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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?

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Becoming a real estate meme & the top and bottom of the market

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Do you ever feel like it’s going to be a good week? I’m definitely feeling that way as I finally got rid of a nagging cold that wouldn’t go away. I tested negative multiple times, so this really was a cold. But besides that, season four of Ozark is coming out on Friday, so I’m doing the happy dance. Anyway, here are a few things on my mind. 

January public speaking gigs:

FOUR THINGS ON MY MIND:

1) She became a meme: I was watching the 49ers and Cowboys play on Sunday and I knew right away this woman became a meme. In fact, during the game I tweeted this. To me this is a perfect expression to sum up buyers feeling exhausted in today’s housing market. Am I right? By the way, this isn’t a statement about the Cowboys, so please keep your hate mail.

A sad Dalls Cowboys fan used as a meme to say "Buyers in today's housing market"

2) Housing market temperature in one picture: I saw this picture the other day from Realtor Rico Rivera and I think it captures how competitive the market is right now. As I said last week, we just got done with the most aggressive housing market ever and we’ve started 2022 at a really competitive place. Anyway, real estate agents left their business cards on the kitchen counter and this property ended up having over 30 offers. What advice would you give to buyers about getting an offer accepted in a situation like this? I’d love to hear your take. 

Graph of offers: By the way, getting 30 offers is wild, but thankfully it’s not common to have that many. However, it does happen. This visual shows the number of offers for the past 45 days of sales and how each property sold in relation to its original price. What do you see?

NOTE: Real estate friends, I appreciate when you input the correct number of offers in MLS because your data-entry matters for credible stats. My sense is we’re still getting an accurate reading about the overall trend, but I wish there weren’t as many zeros (obviously a sale had at least one offer).

3) Is it more aggressive at the top or bottom? I’ve been asked several times if the market is just as aggressive at higher prices compared to lower prices. What would you conclude by looking at stats? And what has your experience in the trenches shown you?

This table compares the percentage of cash sales, days on market, and the percentage of multiple offers by price range in Sacramento.

QUICK TRUTHS:

A) There is more cash at the highest prices.

B) There is more competition at lower prices as shown with more multiple offers and taking less time to sell. By the way, take under $300K with a grain of salt as there isn’t much in that range.

C) The higher the price, the longer it typically takes to sell.

In short, the market is freakishly competitive in EVERY single price range, but it’s technically more competitive at the bottom half of the market. There is more cash at the higher end, but that’s not a new trend because it’s been the case for years when I pull stats.

4) Since the bottom: Okay, last thing. If you wanted to compare the bottom of the market in 2012 with this past year, here’s some fresh stats for you. This is the annual median price each year (not adjusted for inflation).

A chart that shows the annual median price change in four counties in the sacramento region (compares 2012 with 2021)

I hope that was interesting. Thanks for being here.

Questions: What do you think of the meme? Any thoughts on the stats?

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The most aggressive housing market ever?

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Was last year the most aggressive housing market we’ve ever had? I’m going to go out on a limb and say HECK YES based on the stats. But what do you think, whether you’re local or in a different market?

A picture of a road in the desert with the caption question, "Most aggressive housing market ever?"

January public speaking gigs:

Post outline (since this is longer):

1) Records were broken
2) Sacramento region recap
3) Sacramento County recap
4) Placer County recap
5) El Dorado County recap
6) Yolo County recap

STATS: Annual stats include the entire year (Jan to Dec). These stats are not just a comparison of Dec 2020 with Dec 2021.

1) RECORDS WERE BROKEN:

A) Fastest-moving market ever: This is no surprise to stressed buyers and a stressed real estate community, but we had the fastest-moving market ever in the region. It took an average of 17 days to get into contract, which is the lowest annual number on record. The wild part is the median days on market was only 7, which means half the market got into contract in a week or less.

This visual shows a line graph of days on market and median days on market from 2000 to 2021.

