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housing shortage

Six things to remember about crazy home price growth

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Price growth has been unreal lately in many parts of the country, but here are some things to keep in mind before pricing for the moon…

Six things to keep in mind:

1) County stats don’t translate perfectly: It’s easy to look at county or zip code stats and think, “Dude, my home is worth 14% more now because the median price is up by 14%.” But the market isn’t that rigid where price growth for a larger area applies equally to every parcel.

2) Picking and choosing: If we’re not careful we can pick and choose stats that benefit us the most. For instance, someone in Placer County this month could be tempted to focus on the region at 14% instead of Placer data at 6.4%. My advice? Look at all the stats instead of fixating on glowing numbers.

3) Larger homes are padding the stats: During these past few months we’ve seen buyers focus on noticeably larger homes, so it’s important to take this into consideration when interpreting huge price growth. At the least larger homes represent some of the heightened price growth lately.

4) Not every property type has the same trend: The truth is not every type of property is going to be showing the same price growth. Thus price trends could be different for vacant land, entry-level homes, the million dollar market, attached homes, 55+ communities, 2-4 units, commercial units, etc…

5) Hot Pockets: The real estate market is like a Hot Pocket taken out of the microwave a tad too early. Some portions are blazing hot while others are only warm or frozen. Like a Hot Pocket, we can say the real estate market is “hot” overall, but it’s definitely not the same temperature in every neighborhood or price range. For instance, the City of Davis seems to have very subdued price growth over the past couple of years, but East Sacramento has been a far different story with large increases. My advice? Price according to similar homes that are getting into contract rather than projecting zip code or county stats on a property.

6) It’s NOT all about prices: The question I get asked the most is, “What are prices doing?” I get it, but if we want to understand a real estate market it’s important to look to other metrics too like inventory, sales volume, days on market, SP/OLP ratio, etc.. Besides, sales are like historical artifacts that tell us what the market used to be like 30 to 60 days ago when these homes got into contract. If anything sales tell us more about the past than the present. If we want to understand the market right now it’s critical to see what’s happening with the listings and pendings (which will be future sales in about 30 to 60 days).

I hope that was helpful or interesting.

NEW VIDEO TUTORIAL: I made a graph last week to show the seasonal market and lots of people responded saying they’d like a tutorial. Here it is.

Thanks so much for reading my post today.

Any thoughts?

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

MARKET SUMMARY: For anyone interested, here are some tidbits for social media, newsletters, or in case you want to win the real estate category on Jeopardy.

– We have 20 days of housing supply in the region

– There were 41% more multiple offers this September compared to last year

– Monthly inventory is lower than it’s been in 15+ years

– There are 53% fewer listings in the region right now (not a typo)

– Sac, Placer, Yolo, and El Dorado counties all have less than one month of housing supply. Each respective county is lower than it’s been in 15+ years.

– We saw the highest number of sales for September in Sacramento County in 11 years (since 2009).

– The million dollar market has grown this year in the region. 3.3% of homes have been above one million in 2020 compared to 2.5% last year.

– It took 9 fewer days to sell this September in the region compared to last year at the same time.

– Demand has increased dramatically lately from local buyers as well as Bay Area buyers. This is part of why we’ve seen heightened pending contracts, higher prices, lower inventory, more multiple offers…

– Normally the market at this time of year would be cooling more substantially by now, but the spring buying season has been sort of extended. Yet before saying it’s simply buyers making up for the sluggish pandemic market in the spring, let’s not ignore the power of low mortgage rates. It’s no coincidence we’re seeing a hyper-competitive market over the past 90 days as mortgage rates have gone below 3%.

– In the background it looks like sales volume and pending contracts are starting to flatten. I talked about this last week. Normally during the fall season we see a dip in all metrics. That really hasn’t been the case so far, but seeing volume flatten could lead to other metrics dipping at some point.

– So far this fall season reminds me of 2012 where the market was incredibly aggressive. Prices kept going up that fall, yet there was a hint of a normal seasonal trend too as there was a dip in sales volume. We’ll see what this fall holds. For now it’s anything but cold.

WAY TOO MANY VISUALS:

You are welcome to use these in newsletters and social media with proper attribution. Scroll quickly or digest slowly.

