Sacramento Appraisal Blog

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Predicting housing price cycles isn’t so easy

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Does the housing market really have price cycles? Yes. But these cycles aren’t always so rigid and perfectly predictable like so many people think they are. Let’s talk about this today. I’d love to hear your take also.

Fortune cookie with a message that says, "The housing market will change in the future."

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)

THE MARKET FROM 1975

Last week I wrote about doom and gloom articles, and today I wanted to follow up by looking at some visuals using the Freddie Mac Price Index.

Limited data: I have stats from 1998 through the local MLS, but it’s really difficult to get older stats. However, Freddie Mac does have a price index from 1975 for Sacramento, so that’s what I used here to help tell the story of value.

Is the Freddie Mac Price Index accurate? Yes, I think so. I lined up the median price for Sacramento County (my stats) over the past twenty years (red), and compared the Freddie Mac Price Index on a separate axis (green). I would say the trend looks really similar, so this makes me trust the trend from the 70s, 80s, and 90s also. If you have a better source, speak up.

This shows the Freddie Mac Price Index and Sacramento County median price over the past two decades (a line graph). These two metrics are very similar.

NOT ADJUSTED FOR INFLATION

When looking at the Freddie Mac Price Index it’s clear there are multiple price cycles over the years since 1975. And when we don’t adjust for inflation, the current price (nominal price) is way above the previous peak.

Freddie Mac Price Index line graph for Sacramento from 1975 (not adjusted for inflation). This visual shows ups and downs in the market through the years.

ADJUSTED FOR INFLATION

What happens when we adjust for inflation? We can still see market price cycles, but we also see the current price point is so much closer to the previous peak in 2005 instead of being way above. There isn’t anything magical about being “back to peak prices” of course. I’m just saying when we start comparing today with really old prices, it becomes important to consider inflation because the value of the dollar hasn’t stayed the same.

Freddie Mac Price Index line graph. This graph is adjusted for inflation from 1975.

I dig this graph especially. When we adjust for inflation, it sort of smooths out the trend a bit. In other words, it makes the trend a bit less extreme.

Freddie Mac Price Index in Sacramento. This line graph has a dark line to adjust for inflation and a light line that doesn't adjust for inflation. This helps us see what inflation-adjusted prices look like (less extreme basically)

I hope you liked the visuals.

STUFF TO CONSIDER ABOUT PRICE CYCLES

1) Not the new template: What happened last time isn’t the new template for every future market correction. It’s easy to look at prices today and say, “We’re about ready to implode just like we did back then,” but the truth is there isn’t a market formula where prices always drop by the same amount. I hear things like, “The market will drop again by 50%,” or “The market will likely dip by 10%.” Both of these statements have one thing in common. They are guesses about a future that has not happened. As I always say, nobody has a crystal ball. That doesn’t mean we ignore trends today, but it does mean we are humble about our ability to know the future. But if you do want to test your prophet skills, tell me this. Who is going to be president in two years? What will bitcoin be worth in three months? And will mom jeans be more or less popular next spring?

2) Fixation on last time: I think in some cases we get so fixated on the previous bubble that we start saying a correction like that is locked in for the future. Look, I’m not glossing over rapid price growth lately that feels unsustainable. All I’m saying is when we back up and look at a few more price cycles, it’s clear not all up and down cycles have unfolded the same way. In my mind it’s like having multiple kids. There are similarities, but there can also be big differences.

3) The previous peak doesn’t matter: Getting back to the previous price peak doesn’t hold any power for the market today. In other words, there is nothing magical about crossing that threshold – especially since that market was full of fraud. The truth is we are way beyond the peak already when you consider prices without being adjusted for inflation. This is true on the national level also. But there isn’t anything noteworthy about getting back to the peak when adjusting for inflation either. Case-in-point. Around 2002, we were back to the prior peak from the 1990s in Sacramento. People could’ve said, “Bro, we’re about to drop because we’re back!!!” But then the market kept going for three more years…

4) No seven-year rule: The market doesn’t have to behave a certain way every seven years. Bottom line. Some people talk about a seven-year price cycle where prices go up for seven years before they go down. Well, here we are in year eleven of price growth in Sacramento.