B) Highest dollar growth ever: Prices increased more than ever this year in terms of dollars. The median price increased by $90,000 and the average sales price was up about $99,000. These are both records. The stunning part is this took place in our tenth year of price growth in this cycle.

What about percentage growth? Percentage growth was NOT a record even though price metrics were up about 20%. The truth is we’ve seen this type of percentage growth before, though when prices were lower it was so much easier to see higher percentages. This is why noting the dollar amount is so important. All that said, let’s remember part of the glowing numbers here has to do with more sales at higher prices (which pads the stats).

C) 18 months of less than one month of supply: Since July 2020 we’ve had less than one month of housing supply in the Sacramento region. There has never been a stretch this long. It wasn’t even this bad during 2013 when investment funds were gutting the market. Having one month of inventory means if no other listings came to the market we would only have enough for one month’s worth of buyers.

A line graph to show the months of supply over the past 2 years (this helps show we've had 18 months of supply under one month

D) Highest percentage of multiple offers ever: In April we reached the highest percentage of multiple offers we’ve seen in the region at 76%. It’s easy to say 100% of sales are getting bid up with multiple offers, but that’s not true. Check out how disconnected a figure like 76% is from normal though. The real shocker though is 57% of sales in DECEMBER had multiple offers, which is higher than any other SPRING market besides 2021. Read that again. By the way, this stat has only been available for five years (though it’s likely April 2021 was the highest ever still). We can debate in the comments or cage fight if needed.

E) One year of paying at or above the list price: Every month this year buyers paid at or above the list price. I know, this sounds a bit dull or obvious, but it’s truly sensational. Take a look at the image to show how far off the orange line (2021) is from the rest of the pack. In a competitive year we might see a few months where buyers on average pay at or above the list price, but last year this happened ALL YEAR LONG. Even in December buyers on average paid right at the list price. In a normal year we should’ve seen 3% or more below the list price in December. Keep in mind we did see seasonal slowing for the second half of the year, but it didn’t feel like slowing to many since the market basically “slowed” to a really elevated level.

NOTE: This is the average. There are many examples of buyers paying well above the asking price and even 15% of buyers last month paid below.

F) More million dollar sales than ever: This past year 7% of sales were above one million dollars and that’s the highest percentage on record. Well, I should say this is the highest percentage without adjusting for inflation, so there is an asterisk here. If someone wants to adjust for inflation, please do so. Also, there were twice as many million dollar sales compared to 2020.

CONCLUSION: In short, the stats are insane. Can you see why I’m saying it was our most aggressive year ever? You don’t need to agree with me, but if you disagree, I’d love to hear why. Also, I don’t have stats for 1853 during the Gold Rush, so I’m really just talking about recent history.

Any thoughts?

——————— huge market recap below ———————

THE SHORT VERSION:

The market in 2021? Prices went way up, housing supply was anemic, volume was slightly higher in most counties compared to the previous year, and properties sold as fast as they ever have. Most of the year the market really felt like an auction due to supply and demand being so lopsided. We have a supply problem with sparse listings and we have a demand problem fueld in large part by mortgage rates around 3%. When looking at the past two years it’s apparent the market sped up again after years of slower growth. Ultimately while the stats are glowing, how many think having another year or two of growth like seems sustainable? I’m guessing few hands went up since affordability has been declining and mortgage rates are presumably going to rise. Anyway, enjoy an offensive amount of visuals and feel free to share some images too.

Thanks for reading my sharing policy so we’re on the same page.

THE LONGER VERSION:

I’ve outlined lots of recap stats below by county and I hope you find these useful. Keep in mind these are ANNUAL visuals that compare a year’s worth of sales to the previous year. This is why some of the visuals don’t have a normal up and down rhythm during the spring and fall. What do you see though? What stands out to you?

2) SACRAMENTO REGION (Sac, Placer, Yolo, El Dorado)

3) SACRAMENTO COUNTY:

4) PLACER COUNTY:

5) EL DORADO COUNTY:

6) YOLO COUNTY:

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 stands out to you the most above? What are you seeing out there in the market?

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