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Why your home isn’t worth 16% more today

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Home prices have been massive lately, but there is an asterisk. It’s easy to look at glowing stats and say, “Dude, prices are up 16%, so my house is worth 16% more.” But lofty county or regional price stats don’t always show up the same in a neighborhood. Let’s talk about this.

TWO REASONS WHY PRICES ARE SO HIGH ON PAPER:

1) The top & bottom: There have been more sales at the top of the market and fewer sales at the bottom. In fact, when comparing the past four months this year with last year, we’ve seen 20% fewer sales under $400,000 and 75% more sales above $750,000. Here is a brand new visual to show the change in various price ranges. If you’re not in Sacramento, is this happening in your area too?

The effect: Having a big change in volume at the lowest prices and a hefty change at the top has simply boosted price metrics. Thus on paper price stats are really high compared to last year, but when pulling comps in a neighborhood we don’t always see anywhere close to this sort of explosive growth. 

Here’s another way to look at the same data:

2) Larger homes: I’ve mentioned this before and I’m not trying to beat the dead horse, but during the pandemic buyers have been purchasing noticeably larger homes over the past four months. Do you see the spike? In short, having larger homes has boosted price stats, so when talking about growth it’s good to remember that part of the reason for higher prices is due to larger homes selling more often. 

The takeaway: There is no mistaking the market has increased in value quite a bit this year. I’m not saying it hasn’t. I’m just saying if we’re not careful it’s easy to get infatuated with lofty regional price stats which can sometimes blur our vision for a neighborhood market. My advice? Know why the numbers are the way they are and focus on comps instead of county or zip code stats. Moreover, don’t expect the market to be the same temperature with every location, price range, or property type.

I hope that was interesting or helpful.

Questions: Have you seen some neighborhoods where prices have risen greatly and others where growth is more subdued? Did I miss anything? Any stories to share?

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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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Three ways the pandemic has affected buyers

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How has the pandemic affected buyers? Today I want to share a few fascinating shifts concerning home size, pools, and migration. If you’re local, have you been seeing this? If you’re not local, what’s happening in your area?

1) BUYERS WANT LARGER HOMES

If you’ve been cooped up for months it makes sense that you’re going to want a larger home, and that’s exactly what the stats show in the Sacramento region. Do you see that spike in home size on the right side of the graph over the past three months? For the first time ever the average monthly home size was over 2,000 square feet in the Sacramento region too (two months in a row).

The Takeaway: Be in tune with shifting buyer expectations so you price it right since larger homes may be more marketable right now.

2) POOLS ARE MORE POPULAR

Lots of buyers want a home with a pool. After all, if you’re going to quarantine somewhere you might as well have the ultimate backyard. Home sales with built-in pools are up 4.2% this year in the Sacramento region so far. This is something we could have guessed, but it’s good to see what the stats actually say rather than going with what we feel might be true.

The Takeaway: Homes with pools are in high demand. They are more marketable and they may be more valuable too.

3) FLOCKING TO PLACER & EL DORADO COUNTY

This is where it gets interesting, so bear with me. Noticeably larger homes have shown up in sales stats from June to August this year, but a big part of that comes down to buyers focusing more heavily on Placer County & El Dorado County. In fact, over the past three months compared to last year Placer County sales volume is up 16.8% and El Dorado County volume is up 31.5%. Why does this matter? If you didn’t know, monthly sales in these two counties are routinely 400+ square feet larger in size than Sacramento County (mostly due to having newer homes through the years that were built larger). This data does NOT include brand new homes currently being sold from builders – only MLS sales. Anyway, when we consider why the home size in the region has jumped so much lately, a huge reason looks to be buyers flocking to these two counties in search of more space.

The Takeaway: When we consider large price gains lately it’s important to recognize some of the hefty gains are because larger homes have been sold.

I put some of this post in a video in case that’s easier to digest. Enjoy.

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

Questions: In what ways have you seen buyers and sellers change because of the pandemic? I’d love to hear your take.

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5 things to remember when using price per sq ft in real estate

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Using price per sq ft can be very dangerous. I know that sounds odd because price per sq ft is about as common as anything in real estate. Home owners ask, “How much is the price per sq ft in the neighborhood?”, and real estate agents might say, “I priced this property based on the price per sq ft in the area.” But having a correct understanding about the way price per sq ft works can revolutionize the way we see the market and value properties. Let’s unpack five principles below, and I’d love to hear your take in the comments.

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5 principles to remember when using price per sq ft in real estate:

1) There is a price per sq ft spectrum in a neighborhood: There is never just one price per sq ft figure that applies to every property in a neighborhood. For instance, a neighborhood might easily see a price per sq ft range from $100 to $250 when looking at all sales.

2) Similar houses tend to have a similar price per sq ft: When homes are similar in size, location, bed/bath count, etc…, they tend to have a similar price per sq ft. That’s obvious, but the contrasting factor is that non-similar homes might have a VERY different price per sq ft that shouldn’t be used to value your home.

3) Property characteristics can quickly change the price per sq ft: When there are differences in condition, location, lot size, quality of upgrades, bed/bath count, size, etc… the price per sq ft can change dramatically. We might see a small remodeled home selling at $250 per sq ft, a model match fixer selling at $175 per sq ft, a short sale model selling at $185 per sq ft, and a home with an adverse location selling at $215 per sq ft. Thus even for one model there could be a price per sq ft range from $175 to $250.

4) Smaller homes tend to have a higher price per sq ft: It costs more to build smaller homes, so smaller homes tend to have a higher price per sq ft than larger homes. This is why it’s dangerous to use a price per sq ft figure from a smaller sale to value a larger home. A smaller home might sell at $250 per sq ft, but a larger home might be closer $150 per sq ft. Here is a quick video below (or here):

5) Price per sq ft provides a valuable context: When you can talk through price per sq ft figures in a neighborhood, and explain the above points, you are an incredible resource. Appraisers, pay close attention to the price per sq ft range in a neighborhood. Some appraisers treat price per sq ft as a meaningless metric, but it’s actually valuable. If your value does not fall within the range (especially the competitive price per sq ft range), it’s important to be able to explain that.

CONCLUSION: Be careful about using price per sq ft to price a property because sometimes it’s like putting the cart before the horse. I recommend starting a valuation with an “apples to apples” approach where you first and foremost try to find other similar sales and listings in the neighborhood, and then subtract and add value based on any differences with your property. After you have a grasp of similar sales, research price per sq ft figures for the entire neighborhood as well as competitive properties. Ask yourself if your value makes sense in light of price per sq ft figures.

Questions: Any thoughts or insight? I’d love to hear your take.

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