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The coming recession & the housing market

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The coming recession is a huge topic right now and lots of people are wondering about the effect on home prices. What’s going to happen to the housing market? Will we see another crash? Here are a few thoughts on my mind right now. Anything to add? Please comment below.

Last time isn’t the new template: The collapse of the economy during the last recession isn’t the new template for how every future recession and housing market will unfold. I’ve heard things like, “I’m so ready for this recession because I’m going to buy low after values tank.” But prices don’t always crash during a recession as you can see in the images below.

Severity matters: It’s hard to think the housing market is going to be swayed much if it’s a quick recession. But if buyers and sellers end up struggling financially and losing jobs, we can expect a greater effect on home prices (thanks Captain Obvious). The thing is we don’t know right now how severe of a recession we’re going to have, so that’s why we can’t say exactly what the housing market will do.

Consumer behavior: One thing we need to watch is consumer behavior. How will consumers think and act differently in coming time about their purchasing decisions? As I talked about last week, during a recession builders actually tend to build smaller homes since consumers tighten up their finances. This reminds us the way consumers think and act can certainly shape real estate.

Locations aren’t the same: It’s nice to see what national price metrics have done during various recessions, but national numbers can show a different trend than local data.

What do prices do during a recession? Sometimes prices have gone down and other times they’ve gone up during (or after) a recession. There’s not a one-size-fits-all answer. In Sacramento at least most of the time there’s been a price dip during or after a recession. If you’re looking for some historical data in your market, I suggest you check out the Freddie Mac Price Index.

During & After: I’ve seen some images that show home prices have appreciated during three of the past 5 recessions. That may be technically true on the national level, but we have to be sure to look at local stats. Moreover, let’s not narrow our focus to only ask what happens during a recession. What about afterward? What do you see in the images below? 

UNITED STATES:

CALIFORNIA:

SACRAMENTO:

Don’t get too stuck on prices: When we think about a recession, let’s of course watch prices, but the bigger story will likely be found in what happens to the number of sales. Are buyers playing the market or are they backing off? In short, let’s not forget to watch sales volume because we’re so obsessed with prices.

The inverted yield curve (and hesitancy): Lots of people are talking about the inverted yield curve as an indicator of a coming change in the economy. For now I don’t hear buyers saying things like, “Maybe I shouldn’t buy because of the inverted yield curve…” Okay, I’m joking in part because most buyers aren’t going to be making a decision based on this metric. But to be fair there’s been a sincere hesitancy among some buyers because they feel uncertain about what the future market is going to do. By the way, thanks to Alex on Twitter for the “inverted” Top Gun reference. This is golden.

Hype: Everyone has a take right now and there is lots of hype about what the market will or won’t do when a recession hits. Some preach doom and gloom and others are doing their best to paint a rosy view of housing. My advice? Let’s do our best to let the actual market influence what we are saying about the market instead of getting caught up in someone’s talking points or agenda.

Making predictions: There are many predictions about a coming recession, and at some point one will happen. But predicting recession specifics is a bit like predicting housing market specifics. At the end of the day we might have ideas, but we don’t know the exact future until it happens.

I hope this was interesting or helpful.

BIG MARKET UPDATE I’M GIVING: I’ll be giving a deep market update at SAR on September 24th from 10:30-12:00pm. My goal is for everyone to walk away with an understanding of how the market is moving, ways to describe it, and some ideas for business in 2020. Sign up here.

Questions: What has been your experience with real estate and recessions? What are you hearing from buyers and sellers right now? Any stories to share?

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A massive garage & paying too much attention to prices

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I saw a massive garage while on vacation that I just have to share. I also have some quick thoughts on focusing too much on prices. Those are the two things on my mind. Then for those interested let’s dive deep into the market. 

I took almost two weeks off and part of my vacation was to drive to Boise to visit family. Of course my real estate mind doesn’t shut off when out of town, so I was blown away to see a brand new neighborhood with nearly every other house having a massive RV space in the garage. This one actually has two separate RV spaces. I’ve never seen two spaces like this in my market. Have you?

I’ll admit the neighborhood looked a little odd from the street because of the amount of space dedicated to garage doors. It didn’t look bad per se, but it was definitely different. And for the record, I would use both spaces for a massive woodworking shop. Forget the RVs.