5) There is a cycle: There really is a rhythm where prices go up and down, but it’s not so easy to perfectly predict either. In many locations the market tends to change every decade or so. But keep in mind some markets are flat over time rather than super cyclical like California. Here’s a post I wrote called, “Is the housing market going to crash?” The goal of the post isn’t to say YES or NO, but rather to think through some of the bigger issues.

Data Sources:

FRED CPI
Freddie Mac Price Index
How to adjust for inflation (YouTube video)

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 stands out to you most in this post? What did I miss? I’d love to hear your take.

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

The anatomy of doom & gloom real estate articles

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The market is going to crash. This time it’s going to be even worse. Have you been seeing more doom and gloom housing headlines? I sure have. This week I’ve had quite a few articles emailed to me. What do you think of this one? What do stats actually show? What do I say to my buyer who feels concerned? Let’s chat about this.

This photo is me holding a sign that says "doom and gloom"

This is me holding a shabby chic doom sign I made this past weekend.

UPCOMING PUBLIC SPEAKING GIGS:

  • 2/25/2022 Placer Assn of Realtors market update (details)
  • 3/15/2022 NARPM Luncheon (details)
  • 3/22/2022 SAFE Credit Union market update (details)
  • 4/28/2022 SAR Think Like an Appraiser (details)

TEENAGE BLOG: My blog turned thirteen years old on Sunday. I’m definitely going to be watching the car keys and liquor cabinet closely… 

NOTE: This post focuses on breaking down what I tend to see in so many doom and gloom real estate articles (and YouTube videos). If you’re looking to read about market ups and downs, check out a piece I wrote a few months ago, “Is the housing market going to crash?”

THE ANATOMY OF DOOM & GLOOM ARTICLES

Sensational title: These posts start with a sensational title such as, “We’re going to see a massive implosion,” or “It’s going to be worse than 2008.” I get it. A great title helps people click.

Minimal statistical substance: In many doom articles we tend to see big ideas without statistical substance. These articles often say, “Prices are high, so we’re going to see the same thing happen again.” In my mind that’s not enough substance, especially since there is no such thing as a rigid formula where the housing market has to do exactly what it did the last time. Moreover, many websites have been sharing this message for years, so at some point we have to question credibility. But back to stats, many doom articles seem to hype up the future without entertaining the present. I guess the message of, “The market will change in the future,” feels a bit vague and boring to me. For reference, here’s a post I wrote a few years ago to discuss price cycles in real estate. Remember, not every price cycle rises and falls exactly the same. In other words, what happened last time isn’t automatically the new template for the future.
 
Perspective that goes against stats: Sometimes people say things like, “We’re going to see massive mortgage delinquencies and a new foreclosure crisis.” But when we look at actual stats, mortgage delinquencies are really low and foreclosures hardly exist. During the beginning of the pandemic, the mortgage delinquency rate shot up, but it has since declined. This doesn’t mean we cannot have a problem in the future, but current stats don’t support a doom narrative.
Here’s a look at forbearance rates also. They’ve been declining, and 1.30% of all loans are in forbearance (compared to 8.53% in early 2020). At the start of the pandemic there was so much concern (rightly so), but a housing collapse based on this hasn’t panned out.
 
A visual to show the decline of forebearance rates through the past couple of years. This is a line graph.
Fringe source: A few people sent me an article this week, and I wrote back stating, “This is a fringe political website that I’ve never heard of. I wouldn’t give any credibility to this slanted source.”
 
An obsession with doom: If someone is going to write with a doom lens, I’m skeptical because I know I’m not getting objectivity. To be fair, I feel the same way about a positive-only lens that ignores anything negative.
 
Experts likely not quoted: In many doom articles it’s just one person pontificating without expert perspective (or stats). It reads more like a housing diatribe instead of housing research.
 
