House Appraiser

Price reductions don’t mean the market is crashing

September 14, 2021 By Ryan Lundquist 12 Comments

We’re seeing more price reductions lately. Does this mean the market is starting to collapse? Are things beginning to turn? Is this 2008 all over again? I’ve been getting great questions like this lately, so let’s talk shop.

Teaching my favorite class: On September 28th from 9am-12pm I’m teaching my favorite class at SAR called How to Think Like an Appraiser. It’s three hours, which sounds painful, but I love this one because we have space to dig deep into comp selection and adjustments. Sign up here.

5 THINGS TO KNOW ABOUT PRICE REDUCTIONS

1) Price reductions are normal: It’s normal to see more price reductions from the summer through the fall season. The danger is it’s easy to observe normal trends through a doom and gloom lens. The issue is demand changes from the spring and there is less attention from buyers as people are focused on school, vacation, and getting into a fall rhythm. It then takes sellers a bit to adjust their expectations and find proper pricing in a cooler market.

2) Anything can be overpriced: Over the past week in Sacramento there were price reductions in every single price range. This tells us it’s possible to overprice at any segment of the market.

3) Technically the market is NOT way overpriced: The local housing market is seeing more price reductions, but I don’t think it’s fair to say we have an overpriced market. Like I said last week, stats are still not normal as the market is more aggressive than it normally is for the time of year. According to Altos Research 28% of recent listings have price reductions in Sacramento County. Anyway, check out Altos and see Placer, Yolo, and El Dorado too. I don’t pull stats like this regularly, but a figure at 28% sounds about right as it fits with other stats I do pull. I can bore you with details in the comments if you wish.

4) Be careful about judging: The danger in real estate is to think whatever we are seeing with a few properties is what the entire market is experiencing. Maybe. Maybe not. It’s like me noticing several people wearing overalls. Is it a trend or did I just happen to see a few friends reliving their glory days from the 90s? Look, personal experience is really valuable, but it’s important to be sure we’re looking at stats on a bigger level beyond what is in front of us.

5) A closing note for sellers: It’s critical to nail the list price right now and I advise being in touch with the current climate of fewer offers, taking longer to sell, and more price reductions. It’s easy to be infatuated with hot headlines or cling to the idea of fetching a massive cash offer from an out-of-town whale. My advice? Price for the market and see what happens. Don’t price for the unicorn. It’s still a competitive market, so you may be able to get a few strong offers, but it’s not what it was four months ago. Oh, one more thing:

Anyway, I hope this was helpful.

Thanks for being here.

Questions: What are you seeing out there with price reductions? What advice would you give for pricing a property right now?

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The housing market is trying to get back to normal

September 9, 2021 By Ryan Lundquist 24 Comments

Normal? That’s not a word we’ve used much to describe the housing market lately, but we are finally starting to see some normalcy. Many parts of the country are showing what looks to be normal seasonal slowing and that is a sight for sore eyes. Anyway, let’s talk about this and then I have lots of local stats.

The normal that should be happening: The market right now should be slowing for the season. That’s what normally happens and it’s what we are seeing in so many areas of the country too.

Sorta kinda normal: When a market cools for the season we tend to see some of the signs in the image below to one degree or another. Even though we are beginning to see many of these things show up in the market, we really cannot say the market is fully normal yet because supply and demand are still too imbalanced. But any hint of normalcy lately is actually a really good thing. Imagine the chaos of seeing another year like last year where the market just kept going up through the fall. That is exactly what we don’t want to see.

Anyway, which signs are you seeing or not seeing in your area?

Now let’s talk about slowing.

I’ve had a number of emails lately critiquing my use of the word “slowing,” so I wanted to talk about this openly. I hope that’s cool. If this isn’t your thing, just scroll down. By the way, I’m always good with constructive critique too.

Bro, don’t say slowing: Over the past few months the market has slowed. Or wait, it cooled. No, the temperature changed. I mean, it’s normalizing. Uh, it’s actually stabilizing. Thankfully there isn’t just one way to describe things. I’ve been talking about a seasonal slowing for months because that’s the story the stats are telling. But the word “slowing” almost seems offensive to some, so let’s talk about that.

