housing market in Sacramento

How are appraisers handling concessions?

January 16, 2023 By Ryan Lundquist 25 Comments

How are appraisers handling concessions to the buyer? Could a seller credit damage the chance of appraising at the purchase contract? These questions weren’t asked a year ago, but welcome to the 2023 housing market.

UPCOMING (PUBLIC) SPEAKING GIGS:
1/18/23 WCR Market Update in Cameron Park (register here)
1/19/23 Big market update at SAR on Zoom (register here)
1/20/23 NARPM Luncheon
1/23/23 Residential RoundUP on Zoom (register here (free))
1/26/23 How to Crush Lead Gen (for real estate) (register here)
1/27/23 Q&A Appraiser Marketing (free for appraisers only) (sign up here)
2/8/23 SAFE Credit Union “Snacks & Facts” (for RE) (register here)
3/10/23 PCAR Market Update Lunch & Learn (detailed TBD)
3/28/23 Downtown Regional MLS meeting
4/1/23 NAA Conference in Sacramento

GOOD NEWS FOR BUYERS

Buyers are getting more from sellers lately. Last month 51.5% of all sales in Sacramento County had some form of a concession. Sellers are tending to give things like credits for closing costs, credits for repairs, rate buydowns, etc… Sellers, be ready to negotiate with buyers and offer more if needed. And buyers, get all the market will give you.

HOW DO APPRAISERS VIEW CONCESSIONS?

Question: When a buyer comes in over list price and asks for a concession from the seller, how is that viewed from an appraiser’s mindset?

Answer:

1) No effect on value: The appraiser needs to look to the comps to establish value. Bottom line. The seller can give 3% or more if the lender allows, but this shouldn’t have any bearing on the appraised value theoretically because the proof of value is found in the comps – not the terms of the contract. In other words, if the comps suggest a value at $500,000, it doesn’t matter if the subject is in contract at $500,000 with the seller giving 3% back for closing costs. However, if the only comps at $500,000 are ones with fat credits, and comps without any concessions are coming in closer to $485,000, then that tells us the comps with concessions are maybe closing high due to the concessions. This is where an appraiser might adjust the comps down in the appraisal report if it looks like the market isn’t willing to pay $500,000 without the extra sweetener to get the deal done. And this is where agents establishing a list price really want to pay close attention to what’s happening with concessions in the comps. Don’t just look at the final sales price.

2) Inflated contract price: All that said, when a property has been on the market for a long time, and it gets into contract at a higher level with a huge credit, it’s only human to wonder whether it’s really worth that amount. It sounds a bit suspect, right? In other words, would buyers really pay the contract price if the seller wasn’t giving a fat concession? This is a viable question, and the appraiser is going to record the full listing history of the subject property and scrutinize the terms of the contract in the appraisal report. This means the underwriter is going to see everything too. But still, the most weight needs to be given to the comps, so even if the contract price initially looks iffy based on the listing history alone, appraisers have to be careful to be objective about looking to the comps for value rather than the listing history alone. There is no ignoring the listing history though because it might be a clue about value. But then again, maybe there was a problem tenant who wouldn’t allow access, a lack of open houses, or some other reason why the property was on the market for longer than expected.

3) But the seller wants a higher price: A strategy I see sometimes today is to raise the price and give the buyer a credit back for the amount the price was raised. The idea is to help the seller net more and keep the buyer happy with a credit. Look, it’s fine if the market allows the seller to do this, but sometimes properties are countered beyond what is able to be supported by the appraiser. Remember, the appraiser is looking at all the details of the comps – not just the closed price. Sometimes I hear people say, “Bro, the property closed at $500,000, so it’s a good comp.” Okay, but if this unit also had a 3% credit for closing costs, the appraiser has to consider if that credit inflated the price too. My advice? Be aware of countering too high beyond what the comps suggest is reasonable, and remember the appraiser’s job is NOT to ratify the contract price.

THE MARKET IS HEATING UP FOR THE SPRING:

By the way, the market is beginning to heat up for the spring. I’ve been talking about expecting this. Even during a declining trend, we historically see more attention on the market in the spring season. I’m hearing of more showings, some competition, and phones are ringing. Granted, it’s still crickets for lots of listings, so it would be a big mistake to say today has early 2022 aggressive vibes. The tough part about January is buyers are hungry for fresh listings, but they are slow to come to the market. More on that soon.

