House Appraiser

An open letter to sellers about today’s housing market

May 16, 2022 By Ryan Lundquist 18 Comments

Dear Sellers,

How are things? I hope all is well. It’s been such a crazy market, but things are starting to change. So, let’s chat. This is coming from a good place, and it’s based on observations and what I’m hearing from real estate professionals.

A picture of an envelope with a piece of paper sticking out that reads, "An open letter to sellers."

WEBINAR ON THURSDAY: On May 19th at 10am I’ll be doing a deep market update for SAR to unpack the latest trends. We’ll have an hour to talk through lots of stuff. SIGN UP HERE.

THINGS TO KEEP IN MIND ABOUT TODAY’S MARKET:

1) You’ve lost power: The market is still competitive, but it’s not what it was in February. The truth is buyers have gained more power lately. Most agents I talk to say they are easily getting about half as many offers compared to a few months ago. So, instead of getting eight offers, you might only get a few. And if you’re priced too high, you’ll probably get zero offers.

2) Buyers are growing more sensitive: Mortgage rates skyrocketing means affordability has taken a beating. Seriously, buyers are easily paying $500 or more each month to get a mortgage this year compared to last year at the same time. This means buyers are becoming more sensitive to price, condition, and location. In other words, if they are paying top dollar, they are growing pickier about what they buy.

A meme with Adam Sandler and Bob Barker fighting (from the movie Happy Gilmore). It says, "The price is wrong...." which is from the movie.

3) Don’t aim for unicorns: Be careful of the idea of a unicorn buyer who is going to swoop in, ignore the comps, and pay top dollar in cash for your home. If that happens, great. Keep in mind only about 15% of sales this year have been all cash in the region. This means 85% of buyers are getting a loan.

4) But Zillow says: Don’t get hung up on what Zillow says your house is worth. The only thing that matters is what real buyers are willing to pay. Nobody gets stuck on a low Zestimate, so why get hung up on a high one?

5) Avoid strongarm moves: “Remove the appraisal contingency, pay me an extra $25,000, and give me your firstborn child.” These things still happen in some price ranges (okay, not the child thing), but the market is starting to see just a little bit more sanity lately. I’ve heard quite a few stories of buyers bailing after the seller countered with a stongarm move that might’ve worked a few months back. In short, buyers are picky about getting into contract AND staying in contract.

6) Sales are old and crusty: Sales tell us what the market used to be like probably 30 to 60 days ago when the properties got into contract. In other words, sales are like historic artifacts that tell us what the market used to be like. In contrast, we see the current temperature of the market with what is happening with listings and pendings. This means it’s key to know the sales, AND gauge any temperature change since.

A meme to show the most interesting man in the world saying, "I don't always overprice, but when I do, I expect a Bay Area unicorn buyer."

7) Be ready to negotiate if needed: I am hearing more stories of buyers asking for credits for repairs, concessions, and price reductions. Sometimes sellers feel they’re losing when this happens, but in some situations it’s simply the ticket to selling for top dollar. In short, listen to what buyers are asking for, and help the deal feel good for them too. This isn’t just about you. Don’t be afraid of FHA and VA buyers either.

8) It’s not time to push the price: Look, sellers aren’t entitled to always netting more than recent sales. My advice? Price reasonably and see what the market gives you. There are some situations where you might need to price lower than recent sales too to generate interest. Forget about record-breaking sales or your overpriced neighbor. What is getting into contract right now? That’s the ONLY thing that matters.

9) Tighten up the details: Buyers have become more sensitive about condition, so it can help to address minor cosmetic repairs before you hit the market (if you can). I’ve talked to a number of buyers who feel discouraged about the condition of homes right now for the price, so a good way to stand out is to be sure your property is tight. Buyers notice details, and solving minor issues only helps give them fewer reasons to say NO.

10) Watch for symptoms of softening: Talk to your agent about the temperature and be in tune with signs of softening. As you see stuff like this, let it influence your strategy for pricing and negotiating.

Symptom of a slower market bubble visual

11) Don’t expect to go $100,000 over: A seller got two offers and said, “Let’s hold out for something higher.” I’m not saying to be hasty about accepting offers, but don’t embrace unrealistic expectations. Headlines from the past talked about bidding wars, but right now headlines are starting to say stuff like, “The temperature has changed,” or “It’s still competitive, but it’s not what it was.” On that note, don’t be afraid to reduce the price if needed. You are not giving up value if value wasn’t ever there in the first place.

12) Other: What other advice would you give? Please comment below.