The market isn’t fragile: The housing market is big and I feel like it’s splitting hairs to argue about whether we should use the word slowing, normalizing, or cooling. Here’s the thing. Use whatever word you feel best represents the market, but it’s probably going to take a few key phrases to do the trick. No matter what, recognize the market is NOT fragile (“fra-gee-lay“) and it doesn’t need you or me to protect it with glowing words. Look, I can think positive thoughts all day long about cryptocurrency, but that doesn’t change the value of bitcoin. In terms of housing, the market is dynamic, multi-layered, complex, and there is no such thing as jinxing the trend by using less-than-glowing words.

Moving fast & slowing: If you aren’t down with the word slowing, that’s fine, but in my mind it’s a reasonable way to describe the market. But to say slowing alone isn’t perfect either as I keep saying because the market is doing two things. It’s moving really fast. And it’s slowing for the season.

Okay, I won’t talk about this again for a while.

My commitment: I will never spin data or sugarcoat things to sound better or worse than they are. My goal is to be neutral while presenting analysis based on the numbers. I’ll come up with helpful word pictures to describe the market too (and sometimes crazy comparisons).

Respectfully,

Ryan

Any thoughts?

—–——– STATS SHOWING SOME NORMALCY ———––

Skim or digest slowly.

THE SHORTER VERSION:

The market is still moving faster than it should be for the time of year and stats are still just about at all-time high levels, but the market is hands-down cooler than it was a few months ago. That’s the story stats are telling and it’s absolutely what I’m hearing from the trenches of escrows. “The market is not slow, but it’s slower than it was” sums it up perfectly.

Overall it’s starting to take a little longer to sell, there were fewer multiple offers last month, and prices dipped from their peak in June. But overall stats from July to August were pretty flat, so if someone said the market felt a bit horizontal, I wouldn’t bat an eye. Of course we do expect some renewed attention on the market as the kids get back to school, so stay tuned for that.

One quick thing. I’m watching cash purchases and while we still don’t have much cash in the market, there has been a noticeable uptick these past two quarters.

Some visuals eh…

NOT AS MANY MULTIPLE OFFERS:

For four months in a row in the region we’ve seen multiple offers subside. Last month 62% of sales had more than one offer and that’s one of the most competitive months ever, but there is no mistaking a cooling seasonal trend too.

IT’S LESS COMPETITIVE:

The market is still ultra-competitive, but this image is crystal clear that the temperature of the market has changed in recent months. Even though prices were flat from July to August, this visual shows clear slowing from a few months ago. This is exactly what we should be seeing at this time of year. But here’s the thing. We should easily have half or more of sales selling at or below the list price, so this market is NOT normal yet.

This visual below is striking because it shows definitive change. A few months back I started to point out this change and it was incredibly minor then. I know at times it’s easy to scrutinize mentioning small changes and some people even get bent out of shape, but sometimes small changes are the beginning of a trend. That is EXACTLY why we pay attention to the small stuff (while not getting sensational).

PRICES PEAKED IN JUNE:

These visuals help show prices look to have hit their seasonal peak in June. This is pretty normal and historically August is sometimes lower than July and sometimes about the same.

VOLUME IS SLIDING (NORMAL):

The number of sales peaked in June and now we’re seeing fewer sales happening. This is exactly what should be taking place. The red line represents 2021 and it’s very consistent with the green line (which is the market average).

INVENTORY IS UP SLIGHTLY:

Monthly housing supply is still sparse, but it’s up from a few months back. It actually declined slightly from July to August in most local counties. Ultimately supply is still SO LOW. But isn’t it amazing how with even this slight uptick lately we feel a difference in the market?

IT’S TAKING LONGER TO SELL:

It took a few days longer to sell last month in Sacramento County, which is what we should be seeing at this time of year. Properties are still selling about as fast as they ever have, but clearly we’ve seen a softer trend over the past few months compared to the intensity of spring.

