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The housing market is feeling the pain of higher rates

November 1, 2022 By Ryan Lundquist 28 Comments

The housing market is really starting to feel the pain of higher mortgage rates. Today I’d like to unpack some fresh October stats to show what I mean. I also have some thoughts about the spring season when prices are dropping. Whether you’re local or not, I hope this is helpful.

This post is designed to skim quickly or digest slowly.

UPCOMING (PUBLIC) SPEAKING GIGS:
11/4/22 Market update in Roseville (on Zoom now)
11/15/22 Sacramento Bee Q&A at 12pm (RSVP here)
11/17/22 Fair Housing Lunch & Learn (RSVP here)
12/5/22 SAFE Credit Union market update on Zoom (register here (free))
1/18/23 WCR Market Update in Cameron Park (details TBD)
1/19/23 Big market update at SAR on Zoom (details TBD)
1/23/23 Residential RoundUP (register here (free))

A 40% DROP IN VOLUME IS A SYMPTOM OF STRUGGLE

We’re seeing lots of markets around the country with dropping sales volume, which is the byproduct of a quick change in affordability due to rate increases. In Sacramento, volume took a beating last month. We still need another week before solidifying numbers, but we’re going to be down about 40% or so from last year. Keep in mind most sales in October got into contract in September when rates were at 6%, so being down 40% doesn’t even reflect 7% rates yet.

NOVEMBER VOLUME WILL LIKELY BE WORSE

In October, pending contract volume locally has been down between 40% to 50% depending on the week according to Redfin and Trendgraphix. This means November closed sales volume will presumably take a bigger hit than October, which underscores rates at seven percent are taking more demand out of the market (thanks Captain Obvious).

NOT ABOUT DOOM

By the way, I’m not writing as a doom and gloom guy. This is all about perspective formed by stats. It might not be easy for some to hear, but I’m only interested in talking about the market that actually exists. I have zero interest in promoting a rosy narrative too.

NOT EASY FOR SELLERS TO ADJUST

Prices have changed so quickly that it’s been tough for sellers to adapt. I’ve had a few conversations lately with sellers feeling remorse for not accepting an offer in the spring or early summer. One seller now has an offer about $60,000 lower than an offer made a few months back. That’s not easy to swallow, but it’s the reality upon us. I’m not saying prices are down exactly $60,000 everywhere either, but there has been a notable drop (more on that soon).

PRICES FLIRTING WITH LAST YEAR

As I talked about a few weeks ago, it looks like the median is about to dip below last year. So far in Sacramento County the preliminary median price for October is $1,000 below last year at the same time. It’s honestly too early to pull the monthly median, so I’ll share a solidified version next week. We’ll see how the numbers change between now and next week.

By the way, here’s a thread with weekly price graphs (instead of monthly).

WHAT HAPPENS IN THE SPRING DURING A DECLINING MARKET?

Okay, now some quick thoughts about the spring when home prices are declining. I think lots of people are wondering what is ahead as 2023 begins. In short, not every spring market is the same, but when looking at declining years in the 1990s and 2000s, there are many years where prices ticked up for a bit or looked more level during the spring.

Seasonality doesn’t always disappear: The darker bars show the median price from January to June, and in 2006, 2007, and 2008 there was a flat to slightly up vibe for a few months before declines persisted after the early spring. Of course, this could be due to larger homes selling in the spring, but even if that’s the case, it shows price seasonality isn’t always dead during declining years. We’ll see what happens in 2023. It’s hard to predict this year because we’re in a unique situation with quick rate changes.

The 1990s: The spring price trend is a bit more hit and miss in the 90s as sometimes prices clearly declined during the spring (black bars), but in other cases like 1994 there was a much more pronounced seasonal uptick.

DON’T GET STUCK ON PRICES

I think the visuals above are interesting, but they’re not the end-all graphs because they only discuss the price trend. Like I always say, don’t get stuck on prices alone because sales volume sometimes tells a more compelling story. I guess it’s ironic that I’m only showing prices here, but that’s what I had time for today. I do have some volume images to push out soon, and those will give even more insight into seasonality during declining years.

Thanks for being here.

MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.

Questions: How are rates at 7% affecting buyers right now? What stands out to you about my stats above? What did I miss? I’d love to hear your take.

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The story of Zillow’s last house in Sacramento

October 17, 2022 By Ryan Lundquist 14 Comments

Goodbye. Zillow sold their last house in Sacramento. After announcing failure as an iBuyer in late 2021, they recently got rid of their final unit. And the cherry on top is they sold this property to Opendoor.

UPCOMING (PUBLIC) SPEAKING GIGS:
10/18/22 Orangevale MLS Meeting Q&A (9am)
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11/15/22 Sacramento Bee Q&A at 12pm (RSVP here)
11/17/22 DEI & Fair Housing Lunch & Learn (details TBD)
1/18/23 WCR Market Update in Cameron Park (details TBD)

HOUSING GENIUS OR FLOP?

It’s easy to look at Zillow like some sort of real estate savant because their exit was announced months before the hot housing market began to turn. But let’s not revise history because Zillow’s failure had nothing to do with market conditions. This was about a lack of effective strategy. Zillow basically went on a purchasing rampage in a handful of markets across the country, and they lost a ton of money. I wrote about their failure here. In short, with hindsight their timing looks really good, but this was a flop instead of foresight in terms of actually making money.

Anyway, I announced the news of their last sale about two weeks ago on my socials, and it created a ton of conversation.

ZILLOW’S LAST HOME IN SACRAMENTO

In September 2022 Zillow sold their last unit to Opendoor. This home in the Natomas area of Sacramento was originally purchased for $700,500 in November 2021, and it was listed for sale in February 2022 for $694,100. There were multiple price reductions until the listing was eventually cancelled on 9/13/2022 at $624,900. There were two pending statuses, but for whatever reason it didn’t close.

DID ZILLOW GIVE OPENDOOR A DISCOUNT?

You be the judge. The sale to Opendoor at $354,500 was far lower than literally any competitive sale on MLS (blue dots), and much lower than any model match sale (red dots). A model match sale hasn’t sold this low since before 2016. When looking at this visual, do you think there was a reduced price?

ZILLOW SOLD LOWER THAN ANYTHING IN THE NEIGHBORHOOD

Here’s a different way to look at it. The orange dots represent every MLS sale in the neighborhood, and the off-market price to Opendoor was lower than literally all neighborhood sales (of any size). Also, Opendoor typically gets about a 5% credit from the seller, and if that’s what happened here, Opendoor got an even better deal.

THE VERDICT: YES, THEY SOLD AT A DISCOUNT

Unless there was something that went seriously wrong with the condition of this property within the two-week period of this home being pulled from the market and sold to Opendoor, it’s pretty obvious this unit sold at a discount. Why did Zillow sell it so low when buyers would have been lining up at that price? Will Zillow get a better tax write-off for their loss? Or does this have anything to do with Zillow and Opendoor recently establishing a multi-year partnership? Does this benefit Opendoor’s profit on paper so they can show higher numbers from buying low and selling high?

NOTE: I’ll follow up when this house does sell again.

iBUYERS RIGHT NOW

I’ve noticed Opendoor has seemed to slow their acquisitions lately in response to the market changing so quickly. This makes sense as a way to pause and pivot in a different market. Locally, Opendoor is the largest iBuyer as they have about 280 units, while OfferPad only has 11, and Redfin owns 24. Opendoor normally has about 330 homes in the region, but now it’s closer to 280, which is why I’m saying they’ve been slowing their acquisitions. Opendoor was struggling in Sacramento when I wrote about them in August, but they’ve seemed to get more of their units into contract in recent months. I’m not sure if it was strategic price reductions or the $3,500 incentive they offered (maybe both). Still, only 25.6% of everything Opendoor has listed for sale is pending, so most of their stuff is sitting instead of selling. Ultimately, if we continue to see prices drop it’ll be key for iBuyers and any flippers to acquire properties for lower amounts to anticipate future declines. I’ve said all along there is room in real estate for multiple models to exist, but no matter what the model, the numbers need to work to make profit. Anyway, iBuyers are still here, and they’re trying to pivot. Will they be successful? Only time will tell.