That timeless feeling: The big thing is these articles feel timeless because they are so general in what they’re predicting. These pieces basically could have been written three years ago, and maybe they’ll even get repackaged next year. In my mind this “timeless” feel is the tell we’re reading sensationalism more than stats. Of course, one day the authors will be right since markets don’t always go up. But like the saying goes, a broken clock is right twice a day.
 

Other: What did I miss?

CONCLUSION:

I’m not saying all housing articles predicting demise are bad, but the doom niche tends to be formulaic with much of what I mentioned above. The truth is we should be talking about the current housing market as well as the future. Let’s keep doing that. But be careful not to get swept away by weekly articles that don’t add substance to the conversation. Know what I’m saying?

TWO RECOMMENDATIONS:

1) Know the numbers: Pay attention to actual stats and let the numbers form your perspective and narrative. Ultimately, without a good sense of seasonal trends and current stats, it’s easy to get tossed around by each new sensational headline. Moreover, a quick way to lose credibility in real estate is to habitually share articles that lack merit. I know, that sounds so judgy, but it’s the truth. If you feel like you’re not in tune with stats in your market, maybe start pulling them yourself, find a few people who are doing a good job (and devour their stuff), or even check out what a source like Redfin puts out there.

2) Read mostly everything: I recommend reading from a variety of sources and following lots of different people who talk about housing. Having a well-rounded perspective is important as a system of checks and balances too. On a related note, if someone has a positive-only or negative-only housing outlook, don’t waste your time. All that said, I appreciate hearing what Ivy Zelman has to say lately because she’s been more contrarian than most other housing analysts (which piques my curiosity). Some of my favorite housing voices include Calculated Risk, Altos Research, Odeta Kushi, Jonathan Miller, Len Kiefer, Daryl Fairweather, Steven Thomas (SoCal), Patrick Carlisle (Bay Area), etc…

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 are you seeing out there in the market? What doom and gloom articles have you read lately? What housing sources are you listening to right now?

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

Home prices & mortgage rates are soaring

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There are lots of big questions in life. Are you playing Wordle? Did you like the Super Bowl halftime show? And what are rising mortgage rates going to do to the housing market? Let’s talk about this.

A wordle example with housing words

Okay, really quick. Yes, I play Wordle almost every day. And yes, I liked the halftime show. What about you?

UPCOMING PUBLIC SPEAKING GIGS:

  • 2/18/2022 WCR El Dorado market update (details)
  • 2/25/2022 Placer Assn of Realtors market update (details)
  • 3/15/2022 NARPM Luncheon (details)
  • 3/22/2022 SAFE Credit Union market update (details)
  • 4/28/2022 SAR Think Like an Appraiser (details)

My take on mortgage rates: For now, buyers have been sprinting to the market to get in before rates rise. This has created an auction-like feel in the home-hunting trenches. Thus, for the time being the hot housing temperature has not been dampened by rate increases. But as we saw clearly in 2018, there was a point where buyers backed off when rates rose between 4.5-5.0%. So, rate increases do matter. The struggle is we’re having fewer sellers list their homes, so even with rate increases, supply is just so diminished that there is more upward price pressure present today. All that said, we can’t expect for the housing temperature to stay exactly the same if affordability keeps declining through rate increases and inflation. Again, we haven’t hit any sort of inflection point where buyers pull back, but we need to keep an eye on what happens with rates because absurdly low rates have been a huge driver in creating the market we’ve had these past two years.

A non-scientific Twitter poll I did a few days ago: 

A poll on Twitter to ask what people thought of rising mortage rates. 33% said rates going up would affect the housing market whereas 41% said no, and 24% some maybe.

What do you think? I’d love to hear your take.

Thanks for being here.

—–——– BIG MARKET UPDATE FOR THOSE INTERESTED ———––

This image says "Caution" and it's yellow and black. Then it says "big monthly market update below." Skim or digest slowly.

QUICK SUMMARY:

Is the market more or less aggressive compared to last year at the same time? So far, the housing market in Sacramento is slightly less aggressive when considering January stats. But let’s remember we are now comparing this year with an absolutely insane market from January 2021. Anyway, the stats show today’s market is profoundly elevated from a normal January, but it’s also slightly “slower” than last January. Stay tuned to see how the stats evolve in coming months. And remember, our housing narrative changes as stats change.