HOW PRICES ARE DISTRIBUTED (NEW IMAGE):

This visual shows how prices are distributed throughout the market. In other words, about 10% of homes last month sold between $300-400K (just to give a clue on how to read this one). This is a new visual. Do you dig it?

SMALLER HOMES ARE SELLING (HUGE POINT TO WATCH):

It’s normal around this time of year to start to see the types of homes selling change. We tend to see the largest homes in the market sell during the height of spring and then smaller homes for the rest of the year. There was actually a huge spike of larger homes selling during the first year of the pandemic, so it’s going to be interesting and important to watch how this trend unfolds. Keep in mind some of the massive price increases over the past year has to do with a focus on larger homes.

LAST YEAR VS THIS YEAR:

Year over year comparisons get a little weird these days because the market was so atypical last year, but in my opinion this is still worth digesting since we want to be good students of the market. I suggest taking these percentages with a grain of salt and recognize these percentages DO NOT actually mean every house is worth that much more either.

JULY TO AUGUST FEELS A BIT HORIZONTAL:

The market was somewhat flat month to month. Nothing too sensational. Keep in mind some of the smaller counties have fewer stats, so the numbers bounce around each month. This is why I would suggest giving strong weight to Sacramento County and the region as a whole to decipher the bigger trend in the market.

ONE LAST VISUAL:

Price per square foot as a metric has yet to soften. I think it’s going to take a little longer for that because smaller homes have been selling these past few months and since smaller homes tend to have a higher price per sq ft, it only means this metric is going to be a bit more inflated.

Anyway, this is getting too long…

Do you see what I mean about the market trying to get back to normal? What a different vibe from last year.

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.

SHARING POLICY: I welcome you to share some of these images on your social channels or in a newsletter. In case it helps, here are 6 ways to share my content (not copy verbatim). Thanks.

Questions: What are you seeing out there in the market? What do you think about my take on the market not being fragile?

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

Does it need a closet to be a bedroom?

July 20, 2021 By Ryan Lundquist 25 Comments

Do you need a closet to be considered a bedroom? That’s a big question and the answer is simple. Actually, it’s not. Here are some things to consider.

NOTE: This post does not address the requirements to be a bedroom. Here is a post I wrote about the four requirements to be a bedroom (over 300 comments).

Real estate folklore: In the real estate community I often hear things like, “Closets are definitely required.” But here’s the thing. Is there really support for that claim? Or is it just real estate folklore passed down?

No closet rule: The truth is there isn’t any formal one-size-fits-all definition of a bedroom that states a closet is necessary. For reference, International Residential Code does NOT mandate a bedroom to have a closet. I find local code is sometimes vague about bedrooms too without a strong emphasis on mandatory closets.

The big issue (the market): Ultimately a bedroom should probably have a closet because that’s what buyers typically expect. In other words, buyers expect for closets to be present, new homes are built with closets, and it’s hands-down normal to have closets. So while a closet might not technically be required by code, the market likely requires one. Frankly when there is not a closet that’s sometimes a clue we are looking at something else – a den, office, bonus room, etc… In this regard I get it when appraisers and the real estate community sometimes look at a home and state a room is not a bedroom if there is no closet.

Architecture: It’s possible some types of architecture might not have closets, but that doesn’t mean the home has zero bedrooms, right? Thus it’s important to concede not every type of architecture fits into a neat little “every bedroom needs a closet” box.

Using logic: If I removed all the closets in my house, would that mean I didn’t have any bedrooms? Probably not. Sometimes we get so fixated on the closet issue that we’re not using logic. Look, it would be strange and probably a marketing or value mistake to not have closets, but I wouldn’t say a house had zero bedrooms because all the closets were removed.

Using good professional judgement: The other day I measured a house that’s going to hit the market and the front room didn’t have a closet. It technically met the requirements to be a bedroom in terms of size and egress, but I didn’t label it as a bedroom on my sketch because it felt more like an office or den. Having French doors and no closet just made it feel more like something else instead of a bedroom. I would bet money most buyers would walk through the house and say, “That’s a killer office.” In short, this shows there is a place for subjective professional judgement where we have to consider how a space feels, local code, and how buyers might perceive an area. That might sound wishy-washy, but good professional experience and judgement matter.