Thanks for being here.

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

Questions: What sort of concessions are you seeing offered right now? Anything else to add? I’d love to hear your take.

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Bringing up the housing market during Thanksgiving dinner

November 21, 2022 By Ryan Lundquist 23 Comments

I don’t recommend talking about real estate during Thanksgiving dinner, but if you need some flavorful conversation, I’ve got you covered.

UPCOMING (PUBLIC) SPEAKING GIGS:
12/5/22 SAFE Credit Union market update on Zoom (register here (free))
1/18/23 WCR Market Update in Cameron Park (details TBD)
1/19/23 Big market update at SAR on Zoom (details TBD)
1/23/23 Residential RoundUP on Zoom (register here (free))
5/22/23 Yolo YPN (details TBD)

REAL ESTATE CONVERSATION STARTERS

Some spicy topics for the Thanksgiving table.

– Modern architecture: cool or ugly as sin?
– The Goonies house is for sale.
– Should we call it popcorn or cottage cheese ceiling texture?
– Inflation: How fun has this year been?
– Mortgage rates doubled.
– How long will interior barn doors be in style?
– Airbnb: Love it or hate it?
– Selling Sunset vs what it’s like to actually work in real estate.
– Why is the iBuyer model struggling since the market shifted?
– Elimination of single family zoning.
– Do “Gather” signs increase your home value?
– Declining home prices.
– Should I dance at Chippendales if I can’t make it in real estate?
– Who has incentive to buy, sell, and invest in today’s market?
– Why are sellers overpricing so much today?
– How to cultivate contentment no matter what the market is doing.

IF YOU’RE GOING TO MENTION RATES…

1) OLDER TO YOUNGER

“I bought my first house at 12%, so stop whining about 7%.” This is a great way to connect with the younger generation and bring encouragement about affording a house today (sarcasm).

2) FLEX YOUR LOW RATE

You’re basically a market genius and real estate prophet who clearly timed things perfectly, so brag about your 2% mortgage rate. Try to flex during dinner with something like: “Pass the cranberry sauce to the bro with a 2.25% rate.” This won’t be awkward at all. Haha.

3) BUYERS ARE WATCHING RATES & PRICES

Okay, let’s be serious. Prices have been going down in many markets across the country, and while property owners might worry about losing equity, buyers are actually excited for lower prices so they can eventually afford to buy. This reminds us that market trends aren’t the same for everyone.

Okay, this was just for fun. But to be real, I tend to think about potential things to say at the dinner table in advance so I don’t get sucked into polarizing political arguments where nobody wins. No matter what you talk about, I hope it’s connective and meaningful. And whatever is going on in life right now, may you have a deep sense of contentment and joy.

Happy Thanksgiving!!

THANK YOU

I appreciate all the conversations we’ve had this year. You’ve made me better, and I hope in a small way I’ve done the same for you. And I still haven’t forgotten when I was in the hospital two years ago and you carried me. It was humbling to be on the receiving end of a GoFundMe, but that enabled me to take a few months off to heal. I’ll never forget that.

Question: If you had to pick one of the topics, what would you bring up?

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Home prices are close to dipping below last year

October 10, 2022 By Ryan Lundquist 16 Comments

We are on the cusp of seeing year-over-year median price declines, so let’s talk about it. I wanted to share what looks to be on the horizon in the Sacramento area, and whether you’re local or not, I hope this is helpful.

UPCOMING (PUBLIC) SPEAKING GIGS:
10/11/22 Folsom MLS Meeting (9am)
10/13/22 Market update in Midtown (12-2pm Sign up here)
10/18/22 Orangevale MLS Meeting Q&A (9am)
10/20/22 How to Think Like an Appraiser (9am-12pm) (Sign up here)

THE SCOOP ON PRICES & DOOM

First off, I’m not a doom and gloom guy perpetuating fear for clicks. This is about objectivity and the stats – not being alarming. Okay, that aside, let’s dig into the details. The dotted line in the visuals below is a projection for the October median price based on the price of pending contracts in September. In short, the top line is the median price in 2022, and since May we’ve seen a sharp change which looks like it’s very close to touching or going below last year. It’s possible stats won’t dip below next month, but it looks strongly plausible for Sacramento County (the region will be really close). Keep in mind, this doesn’t mean every single month ahead will be below last year since price metrics can bounce up and down. Whatever the case, we’re close, and it won’t be shocking if finalized October stats are near my projected line. We’ll see.

A line graph to show the median price in the Sacramento region for the past few years. Today's prices are starting to touch last year.

Sacramento County median price line graph to show the median price this year is poised to go below last year

Placer County line graph to show median price trends and that the median price is very similar to last year

BUT BRO, THE MEDIAN HAS ISSUES: Okay, if you don’t care about technicalities about the median price, skip this section. Some might question the median price, and that’s healthy. The thought is we’re seeing smaller homes sell this year, which waters down the median price. But since May the average home size in the region is down 1.74% from last year and the median size is down 0.74%. In short, we’re not talking about a massive difference in size that accounts for the dramatic price difference today (home size does matter). However, all price ranges have seen a dip in volume, and if we start to see more of a dip at the top or bottom, that could certainly affect the median price. Lately volume has been hit the hardest at lower prices. Ultimately, I advise watching traditional metrics such as the median price, average sales price, and average price per sq ft, but also watch big data firms that put out price indexes that don’t have anything to do with the median. Absorb it all. On that note, I talked to Rick Palacios Jr of John Burns Real Estate Consulting and he tells me their Burns Home Value Index is down 7% from the spring through September in Sacramento. In contrast, the median price is down 8.9% from the spring during this same time period. So, there’s a difference, but not too far apart.

CHOOSING COMPS: Being close to last year doesn’t mean the best comps are automatically going to be from one year ago. Maybe. Maybe not. This is where it’s critical to study recent neighborhood sales as well as listings and pendings. The story won’t be exactly the same in every neighborhood, so be careful about imposing a “prices are lower than last year” narrative on every area.

MARKET TRUTHS:

1) CHANGE: Markets go up and down, and home prices are not sacred. In my office I have a sign that says, “The market is always moving.” It’s just true. And while Chuck Norris might eat 7% mortgage rates for breakfast, it’s not as easy for the rest of us mere mortals.

2) WE NEED AFFORDABILITY: As I said a few weeks ago, higher rates are changing the game, and we ought to believe the Fed when they say they want to reset the housing market. If rates went down dramatically, it would bring lots of buyers back, but prices would still be high, so low rates alone don’t solve the affordability issue. This is where price declines today seem necessary for the climate of rates at seven percent.

3) BUT INVENTORY IS LOW: Inventory is definitely still historically low, but a lack of affordability is the bigger force here. In other words, low housing supply isn’t the trump card to keeping prices up. I find sometimes people use a low inventory narrative to say prices cannot go down, but the stats are currently showing otherwise.

4) WE NEED TIME TO SEE THE TREND: There are many ideas about the future and the magnitude of possible declines, but only time will tell for sure. Remember, projections for “national” housing trends don’t mean much for local markets. So, when people say things like, “Dude, the national market will take a 10% hit,” that might not apply at all to Sacramento or wherever you are located. The truth is some areas will feel it more than others.

5) FIGURING IT OUT: The market will adapt and figure this out. If rates keep rising, we’re poised to see more buyers step aside. Bottom line. But this doesn’t mean all buyers and sellers will stop. For now, we are missing about 3,500 sales in the Sacramento region since May, but over 10,000 sales have happened within this time period. Sometimes people talk like literally everyone has stopped buying, but that’s fake news. I’m not trying to sugarcoat the housing trend. I’m just saying we need to obsess over actual stats and form our perception based on the numbers. And remember, it might not be a good time for you to buy or sell, but that doesn’t mean it’s that way for everyone. Look, buy or don’t buy, but be confident in your decision. No pressure from me.

SOME ADVICE:

1) BUYERS: Be patient for the right house and do not overpay. Try to get a better deal, get credits, ask for repairs, and see if you can get a price reduction. Be realistic though. Prices have been going down, but this is not January 2008 either. In recent months we’ve seen 26% fewer sales, which means you have more power. But it also means 74% of the market has still been happening. In short, don’t make any rash decisions, and get as much as the market will give you right now.

