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Picky buyers, the housing crash, and a Sacramento market update

October 12, 2016 By Ryan Lundquist 10 Comments

How did the previous housing crash affect buyers? In other words, how are buyers different today because of what they went through years ago? Without writing a dissertation, let’s consider a few thoughts below. Then for anyone interested, let’s take a deep look at the Sacramento market. Any thoughts?

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Three ways the housing crash seems to have impacted buyers:

Getting into Contract: Despite inventory being low, buyers seem to be picky about price. In other words, if the price isn’t right, they won’t make an offer (in Sacramento at least). Sellers haven’t fully embraced this yet, but it’s very real. You’d think buyers would feel desperate and offer on anything since housing inventory is sparse, but it’s simply not the case. There could be many reasons for this, but one of them is buyers are being cautious about what they offer because they don’t want to feel like they are making the mistake of overpaying like they did a decade ago. Of course prices today are much higher than they were just four years ago and buyers are willing to pay these prices. It’s just buyers are generally more cautious about overpaying. Also, keep in mind buyers are much more informed about prices because of Metrolist, Zillow, Redfin, etc…. This means buyers can often sniff out something that’s overpriced.
Staying in Contract: Many real estate agents in Sacramento have been reporting contracts falling out of escrow much more often. It’s like buyers are picky about getting into contract in the first place and then they are picky about staying in contract. I’ve heard some say contracts falling apart is a sign the market is beginning to crash, but there have actually been more sales this year than last year in Sacramento. Thus the truth is more contracts are actually closing regardless of however many are falling out.
Sensitive about Location & Condition: Buyers seem to be exhibiting a sensitivity to adverse locations and properties that are not in pristine condition. In other words, buyers have higher expectations about what they are buying and they aren’t overlooking the true condition of a home or paying top dollar for junk. Lenders and appraisers certainly aren’t overlooking the condition either (or at least they shouldn’t be). Also, consider how HGTV and other networks have exploded in popularity this past decade. I have to think constantly seeing the latest designs on TV (and Pinterest) only helps foster a more finicky buyer when looking for a home.

What do you think? Any further insight? Let’s talk. Please comment below.

—-—–—– And here’s my big monthly market update ———–—–

Two ways to read the BIG POST:

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

DOWNLOAD 79 graphs HERE: Please download all graphs in this post (and more) here as a zip file. 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.

Quick Market Summary: The market is softening just like we’d expect to see during the fall. Sometimes we talk about real estate in only hyper-positive terms as if values do nothing but increase, but that’s simply not realistic. Almost every year values soften as a part of the normal real estate cycle, and that seems to be what we’re seeing right now. It’s starting to take longer to sell, prices are down a few percent from the summer, housing inventory is up from a few months back, and sales volume is beginning to slough off. Keep in mind one year ago it was taking an average of 6 days longer to sell, which reminds us the fall market this year has been more aggressive so far. Overall single family housing feels flat and the market is very price sensitive, so sellers ought to be very cautious about pricing according to properties that are actually getting into contract in their neighborhood and price range. On a different note the 2-4 unit market has been somewhat subdued for a number of years as values have recovered much more slowly than the single family market, but it seems to be heating up as news of higher rents is spreading to investors. Let’s keep an eye on that and of course keep hoping the economy and wage growth can drive values more than low interest rates and freakishly low housing inventory. Check out specific stats and graphs below for Sacramento County, the Sacramento Region, & Placer County.

Sacramento County:

The median price was $317,000 in September. It dipped 2% from the previous month, but is 9% higher than last year.
The average price per sq ft was $201 last month (down 2% from the previous month, but still 7% higher than last year).
There were only 25 short sales in the county last month.
Sales volume was 3% higher this September compared to September 2015.
It took 4 days longer to sell a house last month compared to the previous month (though one year ago it was taking 6 days longer to sell).
Sales volume is up 7% this year compared to last year.
FHA sales volume is down 7% this year compared to 2015 (keep in mind nearly 26% of all sales were FHA this past quarter).
Cash sales are down 7.6% this year (they were only 13.6% of all sales this past quarter).
Housing inventory is 5% lower than the same time last year.
The average sales price at $346,000 softened by 2% last month (but is 10% higher than last year).