Dude, volume was down? Let me address something since people keep asking. Sales volume in January 2022 was down about 5% from one year ago. It’s easy to look at this and say the market is starting to struggle, but this January was actually fairly normal when we consider the past few years. It’s just that 2021 was elevated because we basically didn’t have a fall season in 2020, which led to more sales than usual.

A quick recap:

Some visuals eh…

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.

MOVING ON UP:

The black line is the weekly median price. This is a weekly view before monthly stats come out for February. Do you see the rise? Yep, prices are going up (not a shocker). Moreover, when looking at pending contracts, we are seeing a higher percentage of multiple offers compared to January, so clearly the market is getting hotter (normal for the spring).

Weekly medina price line graph

Here are a couple of monthly visuals too. The second one shows the preliminary median price for February. This year we are on the cusp of breaking $600,000 for the median price. We’ll see.

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.

Sac Region housing stats

Sac County - Jan 2022 housing stats

Placer County housing stats

El Dorado - Jan 2022 housing stats

Yolo County Housing stats

STILL SELLING ABOVE THE LIST PRICE:

Not everything sells above the list price. It almost offends some people to say that, but it’s the truth. I know it feels like literally everything is selling above the list price, but that’s not the story the stats tell. Think about it this way. There are always price reductions because not all properties are priced correctly, right? So, this means not everything is going to sell above the list price. Anyway, the key here is to ask what normal looks like. In January we should’ve seen properties selling about 3-4% below their list price, but instead we were just above the list price on average. Here is a quick discussion on my Facebook page about what normal looks like for January compared to what we have right now.

HOW IS THE MARKET DISTRIBUTED?

This visual shows how prices are distributed throughout the market. Do you dig this one?

FRESH AFFORDABILITY IMAGES:

There is no mistaking prices have risen and the housing market is becoming more difficult to afford, but stats still show buyers are getting it done when we look at sales volume being more or less normal. This is not to gloss over the reality of some buyers being priced out of the market. I’m just saying statistically sales are still happening at strong levels. But back to affordability, here is a look at the latest affordability stats. The 39% figure means 39% of households can afford the median price (per CAR stats).

MULTIPLE OFFERS:

We’ve started to see multiple offers increase again, which is normal for the spring season. In short, multiple bids are lower than last January, but they’re far elevated beyond normal. And pendings are getting a higher percentage than January already, so this line on the right is poised to tick up.

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.

Choosing comps in a lopsided market

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How do we choose comps in such a lopsided market? I had a great question about this recently, so I wanted to share some thoughts. Anything to add? I’d love to hear your take in the comments.

Different colorful shapes wooden blocks on blue background, flat lay. The caption says "choosing comps in a lopsided market."

UPCOMING PUBLIC SPEAKING GIGS:

  • 2/9/2022 Yolo Assn of Realtors market update (details)
  • 2/18/2022 WCR El Dorado market update (details)
  • 2/25/2022 Placer Assn of Realtors market update (details)
  • 3/15/2022 NARPM Luncheon (details)
  • 3/22/2022 SAFE Credit Union market update (details)
  • 4/28/2022 SAR Think Like an Appraiser (details)

QUESTION: With so many listings receiving offers above list, and people having to pay the shortfall between the appraised value and the contract price, how do appraisers look at comps? If a property sold at $580,000, but it actually appraised for $547,000, and the buyer paid the difference, which number do you use? $580,000 or $547,000?

ANSWER: Here are a few things on my mind.

1) Weigh the comps:

In any market (not just today) we have to weigh the comps. Or another way to say it is, we have to appraise the comps so to speak. What I mean is if something clearly sells for too much, it’s reasonable to give that property less weight in our analysis. Likewise, if a property sells for too little, we might also give less weight to that sale. Granted, selling for too little isn’t as common lately, but in past markets we regularly considered whether short sales or bank-owned sales sold below market value.

