 2021. Keep in mind this is the average of every single escrow. This number doesn’t perfectly describe every single transaction. In other words, some buyers went way above this number and some went lower. The takeaway here is to know how disconnected this number is from normal rather than offer $15,764 above list price thinking that is the winning number. It might have to be way more. Or in some cases it could be less.

5) FEWER MULTIPLE OFFERS TECHNICALLY

This month there were fewer multiple offers compared to last year at the same time, but we’re actually seeing a more aggressive market today. On one hand this stat suggests the market is slightly cooler in temperature, but it doesn’t feel cooler because the offers that are being made are higher.

6) BUYERS MADE MORE AGGRESSIVE OFFERS:

This month there were fewer multiple offers compared to last year, BUT the market was more aggressive since buyers offered higher amounts above the list price to secure properties. This speaks to buyers having a fear of missing out on low mortgage rates (and anemic supply of course).

7) MORE INVENTORY IS COMING

We are seeing more listings hit the market. Typically, the market really starts to hit more of a stride in March with listings coming, so stay tuned. We won’t have enough listings, but more is better.

YEAR OVER YEAR:

Year over year stats are important to digest, but don’t forget to look at month to month stats to understand what the market is doing right now. Also, not every location and price range are going to have the same stats.

MONTH TO MONTH:

Year over year stats are important to digest, but don’t forget to look at month to month stats to understand what the market is doing right now. Keep in mind Placer County has a limited number of sales too, so I would take Placer with a grain of salt from month to month. 

OTHER VISUALS:

As if anyone really wanted more…

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.

SHARING POLICY: I welcome you to share some of these images on your social channels or in a newsletter. In case it helps, here are 6 ways to share my content (not copy verbatim). Thanks.

Questions: What are you seeing out there in the market?

If you liked this post, subscribe by email (or RSS). Thanks for being here.

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