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Housing on steroids, slowing, & smaller homes

November 17, 2021 By Ryan Lundquist 20 Comments

Real estate has been slowing, but it’s still completely nuts. I’ll explain below. But first let me unpack the NAR conference in San Diego and share some exciting personal news. Oh, and let’s talk about smaller homes selling. Then stats and perspective for those interested.

This picture shows an asphalt road with the words "fast" and "slow" written on the asphalt. The top of the image includes the blog title

NAR Conference & my new BFF: I had the honor of sitting on an appraiser panel last weekend at the National Association of Realtor’s annual conference. I appreciated being asked to share my two cents and I’m so grateful to have met and mingled with colleagues too. Also, I met former quarterback Drew Brees since he spoke at the conference and he’s pretty much my new BFF.

This photo shows a few pictures of the NAR conference in San Diego. These are other apprasiers with Ryan. Though one picture has quarterback Drew Brees and Ryan.

500 days of no beer: In personal news it’s now been 500 days since I gave up alcohol. I said goodbye to alcohol for health reasons and I’m feeling really good. This was a personal milestone and now I’m targeting two years. At some point in the future I might re-introduce beer back into my life, but for now I’m taking some time to focus on health. This has been good. And my pants fit better too. 🙂

Slowing but not slow: The housing market has been experiencing definitive seasonal slowing and I’ve been talking about that for months, but at the same time the market is still so much more competitive than it usually is for the time of year. In other words, the stats are slower than spring, but they’re elevated way beyond normal for the fall season. On that note, when some say the housing market is crashing, I wonder if they’re in touch with how aggressive some of the statistics are right now.

Smaller homes: During the beginning of the pandemic there was a notable uptick in the size of homes selling. Initially I thought it was maybe due to buyers targeting larger homes to sort of quarantine in style, but now with the benefit of hindsight I think the real culprit was a spiked emphasis on more expensive (and larger) homes due to an influx of buyers at higher prices.

Here are a few visuals to show this spike in size in 2020 and now a slightly smaller size in 2021. I wanted to mention this because part of me wonders if we are starting to see a bit of the pandemic home size sizzle begin to fade slightly.

This visual shows the median home size and average home size in the Sacramento region since 2012. It has increased over time and there was a spike in 2020 in particular. This is a line graph.

This image shows the average home size and median home size in Sacramento since 1998. Size has increased and it shows there was a slight tick down in 2021 from 2020. This is a line graph.

This visual shows a dip from 2020 to 2021 in home size. It almost looks like 2020 was an elevated year and now the trend is getting back to normal.

Sharp size drop lately: There has been a definitive drop in home size since May. It’s normal to see larger homes sell for about half the year and then smaller homes for the second half of the year. The drop this time around though has been sharp and that’s something I’ll be watching. This could speak to a normalizing of the higher end market (fewer higher-end sales after a pandemic spike), but we need some time to understand. Stay tuned.

This visual is both a bar chart and a line graph to show the average sales price (bars) and average hom size in the Sacramento region (lines). This shows a seasonal rhythm to both over time.

No blog post next week: I won’t have a blog post next week because I’ll be thinking about family, woodworking, and eating pie. I am doing Run to Feed the Hungry, so I hope to see some local friends there. Happy Thanksgiving!!

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:

The market is so obviously not as hot as it was during the height of spring. Yet the slower speed today is still so much faster than a normal fall season. This is why I keep saying the market is like a car speeding on the freeway that recently let up on the gas. The car is clearly slowing, but it’s still going really fast. Both things are happening at once. Ultimately buyers have been gaining more power and it’s been a bit easier to get into contract, but there is a difference between easier and easy.

Some visuals eh…

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.

Sacramento housing region stats for price, number of sales, cash percentages, and other elements.

Sacramento county stats for price, number of sales, cash percentages, and other elements.

Placer county stats for price, number of sales, cash percentages, and other elements.

MONTH TO MONTH:

Stats from September to October basically show more seasonal slowing, but not every category is slowing. Remember, stats around this time of year tend to bounce around a bit. One month prices might be up slightly and the next month they could be down slightly. And remember, part of prices dropping has to do with smaller homes selling. Technically the median price in the region has dropped 4% from June, but this does NOT mean prices are 4% lower in every area. Simply put, some of this price drop really has to do with size.