Migration garage marketing plan: This is actually brilliant marketing because the builder is clearly appealing to the retiree crowd. In fact, when talking with a few neighborhood residents, they tell me there are lots of ex-Californians as well as people from Texas and North Carolina. This reminds us of the reality of migration. Who is coming to the market? And who is leaving? Those are two vital questions to ask to know a market.

And a quick thought on prices…

Focusing too much on price? Price is THE obsession in real estate, but focusing too much on price can actually cause us to miss the real story of the market. It’s common to hear stuff like, “Prices are up, so the market is doing great.” I get that, but what if we had a market where there are fewer buyers, but those who are buying are still paying higher prices? This is where fixating too much on prices would cause us to miss what’s really happening. After all, if sales volume is sliding, it could be a sign of buyers stepping away from the market, which is a much bigger issue (that will eventually show up in prices if the trend continues). My advice? Pay attention to prices, but give equal or more focus to what is happening with current listings and sales volume. Are buyers absorbing the listings? What are they saying about the market? How is volume changing? Is the number of sales normal or not right now? These are some of the questions to keep asking.

Any thoughts?

—–——– Big local monthly market update (long on purpose) —–——–

Now for those interested, let’s talk about Sacramento trends. Prices have been a bit flat, but the bigger story here is the sales volume slump streak of fourteen months has ended. If I had to pick a few phrases to describe the market it would be competitive if priced right, modest price growth, lower volume, and fairly normal stats for the spring / summer so far.

DOWNLOAD 70+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

THE SHORT VERSION:

  • Prices feel a bit flat
  • The volume slump streak ended
  • July looks fairly normal stat-wise
  • Pendings are strong right now
  • Sales volume is still down this year
  • The market is slowing for the season
  • Mortgage rates are like a steroid
  • Inventory is sparse (but not in El Dorado County).

THE LONGER VERSION:

Here are some of the bigger topics right now:

The volume slump streak has ended: We had a fourteen month streak going, but it’s now done. For fourteen months in a row we’ve seen sales volume down compared to the same month last year until this month where sales volume was up about 4% in the region. It was a strong month for most local counties, though El Dorado County was down 15% from last year. 

Modest price growth: Price metrics in the region are up about 2-5% or so this year compared to last year depending on which price metric we’re looking at. In short, this is pretty modest price growth overall, which has been the narrative all year (did you hear that sellers?).

Not surprised by slowing: At this time of year we tend to see prices begin to cool and it takes longer to sell. This is exactly what the stats are showing us below too. This comes as a shock to some, but if you follow real estate closely there’s a rhythm to the market, which means we can expect this slowing EVERY. SINGLE. YEAR. In short, in a normal seasonal slowing we tend to see most of these things below happening to greater degrees as we inch closer to the holidays. This is a good reminder that low mortgage rates and sparse inventory aren’t a trump card to buck a traditional seasonal slowing. And if you want proof, it took three days longer to sell last month in the region compared to the previous month.

Rent control: The City of Sacramento approved a rent control measure today. This is huge news and it’s absolutely something to watch. I’ll be talking lots about this in coming time as the trend unfolds. I actually ran a Twitter poll the other day about rent control.

Inventory is down overall (mostly): In the region we have less than two months of housing supply. This is actually down from last year. In short, inventory is sparse on one hand, though on the other hand the new normal is low inventory. It’s tempting to say stuff like, “It’s normal to have a 5-month supply of homes for sale,” but that’s simply not true for today. Maybe it used to be the norm, but for now our new normal looks to be somewhere between 2 to 2.5 months of housing supply.

Multiple offers: When I talk about the market slowing it can sound confusing because the market feels really competitive when properties are priced right. In fact, you’ll probably get a few offers if you price it correctly. But if you overprice you can very easily get zero offers (really). Here’s a stat I’ve been tracking each month. As you can see nearly half of all sales had more than one offer last month. But then again, nearly half of sales didn’t too.

Inventory is GROWING in El Dorado County: Inventory has been shrinking in the market, but not in El Dorado County. This is a new graph I made and I hope you like it. I know it’s busy, but can you see recently how inventory has been shrinking everywhere besides El Dorado County? I may unpack this in a deeper blog post at some point, but this is definitely something to watch. Part of it could be due to the struggle of obtaining affordable fire insurance also.