SACRAMENTO COUNTY:

EL DORADO COUNTY:

PLACER COUNTY:

SACRAMENTO REGION:

I hope that was interesting or helpful. Thanks for being here.

Questions: What are you seeing out there right now? Anything else to add about prices?

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Why is housing inventory so low?

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Housing supply is insanely low right now. It’s getting ridiculous. Why is it so low? Let’s make a list. Please add your take in the comments.

SOME REASONS WHY HOUSING SUPPLY IS LOW

1) Not listing during the pandemic: Sellers aren’t listing as often during the pandemic. This has been common in many markets across the country, and in Sacramento in particular where monthly inventory is down about 50% right now compared to last year.

2) More demand: Mortgage rates below 3% have caused buyers to jump off the fence and basically gut the market. Thus increased demand has depleted listing inventory (which was already low).

3) Lack of new construction: We’ve had population growth in the midst of anemic new construction since the housing bubble burst. In other words, we haven’t built enough units and we’re really beginning to feel the sting of it. Check out this visual from FRED to show housing starts today compared with 2005.

4) Shift in demographics: People are staying in their homes longer and therefore not selling as often. Last year Redfin published research stating owners are staying in their homes an average of thirteen years instead of eight years, which means there aren’t as many homes being listed for sale.

5) Increased migration: Some markets are seeing more buyers from outside the area flocking to the neighborhood. Lots of Californians of course are leaving the state and heading to Idaho, Nevada, Texas, and all the usual suspects, but who is coming to the market? There isn’t one definitive easy source to track migration unfortunately, but Bay Area buyers have seemed to have an increased focus on the region. In fact, LinkedIn recently published stats showing a 7.6% increase in net arrivals in Sacramento. 

6) Nowhere to go: Some owners would list but they feel there’s nowhere to go because homes are too expensive or inventory is too thin. 

7) Shift in home size: We’ve been building larger homes for decades now, which could eliminate the need for some folks to buy something else because they are satisfied and able to stay put. During the pandemic of course we’ve seen buyers target larger homes.

8) Other: Blackstone and investment funds purchase thousands of homes that have not resold on the open market. I wouldn’t say this is the reason inventory is thin, but it’s worth mentioning. We’ve also had wildfires in portions of California where homes have not been rebuilt.

9) Not a distressed market: We used to have more listings because of all the distressed sales, but we just don’t have that sort of market any longer. Bank-owned sales (REO) represent about 1% of all sales in Sacramento County as well as the region, and short sales are even rarer.

10) What else? Did I miss something? Please comment below.

I hope that was interesting or helpful. Thanks for being here.

Questions: What point stands out to you the most? Why is inventory so low right now? I’d love to hear your take.

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Moving money, duplexes, & unicorns.

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Moving money, duplexes, and unicorns. This sounds like a seriously boring blog post, but this is fascinating stuff and I hope you walk away with insight and maybe some ideas for where to focus business if you work in real estate. If you’re not local, are these trends happening in your market? I challenge you to find out.

Increasing 1031 Exchange Sales: Here’s an image to show all 1031 Exchange sales in the Sacramento region over the past two decades. In short, a 1031 Exchange is a way an investor basically swaps one property for another to minimize the tax burden. Often investors from outside a market will move money into a lower-priced market too, but that’s not always the case. Anyway, here are all 1031 Exchange sales on one graph. I know, there are way too many dots here. But do you see two main clusters? There were more sales in the last rising market cycle and there are more in today’s market.

I spoke with a 1031 Exchange guy and he echoed this is exactly the trend he is seeing out there. When a market is rising, investors tend to move money. I will say the stats here are not perfect because these are only sales where agents have input a 1031 happening. However, I believe most importantly we still have an accurate trend to see about the frequency of 1031s happening. For what it’s worth, about 85% of these exchanges were single family homes, so clearly investors wanting to park money in Sacramento aren’t just looking to the 2-4 unit market.

Brand new duplexes: This might not seem like a big deal, but here are four recent duplex builds in Sacramento. This hardly seems like a trend or worth mentioning, but being that there are literally about a dozen new duplex sales over the past ten years, it’s a big deal to see four right now. The good news for today is it’s possible in some situations to build a duplex and make the numbers work. We have a severe housing shortage in California too, so seeing more multi-unit properties is definitely something we desperately need.