Sacramento region stats for price, number of sales, cash percentages, and other elements. September to October stats.

Sacramento county stats for price, number of sales, cash percentages, and other elements. September to October stats.

Placer county stats for price, number of sales, cash percentages, and other elements. September to October stats.

STILL SELLING ABOVE THE LIST PRICE:

Here are some visuals to show how properties have sold in relation to the original list price. In short, we are seeing more properties sell at or below the list price, but last month on average properties still sold almost 0.50% above the original list price. For context, 43% of the market sold at or below the list price last month (most of that is not below). In 2019 more than 70% of all sales sold at or below the list price though, so despite seasonal slowing the market is still moving really fast. It is actually highly unusual to see homes selling above the list price in October. On average homes sold about $2,800 above the original list price whereas in October 2019 homes sold about $15,800 below the list price.

We really don’t have an overpriced market, but some sellers need to adjust to the reality of a slower pace compared to April. Buyers, there is a little more hope for you, but you still have to bring a strong offer. Only 13% of homes sold below the original list price last month. In a normal market his number should easily be 20% or more. Hang in there.

A line graph to show the original sales price to list price ratio since 2018 in the Sacramento region A line graph to show how much buyers have paid in relation to the original list price since 2018 in the Sacramento region August through October stats for specific price ranges

This visual shows the percentag eof homes that sold above the list price from November 2020 through today

UPDATED VISUAL:

This is a cool visual I’ve been making for a few months. It shows how prices are distributed throughout the market. I actually corrected this visual since I made an error in Excel that pushed the columns over one bin (and that changed everything). Sorry about that.

TWO BRAND NEW VISUALS:

Here are a few new visuals to show how much buyers paid above asking price. I like this format because it compares multiple years at once. But I’m not totally sold on this either because 2020 was such an odd year and 2021 is so far removed from the trend. It just feels a bit awkward maybe. No matter what though, do you see how normal it is at this time of year to see cooling? It’s like the market goes up for about half the year and then things descend.

A BUNCH OF VISUALS:

In case you’re still reading, here are a bunch of visuals to digest. I’m playing catch-up after being out of town, so I don’t have any more time to organize these. Let me know if anything stands out to you.

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?

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Goodbye Zillow

November 8, 2021 By Ryan Lundquist 43 Comments

Last week Zillow announced failure as a home flipper and there were no candle vigils. But there has been so much talk and I’ve heard everything from “This means the market is going to crash” to “The iBuyer model is dead.” Let’s talk about what this failure really means. Any thoughts?

a fail stamp in red with a white background. The text says "Zillow's big fail"

Skim topics of interest or digest slowly.

Failure despite massive price increases: We are coming out of one of the most aggressive markets ever and Zillow was not able to succeed despite massive appreciation. Just think how much more difficult it would have been to flip in a declining market.

Zillow losing isn’t about the market: Lots of people have said things like, “Zillow must know the market is about to implode, so they got out before it was too late.” But here’s the thing. Zillow overpaid, so of course they are selling at a loss. Zillow losing money isn’t about what the housing market is doing right now. It’s the byproduct of a flawed strategy. As a side note, I have a friend who was the recipient of an offer nearly $100,000 over market value and I now joke with him that his transaction is what pushed Zillow over the edge into failure… Keep in mind Zillow’s own economists have been predicting price growth next year, so backing out due to a looming market collapse goes against what their brand has even been saying. Look, I’m not giving credibility to Zillow’s predictions, but keep in mind mostly every data company is predicting price growth next year.

Operation Catch-up: It’s almost like Zillow wanted to catch up to Opendoor rather than being sure their acquisitions made sense. It’s like Zillow was so zealous to be the number one iBuyer that they didn’t prioritize making the numbers work. In Sacramento Zillow caught up to Opendoor a few weeks ago, but then they announced their flipping exodus. So… congrats on being #1?

This picture shows a magnifying glass over Zillow's logo with the Zillow website in the background

This is NOT enough to crash the market: Some YouTubers are making a mountain out of Zillow having seven thousand properties to sell, but these are a drop in the bucket for the housing market. As of this week there are 400,688 homes for sale in the United States according to Altos Research, so it’s absurd to talk about Zillow’s holdings being enough to turn the market. Remember, these units are spread through many locations too. In Sacramento Zillow owns 413 units and 185 of them are currently either active or pending. In other words, 44.7% of what Zillow owns is listed for sale right now. In contrast 54.2% of Opendoor units are on the market and 40% of what Redfin owns is listed. Ultimately Zillow’s ratio of what they own verses what is listed looks pretty normal compared to other iBuyers. And Zillow only has 55.3% of their units left to list locally, so it’s hard to imagine this amount could change the market.

The new doom flavor of the week: Zillow’s failure is the latest sensational headline used to predict the demise of the market. Over a year ago it was the pandemic, then it was forbearance, and then it was the end of the eviction and foreclosure moratoriums. A few weeks ago it was Evergrande in China. And now it’s Zillow. My advice? Be careful of sensational voices that use headlines to continually promote doom. Look, at some point the market will go down because that’s what markets do, but don’t get caught up in sensationalism until that happens. Instead, pay attention to stats and try to be objective about issues instead of getting swayed by the flavor of the week. I advise avoiding negative-only narratives as well as positive-only narratives. Both are problematic.

Offerpad is stepping up as in iBuyer: Zillow failing isn’t the deathblow to the iBuyer model. It’s easy to say that, but let’s remember Zillow failing was likely more about their strategy rather than the model. In other words, Opendoor and Redfin are still in business and Offerpad is another iBuyer with a huge presence in other states that will soon be expanding to California. Last week I saw a Sacramento position with Offerpad advertised on LinkedIn and I even know someone who interviewed for the job. I’ve been told they are hoping to be active by January, but we’ll see.

The school of hard knocks: The real estate community didn’t hold any candle vigils for Zillow’s failure and there was no sad violin music. The message is simple, “Welcome to what we already knew. Real estate is difficult.” There is certainly a place for different models in real estate, and I suspect over time some tech companies are going to make better inroads, but technology companies ought to exercise humility. In other words having brand recognition and millions of dollars doesn’t guarantee you success in real estate.

Public perception: Zillow is a big brand and while their failure as a flipper has no power to sway the actual real estate market, we do have to wonder how the public will respond. Last week Bill McBride of Calculated Risk said, “It is possible this will have an impact on buyer psychology, and make some buyers more cautious, but that is impossible to measure.” I agree on all points. We need time to tell. For now it seems like the real estate community is much more fixated on the demise of Zillow than the public. I’ve yet to personally hear of buyers and sellers making real estate decisions because of Zillow’s failure. Let’s keep watching.

Not all iBuyers are the same: This visual comes from Mike Delprete. I recommend signing up for his email list. In short, Zillow has been losing big-time, but it looks like Opendoor is starting to figure out how to make a profit. I’m not sure anyone has really cracked the code, but these companies are trying.

This is a bar chart to show iBuyer profit and loss. It basically shows Zillow has lost $28,284 per transaction compared with Opendoor and Offerpad last quarter gaining $6,000 to $7,000 per transaction

Growth was rapid: In Sacramento Zillow owned fewer than 50 homes in June, but less than five months later they owned over 400 units. Not only did they overpay for many of these properties, but on a practical level I wonder how they were going to quickly repair these homes with a deep shortage of skilled laborers.

Integrity from agents: One thing that maybe hasn’t been covered much in media is honesty from real estate agents. Quite a few real estate agent contacts told their prospective sellers to sell to Zillow instead of list on MLS. The sentiment was, “There is no way I can get you that amount because they’re paying way above what the market will give you.” In short, props to these agents for integrity.

Not telling the truth: One of the things that bothered me about Zillow’s public narrative in recent months is they said they were paying market value for the homes they bought when in fact everyone in the trenches of real estate knew they were overpaying. This breaks down trust in my book.

