House Appraiser

The coming recession & the housing market

September 5, 2019 By Ryan Lundquist 31 Comments

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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How do you know how much the market has gone up?

July 24, 2019 By Ryan Lundquist 19 Comments

I’ve been getting this question quite a bit lately. How much has the market gone up? How do you figure that out exactly? This is something we consider all the time when pulling comps, which is why it’s so important. Let’s talk about it.

NOTE: This post is longer because there’s lots to say. You can still skim the bold headings though if you wish.

Here are a few simple things I do to gauge value changes:

1) Look for comps: The best thing we can do is look to the comps for the answers. More specifically, look for the price difference between sales in the past compared with properties that are currently getting into contract.

To gauge a change in value I recommend comparing similar properties from the past to similar properties now. This is often done with sales from last year vs this year, but here’s an example of several years ago with this year. If you’re in a tract neighborhood you might consider comparing a few different similar-sized models from the past with those same models today. If you’re not in a tract area, just compare competitive sales from the past with competitive sales today.

In this example above I looked up a 2,734 sq ft model in South Sacramento and in 2015 this model was selling for about $330,000 while today the most recent sales have been $400,000 (backs highway) and $412,000. There is a pending at $419,126. Ultimately we could say the market has gone up by $80,000 to $90,000 or about 24% to 27%. It might seem odd that I’m looking up 2015 sales, but in this case the subject property sold in 2015, so I was attempting to figure out how much the market changed since then.

When lining up all data from 2018 through 2019 it’s really clear we’ve seen price increases, right?

2) Sales last year & this year: We can also try to find some sales that sold last year and then re-sold this year. I realize if we’re lucky we might find only one or two examples at best. I’m not talking about flips where remodeling has occurred, but an example like the one below where it sold in the exact same condition.

In this example we see the market has shown about a 2% uptick in value over the past year. Of course we have to understand whether these sales sold at reasonable levels. After all, if either sold too high or too low, then it’s probably meaningless data. Ultimately sales like this can be clues into the market (more on this below too).

3) Stats programs: Some people might use fancy excel spreadsheet programs where competitive neighborhood data can be exported to show price changes over time. I don’t personally use something like this, but it’s not a bad idea if it helps you get a good picture of a neighborhood market. If you use something like this, please comment below.

4) Create visuals: I’m a visual guy and it helps me see the market by creating visuals. I find myself spending a good chunk of time on #1 and #2 above as I’m pulling comps, but I also use this step to compliment those steps. If you want to learn to make graphs, here’s a tutorial. If you’ve been thinking about this, why not go for it? Creating images has been revolutionary for the way I see the market and explain it.

CLOSING TIPS:

1) Be careful about zip code data: If you’re pulling data from a zip code or county, just remember trends shown in a larger area may or may not apply equally to every neighborhood or price range (or property type). This is why I don’t look at my recent big market update, see price metrics are up 3-4% this year in the region, and then use that number for every neighborhood. Nope. I advise knowing the larger trend very well, but don’t impose that trend on a smaller area without doing research.

2) Not just one example: It’s dangerous to base a value conclusion on only one example. This is why I wouldn’t look at my example in number two above and definitely state the market has increased by 2%. One example is best considered a piece of the puzzle, and it’s important to find other pieces before understanding the puzzle.

3) The stock market & competitive data: In the stock market you can have different stocks going up, down, and sideways all at once. The same thing happens in real estate. This is exactly why I strongly recommend you look at competitive data in neighborhoods. For example, if you are valuing a 1,200 sq ft house, make sure you are looking at examples of similar-sized homes to understand that market segment instead of 4,000 sq ft homes in the same neighborhood. Otherwise if I only look at larger homes that might be a little more stagnant, I could miss the fact that the bottom of the market is increasing much more rapidly than the top end.

4) Declining market: It’s been years since we’ve had a declining market, but this same methodology above can help you measure the market when prices are declining too.

5) Seasons: When looking at older sales let’s remember the seasons in which they sold. Thus last year I might give a 2% adjustment in a neighborhood for a property that sold in June, but I could give a 5% adjustment for something that closed in December because it sold when the market was down further during a dull fall season.

6) Being quick & reconciliation: There’s not just one way to do this, and there aren’t quick answers. We have to dig in. Most of all, we might choose a few different ways to study the market and then reconcile our findings. What I mean is I might do all of the steps above, get slightly different answers for each step, and then piece them all together (reconcile them) when I use a comp in a report and make a specific adjustment to that comp. In other words, if I adjust a comp up by 2% or 4% or whatever the number is, I’m coming to the table with some sort of rationale or support for why that adjustment makes sense.

I hope this was helpful.

MARKET UPDATE VIDEO: Here’s a video to walk through the growing and slowing market in Sacramento. Enjoy if you wish.

Questions: What do you think of the steps above? Anything else you’d add? What do you do?

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Slow is not a dirty word in real estate

June 13, 2019 By Ryan Lundquist 11 Comments

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?

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Two things to understand about Zillow’s accuracy rate

May 1, 2019 By Ryan Lundquist 35 Comments

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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