Some of my Favorite Graphs this Month:

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fha-and-cash-sales-by-quarter-in-sacramento-county

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SACRAMENTO REGIONAL MARKET:

The median price was $355,000 in September. It’s down less than 1% from the previous month, but is 9% higher than last year.
The average price per sq ft was $207 last month. It went down 1.5% from the previous month, but is 7% higher than last year.
It took 4 days longer to sell compared to the previous month (but 6 less days compared to September 2015).
Sales volume was 3% higher this September compared to September 2015.
FHA sales volume is down 7.5% this year compared to last year.
Cash sales were 16% of all sales last month (FHA sales were 22%).
Cash sales are down 6% this year compared to last year.
Housing inventory is 9% lower than the same time last year.
REOs were 2.5% and short sales were 1.3% of all sales last month.
The average sales price was $393,000 in September. It softened by 1% last month but is 9% higher than last year.

Some of my Favorite Regional Graphs:

sales-volume-2015-vs-2016-in-sacramento-placer-yolo-el-dorado-county

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median-price-sacramento-placer-yolo-el-dorado-county

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PLACER COUNTY:

The median price was $432,000 last month, which is up 11% from last year.
The average price per sq ft was $212 last month. It softened by 1.5% from the past couple months, but is 4.7% higher than last year.
It took 1 day longer to sell compared to the previous month (but 5 less days compared to September 2015).
Sales volume was similar this September compared to September 2015.
FHA sales volume is down 15% this year compared to last year.
Cash sales were nearly 16% of all sales last month (FHA sales were nearly 16% also).
Cash sales are down 1.7% this year compared to last year.
Housing inventory is 16% lower than the same time last year.
REOs were 1.3% and short sales were 1.1% of all sales last month.
The average sales price was $483,000 and is 8.5% higher than last year.

Some of my Favorite Placer County Graphs:

days-on-market-in-placer-county-by-sacramento-appraisal-blog months-of-housing-inventory-in-placer-county-by-sacramento-appraisal-blog number-of-listings-in-placer-county-2016 placer-county-housing-inventory-by-home-appraiser-blog placer-county-median-price-since-2014-part-2-by-home-appraiser-blog placer-county-sales-volume-by-sacramento-appraisal-blog

Classes I’m teaching in Lake Tahoe: On October 21st I’ll be teaching two classes in Lake Tahoe for an Appraisal Institute Conference. This is an enormous honor and I look forward to mingling with appraisers and sharing ideas. Click here for details.

Question: Did I miss anything? Any other market insight you’d like to add? What are you seeing out there? I’d love to hear your take.

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How to figure out what an accessory dwelling is worth

October 5, 2016 By Ryan Lundquist 20 Comments

How much is that accessory dwelling worth? How do we really put a value on it? It’s not always easy to figure that out in real estate, so I wanted to share some of the issues I tend to think through as an appraiser when there is an accessory unit on a property. Anything you’d add? I’d love to hear your take.

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Things to consider when valuing a property with an accessory dwelling:

1) Comps: How much are other homes with accessory units selling for? This is a fundamental question to ask. Since data is often limited we might have to look through years of neighborhood sales (or competitive neighborhoods) to try to find something that has sold with an accessory dwelling unit (ADU). Even if the sales are older or a bit different in size we can at the least come up with a percentage or price adjustment to try to get a sense of what the market has been willing to pay. Ideally we’d find three model match sales in the past 90 days, but that’s probably not going to happen. Remember, we might not use the really old sales as comps, but we can still use some of the older data to get a sense for how the market has behaved regarding accessory units.

2) ADU Minimum: At a minimum an accessory unit needs to have a bathroom, sleeping area, and kitchen. This means an outbuilding without a bathroom really isn’t an accessory unit. And that Man Cave / She Shed isn’t an accessory dwelling because it’s basically a game room meant for hanging out instead of living.

3) 2nd Unit or Not: Are we dealing with a second unit or an accessory unit? It might sound like I’m splitting hairs to ask this question, but there is actually a difference between a full-fledged second unit and something that would be classified as an “accessory” unit (or “Granny flat”, “Mother-in-Law” unit, or “Guest Quarters”). I wrote a post here to describe the difference. In short, whether something is a full second unit or merely an accessory dwelling could potentially change the way we approach valuing the unit and which comps we choose.

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4) Just a House: How much would the property sell for if it just had a house without an accessory unit? This doesn’t help us put a value on the accessory unit, but in a sense it helps us start gauging value for the neighborhood. This at least gives us a place to begin.

5) Combining Square Footage: Often times an accessory unit’s square footage gets lumped into the main square footage of the house. This happens in MLS and sometimes it happens in Tax Records. So we might read a home is 2000 sq ft when in reality the main home is only 1400 sq ft and the accessory unit is 600 sq ft. In this example we don’t really have a 2000 sq ft house but rather a 1400 sq ft house with an accessory unit. The question becomes, could the subject property sell on par with homes that are 2000 sq ft? Maybe. Maybe not. This is where we have to do research. I will say quite a few properties are priced based on a lumped square footage and then they end up sitting instead of selling. This is not always the case, but it reminds us to be careful about assuming a home with an accessory unit is always going to have the same value as a larger home.

6) Permits: Was the accessory unit permitted? If you are hoping to see more significant value recognized for an accessory dwelling, having permits is a key factor. My friend Gary Kristensen in Portland wrote a post on ADUs and he says, “Provide the appraiser and your lender with documentation that your ADU was legally permitted. Also, list information about rental income, expenses, and detail construction costs (if your unit was recently constructed).” Good advice, Gary.

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7) Rent: Can the accessory unit be legally rented? What is the market rent? This is where we might use the Income Approach to come up with a value (another blog post). Imagine an accessory dwelling has a market rent of $1000 per month. Now imagine an appraiser says the extra unit is worth $10,000. Does that seem reasonable? Doesn’t it seem low right away since the unit would be 100% paid for after 10 months? Or imagine a unit rents for $300 but it’s being given $150,000 in value. Doesn’t that seem excessive based on the low rent? Thus sometimes when we know market rent we can begin to sniff out whether a value adjustment is even approaching reasonable.

8) Square Footage Adjustment: If I’m adjusting $50 per sq ft for extra square footage in my report, would it be reasonable to see that same adjustment for the 600 sq ft accessory dwelling? This is only a question I ask myself. There isn’t a constant where the market will pay the same amount for square footage for the main dwelling and something else (converted basement, converted garage, accessory unit). Part of it depends on quality too. If the extra unit has a quality clearly below the main house, it’s probably not reasonable to see buyers pay the same amount for square footage outside the house. Though if the quality is the same, we might be looking at an adjustment that is similar or the same to that which is given to the house. Again, there is no rule here. This is only a question I ask myself in the background when approaching an accessory unit. I would never automatically give an adjustment like this. Remember, square footage adjustments are NOT based on the entire value of the property divided by the square footage.

9) Cost vs. Value: We all know the cost of something doesn’t necessarily translate to the value, but cost can help us gauge quality. There might be a difference in value for an accessory unit that cost $125,000 compared to $15,000, right? This is basic logic, but let’s not overlook the importance of it.

I hope that was helpful.

Questions: Anything you’d add? Did I miss something? If you work in real estate, how do you come up with the value of an accessory unit? I’d love to hear your take.

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Eating tacos and 10 housing market truths

September 26, 2016 By Ryan Lundquist 6 Comments

I eat tacos with investors. That’s right. A few times a year a group of real estate friends get together to talk shop at the best taco joint in town. It’s informal and fun because we’re friends, but it’s also valuable to get a sense for what everyone is seeing out there in the trenches. Anyway, despite not having tacos in front of me at the moment, I wanted to share some of the things that have seemed to come up lately in housing market conversations. Anything to add?

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10 truths about the housing market

1) One high or low sale doesn’t make or break a market.

2) Just because inventory is low doesn’t mean buyers will pay any price.

3) The market isn’t doing the same thing in every neighborhood or price range.

4) There is no such thing as a national housing market. The “national” market is actually made up of thousands of local markets (Jonathan Miller).

5) Appraisers only measure the market. They don’t make values go up or down.

6) There is no recipe or formula for the way a housing “bubble” has to pop. In other words, for all the conversation about a current “bubble”, if the market did “pop” it wouldn’t necessarily have to look the same way it did 10 years ago.

7) Real estate advice has a shelf life, which means it might not be good for every market (or every price range or location).

8) Markets aren’t so perfect that we can say a property is only worth one certain amount like $336,456. It’s best to recognize there is a reasonable range for what the market might be willing to pay (say $330,000 to $340,000). Is there any support for the appraised value to come in at or near the list price or contract price? Does this price fall within the range of what is reasonable?

9) “Negative market trends are not the end of the world. They represent opportunities for some” (from Jonathan Miller).

10) Thinking positively or talking positively about the market doesn’t drive the market. In other words, “you can’t overpower the market with the power of positive thinking. The market doesn’t care what you or your client thinks” Jonathan Miller.

You may notice I referenced New York Appraiser Jonathan Miller a few times above. I realize that makes me look like a fanboy, but that’s okay because he’s an influential voice in my life and I appreciate his weekly notes every Friday. Last week Jonathan knocked it out of the park in his section entitled “McMansions, McEgos, McPrices and McHonor” (that’s where I picked up point #9 and #10).