2) One sale doesn’t make or break the market:

It’s important to note one sale doesn’t make or break the market. This means one lofty “lone ranger” sale doesn’t all of the sudden mean the rest of the market will go to that level. This would be like saying that record-breaking $7M sale in Shingle Springs from August will pull the rest of the market up. Nah, I don’t think so. Or Zillow buying a house for $40,000 more than the comps will cause the rest of the market to rise. Nope. If one sale closes at $580,000, but the rest of the market is below $550,000, we won’t arbitrarily accept $580,000 as the new neighborhood price threshold. The same would hold true if a different house sold at $450,000. This one “low ranger” (sorry) won’t automatically drag the rest of the market down.

A picture of a unicorn with a statement saying, "One lofty unicorn sale doesn't all of the sudden mean the rest of the market is now going to be at that higher level."

3) Using the final sales price:

It’s a really good question whether appraisers will use $547,000 or $580,000. Realistically appraisers might not even know about the lower appraised value because it’s not automatically disclosed in MLS or from agents in the transaction. And there isn’t some sort of appraisal database where appraisers know about the appraised value either. Ultimately, even if I knew what it appraised for, I’m not going to use the appraised value because that wasn’t the official sales price. To be fair, is it possible it appraised too low? Yes. At the same time, if the property really was worth $547,000, maybe the buyer legitimately paid too much at $580,000, right? Again, this is where appraisers need to weigh the comps and ask whether they sold at a reasonable level or not. I realize this sounds subjective, but weighing comps has to do with looking at the entire market and weighing sales against other ones, so there is an objective element here. I’ll be checking out recent and much older sales, competitive sales, listings, pendings, withdrawns, lots of geeky metrics, and even similar neighborhoods. I’ll also be making graphs to help visualize where it looks like value is at right now. If something did sell for too much, it’ll probably stand out because it’s disconnected from the rest of the market – including pending contracts. So maybe I won’t use the higher sale as a comp in my appraisal. Or maybe I can use it but give it less weight. No matter what, I won’t automatically use a sale without thinking through why it sold for more than others. But here’s the thing. If pendings contracts are all around $580,000 too, and other neighborhoods have also risen quickly, maybe it’s the market… In that case I need to recognize prices are rising and then adjust my comps up accordingly.

4) Unfairly judging the original list price:

It’s important for appraisers to be cautious about judging the original list price. What I mean is the original list price is a starting point that could be reasonable, too high, or too low. I’m not saying it’s unimportant. I’m just saying it may or may not say something about value. The truth is value is found in the comps – not the original list price OR the contract price. For instance, a friend told me about a property that got into contract about $200,000 above the original list price recently. I know it’s easy to think it could have a problem appraising that much higher than the contract price, but what if the property was priced $200,000 too low? This is where appraisers (including me) need to be careful to be objective and not give the original list price so much weight to essentially say, “I can’t bring the value in that high.” Nope. Value is found in the comps – not the original list price.

5) Instagram and market value:

I’m seeing images floating around Instagram about market value. The images tend to say things like, “The appraised value is one professional’s opinion,” and “Market value is what a buyer will pay a seller.” That sounds maybe sorta kinda hopefully true, but let’s dive deeper. The truth is what one buyer is willing to pay could represent market value (what the bulk of buyers would pay), but sometimes what one buyer pays is more like individual value because it’s totally disconnected from the rest of the pack. So, if a buyer pays above all the comps and pendings, it doesn’t automatically represent market value. It would be like me buying a house for $750,000 in a $350,000 neighborhood. I can pay that, but just because the seller and I agree on the price doesn’t mean it’s market value. Does that make sense? And here’s the kicker. What if a buyer paid 20% lower than the comps? Would we say it’s market value since the buyer and seller agreed on the price? I doubt it.

The bubble question:

I did a YouTube Live last week and here’s what I said when someone asked about a real estate bubble. This was all off the cuff it the answer should start at 58 minutes. Enjoy if you wish.

Thanks for being here.

Questions: What do you think of the points above? What did I miss? Anything to add?

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

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