I hope this was helpful.

Sincerely,

Ryan Lundquist
Certified Appraiser / Housing Market Analyst
Sacramento Appraisal Blog

p.s. Thanks for picking up the dog dookie before the appraiser shows up

Don’t get stuck on home prices…

May 2, 2022 By Ryan Lundquist 7 Comments

What are prices doing? That’s always the question, and I get it. But there are bigger fish to fry to understand what the housing market is doing.

Market webinar: On Thursday May 19th at 10am I’ll be doing a deep market update webinar through SAR to talk about the latest trends. We’ll have an hour, so we can go over a ton of stuff. Sign up here.

A shift: Over the past few weeks there has been a shift in demand, which is why this conversation is so important. This isn’t about doom and gloom. I’m just saying we need to look at other things besides prices.

The last time: Let’s look at what happened when the market changed in 2005. There’s some helpful insight here, even though what happened last time isn’t the new template for every future correction.

WHY PRICES ARE THE LAST PLACE TO LOOK

Not that much different: The real estate bubble burst in Sacramento County in August 2005, but prices were only down 4-6% during that first year. When thinking of a pop, that doesn’t sound like much, right?

TWO THINGS TO WATCH INSTEAD:

The real story was volume: Prices saw a modest dip, but sales volume was imploding. There was a 43% change in the number of sales between August 2005 and August 2006. Some could’ve said, “Meh, prices are only down slightly,” but the glaring issue was nine hundred fewer sales in August 2006 compared to August 2005.

The real story was supply: Prices dipped slightly, but housing supply increased by 207% in the background. In other words, housing inventory went from 2.6 months to 8.0 months the next summer. And this helped set the stage for a massive collapse in 2007.

THE BIG POINT:

Prices were about the last place to look to understand the trend at the time. The real story was seen when looking at listings and volume.

What to watch: If you want to see what the housing market is doing, I suggest giving strong attention to the number of listings, the number of weekly pending contracts, and the number of sales. There are many other things to watch, but are buyers willing to continue to play the market? That’s the big question, and we’ll see the answer in volume before prices. Of course, if you want to sound suave on date night, watch other things like price reductions, the number of offers, days on market, etc… I’m talking through lots of these things every week. If you’re not local, check out the Redfin Data Center for weekly stats.

Whatever you do, don’t get stuck on prices alone.

Getting buyers to walk: As I said last week, price growth slowed in April compared to truly exuberant gains between January and March. Today we are seeing slow traffic in general at open houses, more price reductions, and buyers having an easier time getting offers accepted (not always). This really happened quickly too over the past few weeks. Overall, buyers are far more sensitive to price, condition, and location, which means sellers need to be open to negotiation. I’ve heard a few examples of buyers walking after sellers said, “Yo, Bestie, thanks for the offer. Now give me $25K more and remove the appraisal contingency.” That might have worked in January, but this is May. It’s a different market today. I’m also hearing more examples of, “We priced it right, but we aren’t getting any action yet.”

Embracing stats: The other day someone wasn’t happy because I wouldn’t call this dynamic the start of a market correction, but the truth is we need time and stats to understand the longer-term trend. This is not me sugarcoating. This is me being objective. Let’s keep watching the numbers (by the week) and letting the stats form our narrative.

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 most in this post? What did I miss? I’d love to hear your take.

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

Starbucks cups & price per sq ft in real estate

March 15, 2022 By Ryan Lundquist 33 Comments

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?

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

Housing market tears & price pressure

February 1, 2022 By Ryan Lundquist 10 Comments

Do you smell that? It’s price growth. The market is rising, which is normal for January. But this year it feels extra aggressive. Let’s talk about it.

Scroll quickly or digest slowly.

Distracted meme with buyers looking at the hot market and an apprasier looking on

UPCOMING PUBLIC SPEAKING GIGS:

2/9/2022 Yolo Assn of Realtors market update (details)
2/18/2022 WCR El Dorado market update (details)
2/25/2022 Placer Assn of Realtors market update (details)
3/15/2022 NARPM Luncheon (TBD)
3/22/2022 SAFE Credit Union market update (TBD)
4/28/2022 SAR Think Like an Appraiser (TBD)

A MARKET OF TEARS:

This conversation struck me yesterday and I think Erin’s tweet highlights just how lopsided the market feels. Anyone have a similar story?

How crazy is it that we’re in a market like this? I just talked with someone else yesterday about a buyer crying when she found out her offer was accepted. It shouldn’t be this difficult to buy shelter, right?