UPDATE (NEW STATS): I pushed out Redfin iBuyer stats on Twitter yesterday to help show how much lower most of their listings are compared to the acquisition price. This sums up the dynamic out there right now with iBuyers.

Thanks for being here.

MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.

Questions: What stands out to you most above? How does Zillow selling to Opendoor sit with you? I’d love to hear your take.

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Chuck Norris eats 7% mortgage rates for breakfast

September 27, 2022 By Ryan Lundquist 13 Comments

Housing trends are changing by the week, and it’s time to start believing the Fed when they talk about resetting the housing market. Let’s chat about this today, and I’d love to hear your take in the comments.

UPCOMING (PUBLIC) SPEAKING GIGS:
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THREE THINGS ON MY MIND:

1) These rates don’t phase Chuck Norris (but we’re not Chuck Norris):

Sorry to state the obvious, but quick rate changes are poised to take more demand out of the market. This doesn’t bother Chuck Norris one bit because the man eats 7% mortgages rates for breakfast. But this is a massive deal for buyers in today’s market who are trying to afford a house.

A picture of Chuck Norris holding two uzis with the caption, "7% mortgage rates don't phase Chuck Norris."

The Redfin image shows the monthly mortgage payment on the national level is about 45% higher this year than last year. Yikes. It’s a good thing wages also rose by 45% (sarcasm). Seriously though, if buyers are paying about $750 more per month compared to last year, that’s a tough pill to swallow that’s going to lead to fewer buyers being able to play the game.

A line graph from Redfin to show the change in monthly mortgage payments this year compared to previous years

This visual from Mortgage News Daily shows another spike in mortgage rates over the past month. Keep in mind it’s going to take a number of months before we completely see the effect of higher rates in data for closed sales, but we should see it soon in things like price reductions, days on market, open house traffic, and stories from the trenches. Also, mortgage brokers may be able to offer a lower rate, so check in with your local professional.

A visual to show mortgage rates from January 2018 to September 2022. Rates basically went down to record lows and then shot way up

2) Believe the Fed about wanting a housing market correction:

Look, it’s time to start believing the Fed about wanting to see the housing market reset. I don’t say this as a housing bear (really), but Fed Chairman Jerome Powell was blatant last week about a correction. It’s as if the housing market is the sacrificial lamb on the altar of Fed strategy to curb inflation. My advice? Start believing the Fed about their intent to change the housing market. The Jerome Powell quote below is from Lance Lambert on Twitter (highlights are mine).

A paragraph from Jerome Powell on what he means by wanting to see a housing reset (quote from last week's Fed meeting)

3) The housing market will figure it out:

All that said, the market will figure this out. The truth is the housing market will adjust and adapt as needed because that’s what markets do. If rates continue to rise, we should expect to see fewer buyers able to participate, and the need for sharper price declines to meet buyers closer to what they can afford today. Bottom line. But remember, not everyone has the same story in housing. I find some expect for every single buyer to back off the market, but some buyers’ lifestyle and finances are going to collide with market conditions right now. In other words, there isn’t just one narrative that perfectly represents every single buyer and seller today. I don’t say this to gloss over blatant changes to affordability. I’m just saying the market isn’t the same for everyone.

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 today? Any thoughts about Fed policy? Also, do you think there is another inflection point for rates (like we saw when rates went above 5%)?

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Choosing comps in a changing market

September 20, 2022 By Ryan Lundquist 14 Comments

I’ve been getting asked lots of questions lately about choosing comps since the market shifted. Here are some things people have been asking me.

A dark brown barnyard wood background with wood boards. The title of the blog post is in white at, "Choosing Comps in a Changing Market."

UPCOMING (PUBLIC) SPEAKING GIGS:
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QUESTIONS I’VE BEEN ASKED LATELY

Are you using comps only within 60 days right now?

No. While my preference is to use recent sales, I’m okay with using older sales if the older ones really are more comparable. In short, if I use older sales and the market has gone down in value since those properties got into contract, then I’m going to need to adjust those sales down. The truth is even a sale that is 60 days old can feel ancient today because it probably got into contract a month before it closed, which means the sale really reflects the market from 90 days ago. Thus, I’m likely going to have to adjust even 60-day sales down since prices have been dipping lately.