Will institutional investors buy these units? There has been talk about institutional investors purchasing some of Zillow’s inventory. Maybe that will happen. Maybe it won’t. In Sacramento I wouldn’t be surprised to see Invitation Homes pick up some of Zillow’s inventory, but then again this investment fund is strategic about what they buy, so it’s not like all 413 units in Sacramento would even make sense for Invitation Homes. By the way, since May Invitation Homes has purchased 126 units in the region.

This image has two street signs. One says "Wall St" and the other says "Main Street". There are clouds in the background.

Will these homes be rented? I’ve heard some say Zillow’s units are going to be rented, but I’ve yet to hear any official source affirm that. In my mind becoming a property manager would be another new venture for Zillow and I suspect they need to convince shareholders they’re not going to do anything new after flopping so hard as a flipper. If you hear otherwise, let me know.

Dude, every listing is owned by iBuyers: Last week an agent friend emailed me to say it felt like almost every active listing she was showing her clients was owned by Zillow, Opendoor, or Redfin. I get it because technically right now these three companies have a 9.97% share of all active listings in the Sacramento region. That’s a whopping stat, but it’s also a bit sensational for a few reasons. First, we have about half as many listings as normal, so these companies having 213 active listings during a severe housing shortage sounds bigger. Secondly, when considering both pendings and actives (instead of just actives) these companies have a 7.7% share of the market. These days with properties moving so quickly it’s important to not just focus on active listings. Lastly, these companies are going against the seasonal trend, so it makes sense to see them gaining market share during the fall. Let me explain. It’s normal to see fewer listings around this time of year as people start to hibernate and think about the holidays. But iBuyers purchased hundreds of homes in recent months and they need to get them on the market, so they’re listing now despite the slower season. On one hand this is good for consumers because there are more listings, but it’s odd too because there is a rhythm to the market where we just see less activity at this time of year. In other words, even consumers aren’t as interested in real estate during the fall.

Quality issues with iBuyer flips: I’ve heard quite a few complaints about various iBuyer companies doing really low-quality work (and being difficult to reach). I’ve heard some prospective buyers say they would basically have to redo the so-called improvements iBuyers made. On a related note I shared some thoughts with CBS Sacramento last night about an Opendoor property with squatters.

Cannot smell the cats: I gave a quote to Money.com last week and I was especially excited they used my “Zillow cannot smell if 20 cats live there…” line.

Zillow isn’t finished: Zillow is said to be finished as an iBuyer, but be careful about calling them the new Purplebricks. They are still here. They just won’t be an iBuyer (presumably).

Thanks for being here.

Questions: What stands out to you most above? What do you think of Zillow failing and the iBuyer model? I’d love to hear your take.

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The struggle to afford the market & making the top of the list

November 1, 2021 By Ryan Lundquist 18 Comments

Are buyers struggling to afford the market? Let’s talk about that today. I have some brand new visuals to share (Part I) and then let’s unpack a new study that says Sacramento is the least affordable area for new homes (Part II). What are you seeing in your area regarding affordability? I’d love to hear.

This image shows a house with a picket fence all made from american currency. The caption reads "The struggle to afford the market"

UPDATE: News just broke about Zillow exiting the market for good. I’ll talk about that next week on my blog (but now on social channels).

PART ONE: Affordability

1) Duh, affordability is going down: It’s no surprise to see affordability diminished in recent years in the United States, California, and locally. Prices have risen and while mortgage rates have been a game-changer for affording higher prices, affordability is still taking a hit. Here are some visuals I made based on data from the California Association of Realtors (CAR) (here).

This image shows the housing affordability index for California, Sacramento, and the United States. This is a line graph and each image basically starts out around 10-20% in 2006, peaks around 50-70% in 2012, and each line is now anywhere from 20-50% today.

2) What was affordability like during the “bubble” days? How many people could afford to buy before the market crashed? According to CAR data in 2006 only about 12% of buyers could afford the median price in California, 10% of buyers in the United States, and 21% of buyers in Sacramento. In contrast, this same index today shows 23% of buyers in California can afford a median-priced home, while it’s 50% of buyers in the United States and 38% of buyers in Sacramento. Keep in mind just because you cannot afford the median price doesn’t mean you cannot afford to buy at a lower price.

This is a line graph that shows the housing affordability index for Sacrameneto and California from January 1991 to December 2005. This is a line graph that basically peaks in 1998 and heads way down in 2005.

California: This visual tells the story that 23% of households in California are able to afford a median-priced home. I suspect many states are more affordable than California, but I’d love to hear any specifics from any onlookers. As CAR points out, affordability was at the peak in 2012. See full report from CAR here. As a side note, there are thirty seven counties in California where fewer buyers can afford the market compared to Sacramento County. But Placer, Yolo, and El Dorado are all less affordable, so when we look at regional data this pushes Sacramento as a whole to be less affordable (though nowhere close to the Bay Area and coast).

This is a bar chart from the California Assoication of Realtors to show the housing affordability index from 2006 through 2021. Basically right now the affordabilty index is at 23%. This means only 23% of households can afford the median-priced home in the state.

PART TWO: Sacramento made the top of the list

A new report says Sacramento is the least affordable area in the country for brand new homes. This report from a company called Knock has gone viral. The Sacramento Bee wrote about it here. I even had an out-of-state family member forward me a national TV show talking about the subject.

A few things:

1) This is only about new homes: Understanding the fine print helps us interpret what is and isn’t being said. For instance, this study from Knock only focuses on brand new construction. In Sacramento 12% of the market is said to be brand new homes, which means this report doesn’t apply to 88% of the market. In other words, when people start saying stuff like, “Bro, Sacramento is the least affordable place in the country,” that’s NOT what this study is saying.

2) Brand new vs used: The median price for a brand new home is said to be $650K compared to $550K for older homes. This highlights the reality of how much more expensive new construction can be at times and also how difficult it is to build affordable housing too (but that’s a different post). Keep in mind some of this price difference could have to do with newer units being larger too. Anyway, it’s not a massive shocker to see fewer buyers able to afford a home priced $100,000 or 18% higher than older units. Check out Knock’s research below. I know, the font is tiny. Click the image for a larger version.

3) Is the resale market 80% unaffordable? This study says 80% of households in Sacramento are not able to afford a brand new home at the median price of $650,000. That’s a sobering stat that most of us wish was different. But does this mean 80% of buyers cannot afford homes that are not brand new (aka “resale” homes)? Nope. According to the California Association of Realtors 38% of households last quarter could afford the median price in Sacramento County and most other local counties range anywhere from 31-35% (see visual). To say this negatively, 62-69% of buyers can’t afford the median price in the Sacramento region (the percentage varies depending on the county). Ultimately it’s clear affordability is better in the resale market, but the stats at 62-69% don’t sound incredibly encouraging either, right?

This line graph shows the housing affordability index for various counties in the Sacramento region (namely Sacrament, Placer, Yolo, and El Dorado). It goes from 2012 through 2021 and the results are about what we would expect. The percentages used to be about 70-75% and now they're about 30-38% of the market being able to afford a median-priced home.

4) Buyers are engaged: It’s easy to say stuff like, “The market is not affordable”, but does that line up with actual stats? Are buyers pulling the trigger at current prices or are they stepping on the brakes? For now despite affordability declining in recent years, volume has been really steady locally and buyers have had a voracious appetite. So despite weakening affordability buyers have been getting it done. Anyway, stay tuned for fresh stats in coming weeks.

Let me stop before this becomes a dissertation.

Stephen Forrester: I did not know Stephen, but he was an appraiser who tragically passed recently. Here is a GoFundMe to help him out.

Questions: What stands out to you most above? What are you seeing and hearing regarding affordability? What did I miss?

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Is the housing market going to crash?

October 27, 2021 By Ryan Lundquist 30 Comments

What’s going to happen to the housing market? Is it going to crash? That’s a huge question as so many people are wondering how long price growth can continue. Let’s talk about this today by focusing on some of the bigger topics in this conversation. Spoiler alert. This isn’t a YES or NO sort of post. Any thoughts?

This image shows a bubble with a house inside. There is a hand holding a needle about to prick the bubble. The caption reads: Is the housing market going to crash?

Background noise: Just in case you need some background noise today, here is a YouTube Live I did with Jason Walter (90 minutes).

THINGS TO CONSIDER ABOUT TODAY’S HOUSING MARKET:

Doom narratives: Some people gravitate toward dark housing narratives and here are some headlines I’ve heard in recent years:

The pandemic will cause the housing market to implode
Forbearance will crash the market
The end of the eviction moratorium will be the death-blow to housing
A foreclosure tsunami is on the horizon
The end of single family zoning will destroy residential real estate
The demise of Evergrande in China will bring down the world
Zillow exiting the market signals the top
What else?

Rosy narratives: In contrast some people embrace a positive-only housing narrative. Instead of looking at stats, it’s like everything feels ultra special like riding a unicorn on a rainbow (I guess that would be nice?). So even saying a word like “slowing” or “cooling” to describe the market seems sinful. But let’s be real. This is just as bad as doom and gloom because it imposes a narrative rather than looking to stats to tell the story of what is happening.

This image says: The market doesn't care what you think about it or which words you use to describe it. You cannot change the trend with positive or negative adjectives.

Confusing slowing with crashing: Right now the market is slowing for the fall season and my observation is some people are confusing this with the market crashing. My advice? It’s important to know how the numbers usually dip during a fall season so you can spot if anything truly is abnormal. Let the stats form your perception of trends.

Market cycles: Markets go up and they go down. That’s just what they do, so at some point we would expect to see prices no longer rise. We are on the cusp of entering our eleventh year of price growth in Sacramento and it’s hard to imagine that would continue forever because nothing always goes up. Not bitcoin. Not stocks. Not NFTs. Not baseball cards or beanie babies. Here is a blog post I wrote two years ago to discuss the myth of the seven year rule in real estate. In short, the market does NOT have to change every seven years. Yet we have tended to see somewhat of a cycle in California lately where we have 7-10 years of price growth and then years of decline. So on paper we are due at some point for a change. Keep reading though.

Timing the market perfectly: Everyone wants to sell at the top and buy at the bottom, but pulling that off is easier said than done. In fact, most of the time when I ask people if they bought on purpose in 2012 at the bottom they say, “No, I just got lucky.” This reminds us timing the market isn’t as easy as it sounds. Remember, when a market bottoms out not everyone can afford lower prices because maybe they don’t have a good financial situation to be approved for a loan. This was a huge problem in 2012 where so many people had gone through a foreclosure or short sale and simply were not able to get a loan despite low prices. In short, just because prices are low doesn’t mean your lifestyle will line up perfectly for that moment.

This image shows an outline of the shape of the United States with an American flag inside of the shape. The caption reads, "Are we back to bubble prices?"

Not the new template: What happened last time in 2007 isn’t the new template for every future market correction. It’s easy to think there is some sort of market formula, but the implosion we saw back then isn’t all of the sudden what every future change now has to look like. Even history speaks to this. In my area in the 1990s prices dipped by about 15% while during the most recent down cycle they dropped by nearly 60% (median price in Sacramento County).

Not tied to the last price peak: When we get back to the price peak, the market will collapse. I hear things like that and it’s just not true. Let’s take a drive through local history. In the early 2000s the market in my area was already back to the previous price peak from the 1990s, but the market didn’t have to turn because it got back to that level. No, it actually kept going for another three years despite surpassing the price peak.

Not tied to inflation-adjusted prices: In my mind it doesn’t matter either if we are back to inflation-adjusted prices. Again, the market isn’t tied to whatever happened in the past and current buyers aren’t making decisions based on whether we are back or not to inflation-adjusted prices from fifteen years ago. Of course these days some buyers are likely to park money in real estate as a hedge against inflation, but that’s a totally different thing with buyers choosing to buy or not based on inflation-adjusted price stats from years ago.

This graph shows the median price in Sacramento County from 1990 onward. This shows a few different price cycles where prices go up, then down, then up, then down, and now up.

False prophets and broken crystal balls: Lots of people make housing predictions and when their predictions don’t come true they punt their predictions down the road until one day they’ll be correct. I can already see the social media flex where someone says, “Bro, I called the market.” Well, maybe that is technically true, but what you actually did was lose credibility over many years before you were eventually right. While we can have ideas about the future, at some point let’s concede nobody really knows exactly what is going to happen.

Unsustainable appreciation: We’ve seen massive price appreciation in recent years and this is not sustainable. In other words, the housing market cannot keep growing at such a rapid pace without simultaneous wage growth, economic growth, or some other stimulus to fuel higher prices. This pandemic market has been quite unexpected because for years we were seeing price growth legitimately slow down (see visual below). But then growth sped up. Way up.

A visual to show price growth over time in various counties in Sacramento. This shows the market was actually beginning to slow down in terms of experiencing less price growth. But then 2020 happened and it all of the sudden went a totally different direction.

Selling and renting: I talked with an owner who wanted to sell his house before the market crashed and then rent until prices stopped going down. I get the sentiment and this guy should do whatever he wants (no pressure from me). But I reminded the owner that during the previous two price cycles the market declined for six or so years before starting to go up again. So the question became, how long do you plan to rent? This is a very practical question and I think sometimes people are so fixated on a coming crash that they’re not thinking through logistics like this. Moreover, it’s not just about prices because lifestyle is often the trump card for buying and selling (see below).

Super tight underwriting: I’m not sugarcoating anything here, but I will say this past market cycle has been characterized by very tight underwriting and buyers actually being able to afford what they purchased. Check out how different FICO scores are in the past few years compared with previous years. This doesn’t mean the market is perfect right now, but it does mean we don’t have the same situation we had last time around either. Of course these past two years home prices went way beyond what anyone predicted and this type of growth feels unhealthy. But at least buyers are being scrutinized instead of only having to fog a mirror.

This image shows mortgage originations by credit score. It's a chart to show originations over the past 15 years

Bro, it’s a generational thing: We’ve had the largest generation come of age and they are hungry for housing. This is a big deal because Millennials are a huge force in the market right now. But I think we need to be careful not to pin the glowing housing trend on them alone. In my mind the danger of this narrative is it minimizes the power mortgage rates around 3% have played in creating excessive demand. Moreover, it also minimizes fewer listings hitting the market due to sellers not listing during the pandemic. Again, I get the shift in demographics and this is a real thing. But let’s not downplay other factors too.

Lifestyle matters: At times we treat buying or selling a house like it’s some sort of mechanical thing that’s only about price cycles. I get it, but let’s not forget houses are shelter and most of the time people buy and sell shelter based on their lifestyle mandating change. It’s about getting into a larger or smaller home. Or maybe buying is about trying to get the kids into a certain school district. Or maybe there is a job change or a relationship change. Or maybe it’s time to leave California (or come back). There are so many reasons why people make real estate decisions and all I’m saying is lifestyle tends to be the big motivator rather than prices alone. Of course having massive equity can help propel these decisions too. Again, I’m not trying to talk anyone into anything. Buy or don’t buy. Sell or don’t sell. That’s up to you alone. Just don’t get trapped into thinking it’s only about prices. In other words, don’t underestimate the importance of your lifestyle and family situation as you consider making real estate decisions.

Riding down the market: If the market did crash, which neighborhood do you want to ride down the market in? This is a relevant question that I heard first from Realtor Mike Gobbi. Remember, the equity in our homes means very little unless we are taking money out or selling.

I know, I didn’t answer the question: I realize I didn’t answer the question in the blog title. What is the market going to do? Well, to be coy, it’s going to keep moving and changing. And at some point it won’t go up any longer. Sorry, I know I’m being vague. Seriously though, what is it going to do over the next two years? To be coy again, I’ll tell you in two years… On a sincere note, nobody knows the exact future. Case-in-point. I don’t think anyone predicted the housing market we ended up having in 2020 and 2021.

Mom jeans vs skinny jeans: Anyway, my goal here is to keep unpacking local trends to put perspective in your hands that is fueled by data and logic. Let’s keep watching, imagining the future, and of course being humble about ability to predict. But if you really are into predicting, tell me this. What is going to be more popular next year? Mom jeans or skinny jeans? If we can get to the bottom of that, then let’s tackle housing trends.

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