THE MARKET IS HERE, BUT THE STATS AREN’T

In a normal year home prices hit bottom in January (black bars), but it’s important to remember sales in January actually reflect homes that got into contract in December. So, if anything, January sales tell us what the market used to be like in December. In today’s market the best way to see the trend is to look at the pendings. After all, today’s pending contracts become tomorrow’s sales. Next month we are poised to see February show a price increase because that’s what normally happens (see graph).

A bar chart to show seasonal median price trends in the Sacramento region from 2017. The point here is the market always dips in January and rebound afterward.

WE DON’T HAVE TO WAIT FOR SALES…

The truth is we don’t have to wait for closed sales before saying the market is showing price increases. If we look carefully enough at things like pending contracts in the neighborhood, multiple offers, days on market, anemic supply, less credits being offered to buyers, feedback from the real estate community, the number of price reductions, etc… we can see upward price pressure and figure out how to quantify it.

This is why it’s critical for appraisers to give market conditions adjustments to the sales if the market is rising. In a deficient appraisal we tend to see a lack of adjustments given to account for a rising market. I don’t say this to pressure any colleagues into making adjustments or “hitting the number.” I’m just saying when I saw an appraisal yesterday where a comp from eleven months ago wasn’t adjusted up, that doesn’t smell reasonable (this was in Oak Park, which I talked about last week). I’m not saying every contract price should “meet value” so to speak either because some properties are getting into contract at a totally unreasonable level. Anyway, this could be a long post and maybe I’ll write more about this if enough people want it.

WEEKLY PRICE GROWTH

Here is a look at price growth by the week so far in January 2022 (black line). Right now we are looking very normal and I expect to see this line going up in coming weeks and months.

RUNNING DUE TO RATES:

It’s normal for the market to heat up in January, but this year it’s scalding hot as buyers seem to be running to the market to get in before rates rise. This type of “get in before it’s too late” dynamic cannot keep up forever, but for now it’s the reality. I’ll be watching mortgage applications, pending contracts, and sales volume closely to help gauge demand. Anyway, what effect are you seeing rising rates have on people you know? Running to the market to get in? Or are they pulling back?

Mortage rates line graph over the past two years. The right side of the graph shows an increase lately as rates are hovering around 3.75%

SUPER SLIM INVENTORY:

UNITED STATES:

Having sparse inventory is complicating the market and helping create what feels like an auction where the highest bidder wins (though technically the highest offer isn’t actually always the strongest offer). According to Altos Research we’ve hit a new low with the number of listings in the US.

This visual is a line graph to show active listings in the United States in recent years. The line is incredibly low on the right side of the graph, and that shows we're at record low levels. We should have twice as many listings basically.

SACRAMENTO LISTINGS:

As of this morning, here is what’s on the market. And as you can see, this snapshot of listings is about half the normal level for February 1st. Doesn’t this image sort of look like the one above though where the market feels like it’s been chopped in half?

A bar chart to show listings on Feb 1 this year are about cut in half compared to the normal trend

LAST YEAR VS THIS YEAR:

Here’s a look at the number of listings by price range on February 1st this year and last year. In short, we have about the same number of listings today, but the big difference is listings are dispersed at higher prices because prices rose so much last year. Keep in mind buyers at higher prices tend to be more mobile too because of the ability to more commonly work from home.

Here is what’s on the market by price range as of today. I have some visuals like this for Sac & Placer County too (just ask me for them).

A LITTLE BIT O’ HOPE:

We are seeing more new listings hit the market, which is what we would expect to see starting in January. That’s the good news. The bad news is buyers are hungry and there aren’t enough listings to satisfy demand at the moment. The image below shows new listings by the month in blue, and we should start to see this blue line rise in coming months for about half the year (this graph doesn’t include January yet, but January should start to point upward). Keep in mind listings don’t normally hit a stronger uptick until after March, so unless something interrupts this normal pattern, it’s time to put your game face on because strong competition awaits.

RANDOM THURSDAY GRAPH:

And here’s a random way to see the increase of listings. This visual shows new listings on Thursday each week in the Sacramento region. If you didn’t know, Thursday is typically the day with the highest number of new listings each week. Since the beginning of the year we’ve seen a modest uptick, which is normal. Keep in mind it tends to be a slower trickle of new listings until things start to pick up more in March.

Thanks for being here.

Questions: What are you seeing out there in the market right now? How do you gauge price growth at this time of year? Anything to add?

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

House Appraiser

Share:

Share:

Share:

Share: