housing market

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.

Home prices are insane (so is the rental market)

May 12, 2021 By Ryan Lundquist 17 Comments

Prices growth has been insane lately and that’s pretty much how the rental market feels too. Let’s talk about this and a few other things. Enjoy.

NOTE: Scroll down for the big market update

Three Things:

1) THE ASTERISK IN THE ROOM:

Home price stats are truly crazy right now across the country. It’s mind-blowing to see prices up 15-20% from one year ago, but there’s also an asterisk. Last year stats were starting to sag during the beginning of the pandemic due to buyers backing off the market. So when we compare today’s ultra hot numbers with last year’s lackluster figures it’s important to account for these sagging stats when talking about the market. I know, that sounds super anal, but it’s important.

2) THE RENTAL MARKET IS NUTS:

In the real estate space we often get so lost in talking about home prices that we simply don’t talk enough about rents. Here are a few things on my mind:

A) Lots of rentals: In California about 45% of homes are not owner occupied. That’s nearly one out of every two homes (duh, thanks bro). This is good to remember as we often focus on buyers and sellers while ignoring the other half of the population. And in case you wondered, the most recently published homeownership rate in the United States is 65.6% as of Q4 2020.

B) Hefty rent growth: Rents have seen a dramatic increase lately in many markets across the country and that’s something to watch. My advice? If you work in real estate, talk to local property managers and find some big data companies to follow. In the Sacramento region, for instance, Yardi Matrix reports 8% rent growth from one year ago.

(props to Steven Thomas for the idea on the nuts image)

C) Feeling the rental shortage big-time: The rental market is extremely tight as we are feeling over a decade of not enough new construction in the midst of population growth. Thus when trying to rent we are seeing multiple rental offers on almost every listing and some would-be tenants are even trying to get creative by offering incentives to the landlord such as a year’s worth of rent at one time. Of course some sellers are wondering, “Where am I going to find a place to buy or even rent?” Also, every time I log on Facebook I see another real estate agent post saying, “I have a client who needs a rental in (insert city) up to (insert dollar amount).” Ultimately we often focus so heavily on having a shortage of properties for buyers to buy, but the rental market is suffering from a lack of available units too.

3) WHEN POLITICIANS SHARE HOUSING DATA:

Okay, I have an important non-partisan take involving a viral real estate example. Here goes. This week two mayoral candidates in New York were asked if they knew what the median price was in Brooklyn, and they said $100,000, which was $800,000 too low. Look, one guy said he misunderstood the question and there’s grace for being imperfect if that’s what happened. But here’s the bottom line regardless of political affiliation. If you’re running for office you’re going to look out-of-touch if you’re off by that much. And then you’re going to get dragged online by people who definitely know the cost of housing.

My unsolicited advice? If you’re trying to get elected, you need to be in touch with home and rent prices enough to understand what constituents are dealing with right now. Or if you’re just trying to win a debate, at least be prepared to answer this question with stats from this century. Look, most citizens don’t expect candidates to be real estate experts, but there is an expectation of having enough understanding to shape policy in the midst of a glaring housing shortage. That’s the big issue. If you don’t even know the numbers, how can we expect you to create policy to deal with the issues? By the way, if you don’t know where to look for data, find a local Realtor association in your county or state – or scour online for professionals and data firms who know their stuff.

NOTE: I almost never mention politics, but this is such a vivid example to show the importance of accurate housing data. Moreover, we’re in a severe housing shortage and our politicians need to up their game, so I’m good with speaking up in a non-partisan way. Please no red or blue comments.

Anything to add?

———————- (skim or digest slowly) ———————–

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’ve seen rapid appreciation in recent months. See comments below on slowing down though….

LONGER VERSION (SORT OF):

The good news is I finally had my second vaccine shot, but the bad news is I lost two days of work this week because I felt awful (yeah, it was Moderna). In short, my market update is going to be a little on the brief side today in terms of having fewer images. Please check my social channels in coming weeks for stats. I can’t wait to share more on Facebook, Twitter, and LinkedIn. Oh, and sometimes Instagram.

SUBTLE SLOWING? Price stats have been on fire lately and they’re poised to continue being hot, though I’m starting to hear things like, “I’m getting 8 offers instead of 12” or “My buyers are having a slightly easier time getting into contract.” This makes sense as we have a few hundred extra listings on any given day now compared to a few months ago (we still don’t have enough listings).

In short, the market typically starts showing seasonal slowing around this time of year, so let’s watch for typical signs of slowing in the midst of a market that still feels like an auction. Look, I’m not saying the housing trend is slow or dull, so please save your hate mail. All I’m saying is in the midst of glowing stats let’s keep our antennas up and look for a change in the stats or sentiment among buyers.

What are you seeing out there?

NOTE: I included 90 days of sales for El Dorado County and Yolo County because both areas have few monthly sales. In short, if you use only one month of data stats are going to bounce ALL over the place and not be meaningful. These are both brand new visuals though. I’m thinking about doing them every month if I get enough positive feedback.