Local code: A few weeks ago I visited a house that had a room with a closet that looked like it should be a bedroom, BUT there was one glaring problem. In this room there was a tiny window not large enough for egress. If you didn’t know, a bedroom needs to have an opening of at least 5.7 sq ft per IRC R310.1. Ultimately this room used to be a bedroom until the previous owner did an awkward addition on the back of the house that removed the original window. The owner then added a tiny window to try to technically meet the requirements for egress. In my professional opinion and based on knowing enough about local code, I did not consider this area as a bedroom even though it had a closet. Thus the presence of a closet was not the trump card for the situation because there were other issues to also consider. By the way, this is not to say all types of architecture need a typical window with an opening that conforms to current code because mid-century modern homes don’t always have that (they sometimes have high windows along the ceiling only).

What if I add a closet? Sometimes I get asked things like, “If I add a closet to this space, will it become a bedroom?” Honestly, it’s impossible to answer without really seeing the space and of course thinking critically about code and how the market would perceive the area.

Logic and value adjustments: It’s tempting to give a token value adjustment for bedroom count differences. Maybe we heard it somewhere or learned from a “mentor” the value adjustment should be $10,000 for each bedroom. So we give this adjustment any time we see a bedroom difference. But does this amount really make sense if we are talking about 2 vs 3 bedrooms and 5 vs 6 bedrooms? Don’t you think the value variance could be huge for 2 vs 3 bedrooms but maybe minimal at best for 5 vs 6 bedrooms? Regarding closets, imagine it would cost $1,500 to add a closet to a room, but you are giving a downward $10,000 adjustment because one room is not technically a bedroom due to no closet being present. Are you telling me the market is adjusting down by $10,000 when there is only a $1,500 cost to actually add a closet? Food for thought.

CLOSING THOUGHTS: Instead of embracing a “closets are always needed” belief system, it’s a good idea to back up and think about buyer expectations, architecture, and local code. Honestly, it would be easy if there was a one-size-fits-all closet rule, but then again that rule could never make sense for all situations and types of homes.

I hope this was helpful.

Questions: What were you taught about closets? Any other points to add? What did I miss? I’d love to hear your take.

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The housing market is slowing (but not slow)

July 12, 2021 By Ryan Lundquist 10 Comments

The housing market is slowing and today I want to share seven quick ways I’m seeing that. But here’s the thing. This market is still driving at warp speed. In short, the market is slowing, but it’s not slow.

Podcast with Golden 1 Credit Union: If you need some background noise, here’s a podcast I recorded recently. I had fun with this one. Listen here.

This post is designed to skim or digest slowly.

7 WAYS THE MARKET IS SLOWING:

The housing market is still so competitive, but there are subtle ways I’m seeing slowing. This is so important for sellers to understand – not to mention real estate professionals who are talking with clients and the public. If you’re not local, what are you seeing in your area?

1) Taking longer to sell: Last month on average it took 12 days to sell a home and 6 median days. Since June pendings have taken two extra days to get into contract. This is still lightning fast, but it’s slower than it was.

2) More homes are selling below the list price: There are slightly more homes selling at or below the list price right now. Here’s a visual to show what buyers are paying compared to the asking price. As you can see most categories slowed slightly last month, but not every category.

3) Fewer multiple offers: For two months in a row we’ve seen fewer multiple offers in the Sacramento region. Keep in mind the percentage of offers is still about as high as it’s ever been.

4) More listings are hitting the market: We still don’t have enough listings to satisfy demand, but there are now literally multiple hundreds of extra listings on any given day in the Sacramento region compared to a few months ago.

5) Slightly higher monthly inventory: We are seeing a slight uptick in monthly housing inventory. Very slight. It’s wild to say this when we basically still have half-a-month of homes for sale, but supply is up just a little in most counties from a few months ago. Of course now we are seeing mortgage rates at their lowest point in months, so we’ll see what happens to supply in coming time.