Just kidding about rates never going below 4% again: It’s unreal to hear about mortgage rates at 3.5%. Remember just a couple years ago when everyone and their Mom were saying, “Rates have bottomed out.” Just kidding. They didn’t. On a serious note, low rates can act as a steroid to help get buyers off the fence and play the market. It helps buyers also artificially afford higher prices too, which isn’t the healthiest sounding thing in the world.

Property tax appeal season: If you didn’t know, it’s now property tax appeal season in the region. Most counties allow residents to dispute their property taxes between July and late November or early December (Placer County is mid-September). Here’s how the process works. Not many people honestly pay attention to their property taxes in an up market. It’s just true. But I advise for all property owners to stay in tune to be sure they are paying a fair share and no more.

I could write more, but let’s get visual instead.

FOUR BIG ISSUES TO WATCH:

1) SLOWER GROWTH: The market continues to show price growth, but the rate of change is slowing. This almost sounds offensive to some because the narrative in real estate is often that the market is always blazing hot. But let’s remember “slow” is not a dirty word in real estate. Moreover, do you know what sellers need more than anything right now? They need to price for the real market today rather than the ultra “hot” market of yesteryear.

2) A QUICK RECAP: All year prices have shown a modest uptick. What I mean is prices are up from last year, but not by much. Keep in mind the lowest price ranges are likely the “hottest” market in town too.

3) VOLUME SLUMP: Up until this past month the number of sales slumped in the region for 14 months in a row (and 13 months in Sacramento County). Sales volume was strong in July though and actually up. This year volume is still down about 9% in the region though. Overall despite a lower year of volume, it’s still not outside of normal low ranges (see 2014 and 2015).

4) PRICES SOFTENED IN JULY: The market generally slowed in July in terms of price growth. This is why I’m saying prices feel a bit flat. This is fairly normal for the time of year, and sometimes we see prices bounce up and down as summer comes to a close. Stay tuned. Let’s keep watching.

NOTE: Take El Dorado County data with a grain of salt. Stats change significantly month by month.

Thanks for respecting my content: Please don’t copy my post verbatim or alter the images in any way. I will always show respect for your original work and give you full credit, so I ask for that same courtesy. Here are 5 ways to share my content.

Please enjoy more images now.

SACRAMENTO REGION (more graphs here):

SACRAMENTO COUNTY (more graphs here):

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

 

DOWNLOAD 70+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: What are you seeing out there? What do you think prices are doing? What are you hearing from buyers and sellers lately?

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

Slow is not a dirty word in real estate

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Slow is not a four-letter word. Well, technically it is. But in real estate it’s not a “four-letter” dirty word. Let’s talk about this, and then for those interested I have a huge market update below. 

The situation: It’s easy to feel good about real estate when the stats are glowing because there’s always something positive to share. But when a market begins to slow it can feel uncomfortable for some because all of the sudden slower stats don’t line up with the rosy narrative that’s been used to describe the market.

The reality of slowing: The market has been slowing. What I mean is right now we’re seeing more subdued price growth in many portions of the country. In other words, prices just aren’t increasing like they were in the past. This doesn’t mean the market is dull or that it’s not really competitive, but it does mean competition is more intense than actual price growth in many cases.

Main point: I wanted to mention this because it’s important to recognize when markets change so we can back away from real estate cliches that may not fit current trends. Moreover, it’s crucial to find new language to describe the market as things either speed up or slow down. My advice? Pay attention to stats and let data inform your market narrative. Thus if you see the market slowing, it’s okay to say that. In fact, sometimes it’s the best thing sellers or buyers can hear.

Abusing price per sq ft: Last week I made a quick video to talk through the problem of abusing price per sq ft in real estate. Enjoy here if you wish.

As always, thanks for being here.

—–——– Big local monthly market update (long on purpose) —–——–

Spring is feeling fairly normal so far. In fact, May was actually a pretty strong month. What a difference from the doom we felt in 2018. Let’s talk about it.

THE SHORT VERSION:

  • Prices are up from the fall and it’s shaping up to be a strong spring
  • Prices aren’t up much from last year
  • There were more multiple offers this May compared to last May
  • Sales volume has slumped for 12 months
  • There are nearly 2,700 less sales this year
  • So far the spring has felt fairly normal
  • This post is long on purpose. Skim or pour a cup of coffee

DOWNLOAD 70+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

THE LONGER VERSION:

Here are some of the bigger topics right now:

Normal: The stats for May were strong and showed what we’d expect to see for the month. Prices showed an uptick, inventory remained low, it took less time to sell, the sales to list price ratio increased, etc… In short, the market feels a bit normal right now. This doesn’t mean it’s perfectly healthy, but from a stats perspective it’s been fairly normal.