2) SELLERS: If you want to compete for the attention of buyers today, you have to put your best foot forward and accept that buyers aren’t desperate for you. Seriously, buyers are picky about getting into contract, and they’re going to walk if you play games. Buyers are really sensitive about price, location, and condition. You can only control the price and condition, so do all you can to compete. And use a mortgage calculator to plug in numbers to see what the monthly payment looks like on a house like yours. Once the shock wears off, let that be fuel for reasonable pricing. What is similar and getting into contract? Price according to those data points rather than your neighbor John who is smoking pricing crack (technical term for John being unrealistic).

3) REAL ESTATE FRIENDS: It looks like price metrics are going to dip below last year. If not next month, it’s likely to be soon unless something interrupts the trend. The truth is this can be really challening for some real estate professionals who are used to saying only ultra-positive things about the market. My advice? Build your business and narrative on the stats and lifestyle buyers instead of glowing news of prices being up. It’s not about the direction of prices, but instead about finding prospective clients who have incentive to buy and sell regardless of what prices are doing. This is true in an up market and it’s true in a down market. Bottom line.

Thanks for being here.

—–——– DEEP LOCAL MARKET UPDATE ———––

Scroll quickly or digest slowly.

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.

YEAR OVER YEAR STATS:

Here’s a look at stats compared to last year. And remember, closed sales in September really tell us what the market used to be like in August when the bulk of these properties got into contract.

MONTH TO MONTH:

Looking at sequential months is key too so we don’t just get stuck or hyper-focused on last year (the past).

OTHER VISUALS:

Here are lots of visuals. Probably more than you wanted. I have mostly Sacramento County and regional stuff this time around since most of my presentations have been in Sacramento lately.

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 stands out to you above? What are you seeing happen with prices right now? If you’re not local, are prices in your market close to year-over-year declines? I’d love to hear your take.

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

Chasing the ball down the road in real estate

September 14, 2022 By Ryan Lundquist 24 Comments

Sellers have been chasing the ball down the road. What I mean is prices have been going down lately, and sellers are trying to find the market through price reductions. I can’t speak for the entire country, but I’d like to talk about what’s happening locally. I’m not writing as a housing bull or bear either, but as a stats guy with the goal of objectivity. Anyway, some thoughts.

A meme to show a guerilla on a bike chasing a girl. The caption reads, "sellers chasing prices."

UPCOMING (PUBLIC) SPEAKING GIGS:
10/07/22 Market update with SAR (Sign up here – On Zoom)
10/13/22 Market update in Midtown (12-2pm Sign up here)
10/20/22 How to Think Like an Appraiser (Sign up here)

Expecting to pay less: Before getting to any stats, I wanted to mention that most people I talk to right now are aware that prices have been dipping. Well, besides some unrealistic sellers right now… Haha. Just yesterday I talked with two homeowners who spoke about prices softening as if it was common knowledge. Or someone called a few weeks ago wanting an appraisal very quickly for PMI removal to lock in a higher value before prices dipped. Have you seen offers from Opendoor in the mail lately? They are definitely lower. And let’s not forget actual market stats, which I’ll get to below.

Here is a visual from Len Kiefer to get at what I’m saying. There is an expectation of softer prices ahead. We’ll see what happens of course, but we want to pay attention to the psyche of buyers and sellers right now.

A visual from Len Kiefer to show price growth expectations subsiding

The median price is down 7% so far: The median price has gone down about 7% since May in the Sacramento region and Sacramento County. This is a much bigger change than usual for the time of year since the median price in August is usually down about 2% or so from the height of spring. This isn’t really a shocker though because we saw such a dramatic change with mortgage rates. In short, a sharp change in rates is causing a sharp change in the stats (including prices). But to be fair, this year is a bit awkward since prices crested one month early in May (usually prices peak in June). This means we have one extra month of declines to pad into the stats.

A line chart to show the median by the month from January to December in the Sacramento from 2016 onward.