Unicorn advice: If you are going to build a duplex, keep your costs down somehow and do something modern as it seems like units with a modern / contemporary feel are the ones selling at the top. Also, sometimes we see out-of-town investors pay more for two-unit properties. That’s a very real dynamic. Know that unicorn buyers are out there and when I see 2-4 unit properties sell for too much it’s often a Bay Area buyer (or 1031 Exchange). But be careful about pricing too high because that’s a quick way to get zero offers (seriously). My advice? Price for the market instead of the unicorn.

REGIONAL DUPLEX SALES: Here’s a quick look at two-unit (duplex) sales over the past two decades in the Sacramento region. I committed graph sin by not explaining “region” on the image (it’s Sacramento, Placer, Yolo, El Dorado county). What do you see?

A DIFFERENT TREND: When looking at Midtown and Downtown there is clearly a different trend. The rest of the two-unit market hasn’t quite seemed to eclipse where prices were in 2005, but that’s absolutely not the case in Midtown. It just goes to show the market isn’t showing the same trend everywhere. 

Anyway, I hope that was helpful. Thanks for being here.

Questions: What stands out to you about the images above? What have you noticed about the duplex market? Anything to add?

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The problem of overpricing in real estate

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Overpricing is a problem. You’d think in such a “hot” market that it wouldn’t be an issue, but it is. I’m not trying to dog sellers, but let’s talk about some of the most common pricing mistakes right now. I hope this helps.

1) Getting married to the list price: Sometimes it’s like sellers get married to a lofty list price and become unwilling to budge – even when buyers are refusing to pay that much. It’s as if sellers get paralyzed and cannot move beyond a clearly unrealistic price. My advice? Listen to the market and budge on price as needed.

2) I need this amount to move: I’ve encountered a few sellers recently who priced based on how much money they needed to move. But the market doesn’t care about personal finances or plans. The market only cares about paying a reasonable price for the property.

3) Headlines: At times sellers hear sensational headlines like, “Values are increasing more rapidly than ever,” so they price according to a headline rather than similar sales in the neighborhood market.

4) Out of touch with picky buyers: Buyers these days tend to be more picky than ever about what they purchase, but I’m not sure sellers are really in tune with how finicky buyers are about price, location, and condition. You’d think buyers would be so desperate to get into contract and pay anything because of a housing shortage, but they’re actually quite patient in many cases because they want to wait for the right property and feel like they’re paying a fair price. My advice? Price for real buyers in the neighborhood market rather than that one mythical “unicorn” buyer who is going to pay more for some reason.

5) Sales instead of comps: The most common pricing mistake I see is pricing according to a sale down the street that really isn’t comparable. So a seller says, “I know that house is totally remodeled with a pool, but someone’s going to pay the same amount for my house.” My advice? Price according to similar homes that are actually getting into contract rather than dissimilar properties. Be careful about hijacking price per sq ft figures too.

6) The fallacy of summer: We hear that summer is the hottest real estate season, but the spring season is actually the hottest in many markets throughout the country. By the time summer rolls around the market is actually beginning to cool because it’s been hot for almost two quarters already. During summer listing volume is just about to peak for the year, and that means it starts to take longer to sell, prices often begin to soften for the season, and buyers gain more power to negotiate. My advice? Be realistic about prices today.

7) Zillow: I can’t tell you how often I’ve heard, “But Zillow says my house is worth X amount.” I know, Zillow says stuff like, “We’re only a starting point and a ballpark figure.” Yet in my experience sellers rely heavily on the Zestimate and very often treat it like a definitive ending point rather than a ballpark. Remember, Zillow doesn’t know anything about condition, upgrades, smell, etc… Sometimes Zillow nails the value, but other times it’s off by a substantial amount – even in a tract neighborhood. My advice? Take “The Big Z” with a grain of salt.

8) Other: What else are you seeing out there?

I hope this was interesting or helpful. In light of the market beginning to cool for the season, I thought scratching out these thoughts might be helpful and even save sellers some money (and heartache).

Questions: Which mistake do you see most often? Any stories or insight to share? I’d love to hear your take.

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