6) We hit the big home peak: The dark blue line represents the average home size in Sacramento and it goes up and down like clockwork each year. Do you see how size typically hits a seasonal peak during May or June (besides last year)? Anyway, the average size slumped in June, which is what we’d expect to see in a normal year. This goes to show we’re seeing some normal seasonality.

7) Word on the street: I’m hearing from lots of real estate agents, loan officers, and appraisers that they’ve seen a slightly slower vibe. I haven’t heard anyone say the market is slow, but there is lots of chatter about slowing. At the same time I’m hearing things like, “My listing had 23 offers” or “We got outbid again,” which speaks to how competitive it is right now.

8) Other: What is number eight?

Any thoughts?

3 WAYS THE MARKET IS NOT SLOWING:

1) Record prices: The market still has upward price pressure in lots of areas and each month we’re seeing old price records shattered (nominal prices not adjusted for inflation). See stats below for specific price metrics.

2) Buyers paying big money over asking: On average properties sold $25,865 above their original list price last month. This is a wild stat considering it represents over 2,800 sales. This figure is higher than any of the previous three months too, which shows the market is still bananas. By the way, the average amount clearly does not perfectly represent every individual escrow.

3) Record sales price to list price ratio: Last month properties on average sold 4.1% above their original list price. This might seem low, but it’s actually higher than it’s ever been. This is a good reminder that not every stat is showing slowness. In other words, when a market slows we don’t always see it in every single metric. Of course it’s good to keep in mind sales in June really represent pending contracts from May more than anything.

Okay, two last thoughts.

NOT CRASHING: The doom and gloom crowd loves to look at slowness and say the market is starting to crash, but that’s what they say every year when stats sag. Look, I’m not saying the market is perfect. I’m just saying stats right now don’t support a crash and burn narrative.

IT LOOKS SEASONAL EH: In a normal year we’d expect for the housing market to crest around this time and begin a seasonal descent for the rest of the year. So it’s no surprise to see the market slowing right now.

——————– BIG MARKET UPDATE ——————–

For those interested, here’s a big Sacramento market update:

THE SHORT VERSION:

Here is a highlight reel to talk through some of the bigger themes right now. In short, the stats are sensational and we are in the midst of an incredibly competitive market. But we’re also seeing some slowing. Both things are true at the same time.

THE LONG VERSION:

Stats are on steroids and we are still seeing one the wildest markets we’ve had. It’s just some metrics are showing some symptoms of what looks like seasonal slowing. Here are some of the bigger themes.

FORECLOSURES HAVE NOT INCREASED:

Some folks are talking about an increase of foreclosures, but that hasn’t been happening. What I mean is these properties are definitely not showing up on MLS. I keep hearing of a coming foreclosure wave also due to forbearance rates, but those keep going down.

MAY TO JUNE PRICE STATS INCREASED (NOT A SHOCKER):

How has the market changed recently? Take a look at May to June prices. In short, every metric in all surrounding counties showed an increase last month.

LAST YEAR VS THIS YEAR:

Last year the market was dull at the beginning of the pandemic, so this year versus last year gets a little weird for a comparison. My advice? Take these percentages with a grain of salt because they’re inflated due to sagging numbers last year. And remember these percentages DO NOT actually mean every house is worth that much more either.

MORE PRICE VISUALS:

A few more visuals to show the insanity of price growth lately. Look how far disconnected 2021 prices are from previous years.

SALES VOLUME HAS BEEN STRONG:

For thirteen months in a row we’ve seen higher monthly sales volume compared to the previous year. This June was up from the previous two years and overall at a fairly normal level. Frankly it’s impressive to see this many sales in light of having such low supply. It just goes to show buyers have been getting it done. Keep in mind last year did have lower volume due to two lower months at the beginning of the pandemic, so that’s one reason why the percentages are up so much this year. But we’ve also seen increased migration this year too, particularly in El Dorado and Placer County.

Anyway, this is getting really long.

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.

SHARING POLICY: I welcome you to share some of these images on your social channels or in a newsletter. In case it helps, here are 6 ways to share my content (not copy verbatim). Thanks.

Questions: What are you seeing out there in the market? What are you hearing buyers and sellers say? I’d love to hear your take.

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

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