Class I’m teaching on Thursday: On September 29 from 9am-12pm I’m doing my favorite class at SAR called HOW TO THINK LIKE AN APPRAISER. We’re going to have a blast talking through seeing properties like an appraiser does. We’ll look at comp selection and talk through so many issues. My goal is to help you walk away full of actionable ideas. Register here.

Questions: What types of conversations are coming up in your circles right now? What is #11? I’d love to hear your take.

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5 things to consider about higher appraisal fees and longer turn-times

September 20, 2016 By Ryan Lundquist 18 Comments

Appraisal fees have been going up and turn-times have been getting longer. Why is this happening? Why is it taking longer to get appraisals done? Is there really a shortage of appraisers? Let’s consider a few points below to help think through some of the bigger pieces to this conversation. I hope this will help you better explain the issue to your clients also. Any thoughts? I’d love to hear your take.

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5 things to consider about higher fees and longer turn-times:

1) Appraiser “Speculators”: Did you know there are actually 45% less licensed appraisers in California today compared to 10 years ago? This sounds alarming, but is it a shortage? The number of appraisers climbed exponentially before 2007 because the market was good and it was fairly easy to become an appraiser in California at the time. This hefty increase was more about the market though rather than there actually being a need for more appraisers (key point). In fact, many of the appraisers who entered the field were more like speculators hoping for easy money – but then the economy unraveled. We can’t therefore look at 20,000 appraisers as being a normal or healthy number of appraisers in California.

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2) Rate of Decline Slowing: According to a phone conversation with the Bureau of Real Estate (BREA) last week, in 2009 the state was losing about 190 licensed appraisers each month, and that number is now 34 per month. It’s great news the decline has slowed, but it’s also going to be a big problem if we don’t see the decline stop at some point. The good news is last week BREA actually announced new rules that essentially make it easier to become an appraiser trainee. Now let’s hope lenders/AMCs will encourage trainees to be used in reports (this needs to happen). Of course one factor worth mentioning is we don’t really know how many of the nearly 11,000 appraisers are actually actively working. For reference, the average age of an appraiser in California is nearly 52 years old (73% male and 27% female).

3) Shortage: When talking with BREA on the phone, they said there is NOT an appraiser shortage. Their sense is there are enough appraisers to handle current appraisal volume, though they said certain markets definitely have a shortage (such as rural northern California), while other markets are still saturated with appraisers (they said Orange County and even Sacramento). This reminds us what Jonathan Miller says, that there is NOT an appraiser shortage, but a shortage of appraisers willing to work for low fees.

4) Not Getting All the Money: A loan officer I spoke with was frustrated that his Borrowers were paying $550 for conventional appraisals and $750 for jumbo appraisals – and still experiencing longer turn-times. When he told me the Appraisal Management Company (AMC) he uses though, that’s where the problem comes in. This AMC regularly pays appraisers $350, which means they’re pocketing 40% of the fee the Borrower thinks is going to the appraiser. A few days ago on Facebook there was an appraiser who had an offer from an AMC to appraise a property for $850, but the AMC was charging the Borrower $1,385. Let’s remember appraisers are supposed to be paid “customary and reasonable” fees under Dodd-Frank, but a reasonable fee is what the appraiser gets – NOT what the Borrower pays.

5) Markets Change: The market has been experiencing a correction after years of low-ball fees from AMCs. Maybe some of it is due to there being less appraisers, and we’ll feel that out over time, but before sounding the appraiser shortage alarm, we have to respect the reality that fee markets don’t remain the same forever. For instance, a local architect friend has been so busy lately that he’s been quoting much longer turn-times and “blow off” fees that clients wouldn’t possibly accept (but they are accepting them). We see a similar market change with contractors as they are incredibly busy right now and not taking the little jobs since the big jobs pay more. Keep in mind appraisers are juggling appraisals for purchases, refinances, and private situations. When things get busy, appraisers understandably gravitate toward clients who pay better. This means low-paying AMC clients get dropped and anything that is not a “piece of cake” valuation might struggle to be accepted unless the fee is reasonable. As a consequence this also means AMCs may have to shop for many extra days or weeks to find an appraiser to take on the assignment. It’s not easy to digest this, but we have to respect the way markets move and then change our expectations too. Otherwise we are left feeling entitled to the way things have been when the market is simply different now.

I hope this was helpful.

Recent Woodworking: By the way, from time to time I like to share some things I’ve built so you know I have a life outside of appraising. Yes, I’ve built a few skateboards recently with my oldest son. It’s like re-living the 80s for me.

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Questions: Which points stand out to you the most? What else would you add? Did I miss something?

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