More multiple offers: We saw more multiple offers this May compared to last year at the same time. I know, it’s barely up, but all year the number of multiple offers has been lagging, so this shows us a strong spring has sprung.

Blackstone: I mentioned last week that Blackstone (Invitation Homes) is starting to sell some homes in Sacramento. For now it looks like they’re offloading some non-performing inventory, so that’s how I plan to describe it unless new information comes to light. Keep in mind lots of headlines talk about Blackstone selling, but these headlines refer to stocks instead of homes. If you didn’t know, in recent weeks Blackstone sold $1B of their stock in Invitation Homes. This is big news of course because it means Blackstone is clearly making a move to exit the market. But this doesn’t mean Invitation Homes is going to exit the actual housing market by dumping all 80,000+ homes they own in the United States. I’m doubtful this is their plan since Invitation Homes is such a well-oiled mega-rental machine. But we’ll keep talking about this as needed.

Slower growth: Prices are up from last year, but they’re not up by much. The market feels really competitive, but we’re just not seeing insane price growth. Most metrics are up anywhere from 2-3% from last year. This reminds us it’s possible to have a really competitive market without insane price growth.

Highest sale ever in Sacramento County: There is now a $5M sale that just closed in the Sierra Oaks Vista neighborhood. It was a private sale and it’s the highest residential sale ever in Sacramento County. The ultra contemporary home was previously listed a couple times and here’s a video from Nick Sadek’s listing. I mention this because we are starting to see outlier sales like this pop up. This is a reflection of where prices are at, but it’s also a reflection of growing demand for the luxury market.

Michelin star: The big news locally is Sacramento got its first Michelin star for a restaurant called The Kitchen. Yesterday someone asked me if this star will affect property value in surrounding neighborhoods. I can comment later on that, but for now I have a Twitter poll going. Please vote.

Picky about getting into contract (and staying): I haven’t run stats on failure rate yet, but I hear from lots of real estate agents about buyers falling out of contract more often these days. I’ll have to run the numbers at some point, but I wanted to say it doesn’t surprise me to hear this. The reality is today’s buyers are incredibly picky about what they purchase. They’re choosy about condition, location, and price, so they take their time to get into contract. Moreover, since they don’t want to get stuck in a bad situation, if something doesn’t go right during an escrow, they’ll bail. Thus they’re picky about getting into contract AND staying in contract. Sellers, did you hear that? Buyers aren’t desperate.

A year of slumping volume: Sales volume in the region was strong for May and has rebounded substantially from a dreadful fall season, though technically volume has been down 12 months in a row in Sacramento County (and 13 months in the region). All things considered we’ve had 9% fewer sales, which means there have been 2,700 fewer homes sold this year. Keep in mind this is not the sign of a market meltdown, but it’s definitely safe to call this a slower year in terms of volume. This is something we have to keep watching. I suspect if rates go up, we could see volume slump again too.

Rates are doing the limbo: Rates keep doing the limbo by finding lower levels, and that tends to put a steroid in the market to create more competition. This is a big factor to watch since our market feels heavily influenced by the direction of rates right now. As a side note, if rates get really low it could lead to stronger price growth.

Getting back to the top: The median price in the region is now higher than the previous peak in 2005. It took us fourteen years to get back, which is the entire lifespan of my 8th grader. Anyway, in coming time we’ll surely have more “bubble” conversations because of this. But let’s be real. Many buyers are already wondering and having these conversations. Keep in mind the market in 2005 was much different than today and there is no such thing as a formula where the market “pops” when reaching 2005 levels. Technically, current values aren’t actually anywhere near 2005 when we consider inflation. But in my experience very few buyers actually think about inflation like this unless they’re statistics nerds. In case it helps, here’s a post I wrote about buyers worried about another housing bubble.

I could write more, but let’s get visual instead.

FOUR BIG ISSUES TO WATCH:

1) SLOWING MOMENTUM: Despite the spring market clearly heating up, stats show the market is slowing down when we look at the rate of change by year. So while we might describe the market as “hot”, we can also describe it as slowing.