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 rental market? What about the resale market? What would you say to those politicians? I’d love to hear your take.

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

How much are buyers paying above the asking price?

May 5, 2021 By Ryan Lundquist 22 Comments

“Buyers are crazy!!! How can they be paying these prices?” That’s what we tend to hear from people who are NOT trying to buy a house right now. It seems like onlookers really don’t understand what it takes to get an offer accepted these days. But for anyone actually in the game, the truth is blatant. If you want the house you’re probably going to have to pay above the list price.

Fresh stats: Today I have some brand new stats. I’ve never broken out numbers like this before and I’m excited to share. Even if you’re not local I hope this gives perspective or ideas for how to visualize your market.

Quick thoughts: On average properties sold four percent above their original list price last month in the Sacramento region. Or in other words, buyers on average paid $23,787 more than the original list price. Keep in mind these stats represent the average and there are many properties that went above and below this amount. There are also quite a few homes that sold at the original list price. In short, this doesn’t mean literally every buyer paid $23,787 above asking. Also, there are few sales below $300K, so take that stat with a grain of salt.

Four reasons why prices have risen so quickly:

1) Supply & demand: Prices have been increasing rapidly due to supply and demand being so lopsided. It’s no secret we have a shortage of listings and excessive demand. This has created a market that feels like chaos where the median price in April in the Sacramento region is up 11% since January. Of course rates below 3% have also played a role in supercharging the market.

2) Appraisal gap: Buyers are paying above the appraised value or bridging the “appraisal gap” so to speak (the difference between the appraised value and the contract price). In some cases appraisal waivers are also helping properties close at higher levels.

3) Priced too low: Let’s be real. Some listings are being priced way too low and this causes properties to get bid up. I’m not minimizing how aggressive the market is. I’m just saying there are cases where listings are painfully low.

4) More at the top: We’ve been seeing more sales at higher prices in the local market as well as across the country. Therefore when looking at lofty price stats we have to realize some of the massive growth has to do with what is selling rather than pure price appreciation.

I hope this was helpful. Thanks for being here.

Questions: What stands out to you about the stats or points? If you are a buyer, what are you experiencing out there? What did I miss?

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How long can this market keep going?

February 24, 2021 By Ryan Lundquist 16 Comments

Is the market about to crash? How long can this keep up? What’s going to happen? Every week I’m getting questions like this, so let’s talk through some of the issues. This post has lots of topics that are coming up, so just skim to something that looks interesting. Anything to add?

The truth is nobody knows the future: Most predictions these days either say the market is going to keep increasing for 5-10 years or we’re poised to crash. But nobody knows the future. I know that’s not a popular answer, but it’s true.

Unsustainable: This market is really starting to feel irrational. We are seeing freakish price growth and illogical offers, which is why this does not feel sustainable. I’m not saying the market is going to crash because of this, but I am saying this type of rapid appreciation cannot keep up without simultaneous economic growth or some other stimulus. Last week I got asked about this in a live interview with Fox 40. Enjoy the discussion (see 4:41 for my answer).

It’s not easy to time the market perfectly (seriously): On paper it’s easy to time a real estate market, but it’s not so easy to pull off in the real world because finances and lifestyle don’t always line up perfectly with market conditions. In other words, most people buy when their lifestyle requires a change rather than finding a so-called perfect moment where prices bottom out. In fact, most of the time when I ask people if they bought on purpose in 2012 at the bottom they say, “Nope, I just got lucky.” This is not to pressure anyone to buy right now. I’m just saying it’s a good idea to get rid of “the market is so easy to time” myth and consider your lifestyle as well as prices.

False prophets: Be careful of some who are forecasting the market because they’ve been making false predictions for years and they keep repackaging their prophecies when the old ones don’t come true. By the way, here is a prophet test flow chart to find out if you’re a real estate prophet.

We’re back to peak prices, so we’re going to crash: I gave a presentation recently where I talked about nominal prices being back to 2005 levels in a certain area and someone interpreted that to mean we’re at the top and about to crash. Look, the median price in the entire Sacramento region is now almost 20% higher than it was at the previous top in 2005, so it would’ve popped long ago if there was something magical about getting back to that level. In short, don’t put your stock in “getting back to the top” as a predictor of future trends. And for economic nerds, I’m talking about the nominal price here (which market participants tend to fixate on), so please don’t open up the inflation conversation.

Not the new template: What happened during the last housing correction is not the new template for every future market change, so we cannot look to the previous crash and derive some sort of bubble formula.

I’m going to sell at the top and rent: I had a conversation recently with someone wanting to sell soon and rent until the market crashes. I get it because this person wants to pocket equity and avoid pain, but here’s a practical consideration. If the market did decline it could take years to do so. For instance, it took about 6.5 years for the last cycle to fully decline in Sacramento. Of course the bulk of the decline happened in the first three years. No matter what though, the viable question becomes how long are you going to rent for?

Fear of missing out: There is a palpable fear among some buyers about missing out on the market and not being able to afford in the future. If you’re in that boat I recommend having lots of conversations with people you trust and maybe don’t buy if you cannot make a decision based in confidence. In my experience buying anything based on fear doesn’t usually work out so well.

The market was slowing and now it’s not: The market was slowing down for years and now it’s doing something completely different (unexpected). The thing is despite being in a global pandemic we’ve had artificially low inventory in light of COVID (less sellers listing their homes), more migration due to the ability to work from home, and shifts in what people want and need as a result of the pandemic. Oh, and mortgage rates dipped below 3% which has created truly excessive demand. It’s been the perfect storm to build what is likely the most competitive market we’ve seen.

Do you see how price growth was slowing until last year?

This upward price trek is happening in many places around the country. Here is a killer visual from Freddie Mac economist Len Kiefer:

A foreclosure wave is coming: There is talk about a coming wave of foreclosures in light of elevated forbearance rates. Here’s the thing. We don’t know for certain how forbearance is going to shake out because we’re still in the thick of this pandemic. Yet forbearance rates have been declining per the Mortgage Bankers Association and not everyone in forbearance is going to sell either (the stats literally show this). Moreover, the vast bulk of people in forbearance have equity to deploy (sell, refinance, etc…) instead of lose their home. I’m not sugar-coating anything and I’ll be the first to say there is uncertainty on the horizon in light of this. I do expect for some of these people to legitimately go into foreclosure, but at this present moment the stats don’t support a narrative of a massive wave of foreclosures materializing. We’ll see what happens of course, but this is what the stats are currently seeming to show.

Riding down the market: If the market did crash, which neighborhood do you want to ride down the market in? This is a relevant question that I heard first from Mike Gobbi. Remember, the equity in our homes means very little unless we are taking money out or selling.

Freakishly high price growth: We’ve had uncharacteristic price growth over the past year. The median price far outpaced where it should have theoretically gone. From my estimation it’s about $40,000 or 9% higher than it should theoretically be had we had a normal year last year (see visual). This could of course be the new normal, but no matter what I think we need to recognize the market is doing something right now that goes against a slowing trend we were experiencing in previous years as well as normal price growth.

The double-edged sword of appraisal waivers: We’ve seen so many more appraisal waivers this year. I get the necessity in light of appraisers being so backed up with a refinance boom and huge volume in the resale market, but what happens to prices over time with so many waivers? If some of these homes are essentially closing too high, does that help inflate the market? Of course let’s remember one sale doesn’t make or break a market, but if we start seeing lots of inflated sales that could certainly help speed up price appreciation. This is something to watch.

Market price cycles & the 7-year rule: Some people buy into the idea that the market changes every seven years, but that’s really not true because here we are in our tenth year of price growth (in Sacramento at least). But there is something to be said about real estate price cycles. Markets go up and they go down. That’s what they do. Bottom line. So at some point the most natural thing we can expect is for prices to go down. You know what wouldn’t be normal? If prices just kept rising forever…

Rates going up can help (eventually): The other day a Realtor friend said he thinks rates need to go up. You know we have a problem when real estate professionals start saying rates are too low. Just remember it’s possible we could see more buyers rush the market if they sense rates really are going to go up. The idea is to get in before they rise.

Look for price resistance: One of the things to watch is whether buyers are resisting prices. So far that is not happening. This doesn’t mean everyone can afford the market, but this month we’re likely to have our eighth month in a row of higher sales volume and pendings have been off the charts. In short, buyers are clearly pulling the trigger right now and we are not seeing resistance when it comes to playing the market.

Dude, this is so obviously a bubble: I get the sentiment. But remember, one of the ways we know something is a bubble is if it actually pops. Freddie Mac had a great article referencing this point years ago.

But inventory is low: There is the notion that inventory is low, so prices cannot decline. That’s a reasonable idea, but it’s only true until it’s not true. If 2020 taught us anything it’s that sometimes dynamics shift, so let’s be open to the idea of the market not having to behave a certain way despite low inventory. With that said, there is such a profound imbalance between supply and demand right now, so prices are clearly poised to rise in the immediate future. Nobody knows how long this run will go, but we would be wise to recognize inventory is about both the active listings on the market as well as demand for those listings. I find conversations about low supply can be lopsided at times if we only discuss what is on the market rather than factors that create demand. Remember, when demand changes, it can also affect supply.

Keep your credibility intact (for real estate professionals): To my real estate friends, I recommend knowing the stats more than ever and being able to articulate what the market is doing by highlighting numbers instead of being swayed by every new sensational idea. I imagine many real estate professionals (including appraisers) will lose credibility in a market like this by being swayed by clickbait, posting predictions that don’t come true, or promising a future that is not known. Remember, sometimes the best answer is “I don’t know” when people ask you to predict the future – while having intelligent discussion about all the moving parts. My advice? Keep your credibility intact by being rooted in data.

I DIDN’T ANSWER MY QUESTION: You may have noticed I didn’t answer the question in my title. But hopefully after reading my post you can understand why.

I hope that was interesting or helpful.

Questions: What did I miss? What is coming up in conversations right now for you? 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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