Seasonal decline or new downward cycle: Is this only a seasonal decline, or is it something bigger? Look, the truth is we need time to see the trend and understand it. For now, we’ve clearly experienced a huge contraction where about 25% of buyers have stepped back from the market. Moreover, we’ve seen sharp price declines for the time of year, so at the least we are in the midst of heightened seasonal declines. Could it be more? Yes. But we need time to understand how the market is going to go. I realize this is frustrating for some people to hear, but let’s remember the future hasn’t happened yet. For now, we are living in the midst of change and uncertainty. Here is something I wrote six months ago to talk about price cycles in case it’s useful.

There is still competition: The market is completely different than it was earlier in the year, but there is still competition. In fact, 25% of sales sold above the original list price last month and 43% of sales in August had more than one offer. These stats are lower than normal actually, but I wanted to mention this because sometimes we hear about softening prices and think literally everything is tanking and selling at a severe discount. It’s a mistake to impose a doom narrative on the market. Remember, there are many stories in real estate, and the story isn’t the same for every seller, buyer, or escrow. In case it’s helpful, here is advice for buyers and sellers in today’s market.

Affordability: The market has taken a beating with affordability, so there are fewer buyers able to play the game right now. There is no such thing as rates doubling and prices remaining the same. The math just doesn’t work. Check out this Redfin visual to show mortgage payments being 37% higher than last year at the same time (or about $600 more PER MONTH).

A line graph to show the monthly mortgage payment

Here are some affordability images I put together for local counties. In Sacramento County, 27% of households can afford a median-priced home. These images are based on CAR stats.

Appraisers saying “stable” or “declining” in reports: Appraisal forms ask appraisers to select a box to describe what prices are doing. Are they declining, stable, or increasing? I suspect these days we’ll have a mixture of some appraisers saying “declining” and others selecting “stable.” Honestly, at this moment in time I care way more about whether market change is accounted for when looking at the comps than I do about a box. In other words, I can see some appraisers checking “stable” since we are living in the midst of change and not certain yet about whether this is an inflamed seasonal trend or the start of a downward trend. However, I have a massive problem if appraisers right now are not adjusting comps down since we’ve seen clear price declines over the past few months. Again, I’m not talking about every market, so save your hate mail. But many markets across the country have seen more inflamed seasonal declines, which means some older sales need a negative adjustment since value is lower right now.

Commentary from an appraisal: Here is a bit of commentary in one of my recent appraisal reports. This is only part of what I say because I’m a man who needs a few paragraphs. One box just isn’t enough.

“At the least we ought to describe the market as showing a downward seasonal shift, though it’s possible we can call this a downward cycle if the trend persists over time. For now, it is most reasonable to categorize the market as having growing uncertainty and blatantly inflamed downward seasonal price declines compared to a normal seasonal trend. At the least, properties are clearly selling for less than they did several months ago. The regional median price has ticked down about 7% since May, which is $45,000. This doesn’t mean every property is worth $45,000 less, but it’s been clear buyers have been resisting paying higher prices.”

One last note about home size: Keep in mind some of the price change lately has to do with smaller homes selling. I know the visual below is chaotic, but check out the dark blue line, which represents the average monthly square footage. Normally the size of homes peaks during May or June, and then we see smaller homes sell for the rest of the year. Can you see how when the dark line goes down, the lighter blue lines also go down (average sales price)? This is a good reminder that price change is also about what is being sold. And for the record, I’m not saying the median price is down by 7% due to size. I’m just saying some of the change lately has to do with smaller homes rather than only the market.

A bar chart to show the average sales price in the Sacramento region. There is also a line that shows the average home size each month. The line basically shows there is a rhythm to the market in that larger homes sell in the spring and smaller homes sell for the remainer of the year.

Okay, one last thing about size: During the beginning of the pandemic there was a blatant spike in home size due to a greater focus on larger homes at higher prices. This spike basically peaked one year ago as size has started to normalize. Now let’s keep watching to see what happens to size. Will we see smaller homes more often as first-time buyers flood the market? Will we see fewer sales at the highest prices? To be determined.

Closing thoughts: The market is always moving, and we are in the midst of change right now. Let’s keep watching the trend and being objective about the stats. It’s really easy today to get sucked into sensational narratives, so my advice is to stay grounded in the stats. And for my real estate friends, keep finding the players of the market. Who has incentive to buy, sell, and invest in today’s market? The key is to identify those people and support their goals.

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 are you seeing happen with prices?

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

housing market in Sacramento

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