2) LAST YEAR VS THIS YEAR: Check out the price metrics below. Can you see why I’m saying prices seem flat lately? This may not be true in every single price range or neighborhood of course, but this shows us price momentum is slowing. With that being said, it’s still okay to say the market is “hot”. It is. But I’d say competition is hotter than price appreciation.

3) SALES VOLUME SLUMP for 12 months: It’s important to look at sales volume in a few ways to get the bigger picture. Here it is by month and year.

SACRAMENTO REGION:

Key Stats:

  • May volume down 4.6%
  • Volume is down 9.2% over the past 12 months

SACRAMENTO COUNTY:

Key Stats:

  • May volume down 6.1%
  • Volume is down 8.3% over the past 12 months

PLACER COUNTY:

Key Stats:

  • May volume is up 2.7%
  • Volume is down 8.4% over the past 12 months

EL DORADO COUNTY:

Key Stats:

  • May volume down 4.9%
  • Volume is down 12.6% over the past 12 months

4) SPRING GETTING HOT: The market is heating up for 2019. We’re seeing price changes, low inventory, and increased sales volume.

NOTE: Take El Dorado County data with a grain of salt. Stats change significantly month by month.

Quick note on how NOT to use my content: Please don’t copy my post verbatim or alter the images in any way. I will always show respect for your original work and give you full credit, so I ask for that same courtesy. Here are 5 ways to share my content.

Now here are a bunch of images. Please enjoy.

SACRAMENTO REGION (more graphs here):

SACRAMENTO COUNTY (more graphs here):

PLACER COUNTY (more graphs here):

EL DORADO COUNTY (more graphs here):

DOWNLOAD 70+ visuals: Please download all graphs here as a zip file. See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: What are you seeing out there? What do you think prices are doing? What are you hearing from buyers and sellers lately?

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

Two things to understand about Zillow’s accuracy rate

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How does Zillow’s accuracy rate work? Let’s talk about two important points. I’m not writing because I’m angry, but only because the public places enormous trust in this brand, and I see this accuracy rate quoted everywhere. Well, let’s at least know the fine print so we can have informed conversations.

Two quick points on Zillow’s accuracy rate:

1) Median makes all the difference: Zillow says their median error rate is 5% for the United States. That sounds impressive, but we have to realize this is a MEDIAN error rate, which means the Zestimate is within 5% of the purchase price only half the time. So Zillow’s slogan could be, “We’re within 5% half the time.” But that doesn’t sound as polished as “Our median error rate is 5%”.

2) Zillow uses the most recent Zestimate: This is such an important point – even if it feels a little technical. I have an example to help show what I mean too. Zillow states “Zestimate accuracy is computed by comparing the final sale price to the Zestimate on or before the sale date.” Let me show you why this matters.

An example: Imagine a property listed for $380,000 and the Zestimate was also $380,000. But then after a series of price reductions, the home sold for $350,000. That would be 8 percent lower than the original Zestimate. That’s not very good, right? Well, now imagine as the list price was reduced, so was the Zestimate, and the most recent Zestimate was $353,000, which is only 1 percent higher than what the property sold for. Here’s the kicker: The home may have sold for 8 percent below the original Zestimate, but for its accuracy rate Zillow can claim 1 percent because it uses the most recent Zestimate instead of the original one.

In short, the most accurate stat here would be 8%. After all, the home literally sold 8% lower than what Zillow said it was worth. Thus when Zillow uses the most recent Zestimate instead, it’s a clever way to get much sexier stats. 

One more thing.

Chasing the List Price & Fixer Upper TV show: What sort of effect does the list price have on the Zestimate? In other words, does the list price actually change Zillow’s value? This might not happen in all cases, but here’s a glaring example of the “shotgun” house from the TV show Fixer Upper. It’s a one-bedroom that was listed for $950,000 and didn’t end up selling.

In this example the list price was outrageously high, but Zillow’s algorithm looks to have simply matched the Zestimate to the list price. This might not happen in all cases, but it certainly did here.

I hope that was interesting or helpful.

Article I wrote: Here’s a piece I wrote about online valuation sites for Comstock’s Magazine last month.

CLASS I’M TEACHING: I’m doing my favorite class at SAR on May 28th from 9am-12pm called “How to Think Like an Appraiser.” Sign up here.

Questions: What do you think? Anything else to add?

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