What role do listings and pendings play in the value?

I’m giving strong weight to pendings and listings because that’s where we see the current market. Closed sales tell us where prices were at when these properties got into contract, so sales in a sense are like historic artifacts that tell us about the past. What is getting into contract right now? That’s where we are going to see what buyers are willing to pay today. I realize we don’t always know the price of each pending, but this is where we want to talk to listing agents and look for a group of pendings, listings, and recent sales to put together the puzzle of where value is right now. In other words, we need to be careful not to base our entire perception of value on one pending contract (which could be too low or too high anyway). Ultimately, if someone handed me a stack of comps from May and all the pendings and listings are lower right now, that’s a clue that I need to adjust older sales down because prices have softened. Or if listings are at the same level, but sitting and feeling stale, that’s also a clue the market has changed.

Are you adjusting down 7% since the median price is down?

The median price is down 7% (or $45,000) in the Sacramento region since May, but that doesn’t mean every single property is down by that much. Remember, at this time of year, part of the median price going down has to do with smaller homes starting to sell, so not all of the median price decline is a value decline. It would be a mistake to take a figure of 7% (or $45,000) and automatically adjust properties down by that much. Look, regional price metrics aren’t going to rigidly apply to every property and neighborhood. It’s possible the adjustment in some areas could be substantially more or way less. This is where we want to look to the comps for the answers. What is happening in this particular neighborhood? That’s always the question, so we have to be careful about imposing regional or ZIP code metrics on a neighborhood. What sort of price difference is there between older sales, newer sales, and current pendings / listings? It’s like a puzzle where we’re trying to gauge the difference from the past (sales) and the present (pendings / listings). It helps to make graphs and such too, but that’s a different blog post.

NOTE: Some older sales might not need any adjustment because prices today could be at a similar level to back then.

Do appraisers have to stay within a one-mile radius?

No. It’s not about how far you can go for comps, but where you should go. One of the temptations today (and in any market) is to hand appraisers “comps” from further away that don’t make any sense for the location of the subject property. In some situations, it’s normal to choose comps from multiple miles away because the market area is spread out (think areas with acreage), but in other cases an appraiser is going to have a tight focus on the immediate neighborhood because prices could be lower or higher when going out further. Ultimately, there is no such thing as a one-mile radius rule, but if an appraiser is passing by lots of lower or higher-priced sales and choosing something different further away, that brings up serious questions. The truth is choosing the wrong comps, and not adjusting for location, can undervalue or overvalue a property. This is why we need to be aware of how prices change in different areas. Maybe it’s the school district, size of homes, quality of construction, architecture, access to commercial districts, etc… By the way, here is a post to talk about bias and boundaries.

Do you start with a 1/4 mile and then go out further?

There isn’t just one way to do this. I personally don’t ever use a radius because I’ve never seen a neighborhood in the shape of a circle. However, I know an appraiser who does a radius, and that’s fine if it works for her. Personally, I like to start with tight boundaries in the immediate neighborhood by drawing with the MLS polygon tool, and then I continue to go out further as needed until I get to the larger neighborhood boundaries. I like to stay within the larger neighborhood where possible, but I’m also going to look at what’s happening in surrounding areas too to be sure I’m not missing something about the market. Ultimately, I tend to start small and go out further as needed, but there isn’t just one way to do this. I know an appraiser who starts big and whittles down to a smaller area. No matter how we go about this, the key is that the value we come up with is credible for the location.

Closing thoughts: This post could be a dissertation, but it’s only a brief window into choosing comps. I’m actually teaching a three-hour class soon on comps and adjustments in case you’re interested (held in Sacramento and not on Zoom). My advice? Study current listings and pendings, and don’t be afraid to make hefty reductions if needed. But here’s the thing. Be careful about making the same canned adjustments in every single neighborhood because the trend isn’t going to be the same in every price range and location. And lastly, just like Neo followed the white rabbit, follow the stats. If there isn’t an adjustment down to give, then don’t give one. Or if there’s a shocking adjustment to give, but it’s legit, it’s time to give it.

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 tips do you have for comp selection in today’s market?

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

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