The housing market for new homes is rebounding, but that’s definitely not how I’d describe the rest of the market. Today I have some thoughts about new construction, avocado toast, and positioning yourself for the market that is happening. Skim or digest slowly.
UPCOMING (PUBLIC) SPEAKING GIGS:
6/30/23 Halftime report with Ben Johnston 10am (Zoom)
7/20/23 SAR Market Update (in-person & livestream)
7/26/23 Fair Mortgage (details TBD)
8/18/23 Details TBD
10/23 SAR Think Like an Appraiser (TBD)
NOTE: This meme quotes a Blink 182 song. They’re playing in Sacramento on Friday (and I’m going to the show). Sorry if you don’t get it.
BUYING HOMES INSTEAD OF AVOCADO TOAST
Here’s the most stunning stat I’ve read this week. 51% of Millennials own a home according to First American. Do you remember when everyone was saying Millennials didn’t want to buy homes because they were more focused on avocado toast? Well, it turns out not all narratives are real. And for the record, avocado toast is brilliant (and I’m Gen X).
A BUILDER REBOUND IS HAPPENING
2023 has been a strong year of new home construction in the Sacramento region. The last half of 2022 was brutal for new homes, but it’s been a rebound so far this year. This year volume is up 37.8% from the pre-pandemic average (2016 to 2019), and volume is basically competing with 2021 and 2022 when we had low rates and extra migration. But today, growth isn’t seeming to come from a flock of eager Bay Area residents, but instead builder concessions are the tractor beam sucking in buyers. And it doesn’t hurt to have 40% fewer listings in the resale market to help buyer focus on new homes.
NOT THE SAME TREND FOR EXISTING HOMES
Now let’s look at existing homes (not brand-new homes). This year from January to May, volume has been down 34% from the pre-pandemic average (2016 to 2019). This is a sharp contrast from the growing trend we’re seeing with new homes. This is a good reminder that the housing market isn’t the same for every type of property (or price range and location). By the way, do you like these new visuals? I used North State BIA data.
DON’T WAIT FOR THE PHONE TO RING
For my real estate friends, in a market that is still struggling with lower volume in the resale market, it’s important to ask questions. Who is buying? Who is selling? How can you be a part of the transactions that are happening? What do you need to do differently today? What portions of the market are growing or contracting? What do you need to do to position yourself for earning business today? Who are the gatekeepers for business in 2023? You’ve got this. You can do it. Don’t wait for the phone to ring. Run to the market. And be okay with hearing NO more than YES.
PAYING ATTENTION TO THE NATIONAL TREND
For a national perspective, I highly recommend following Rick Palacios Jr of John Burns Real Estate Consulting and Ali Wolf of Zonda. Both are really smart and they focus heavily on new construction. I appreciate a focus on surveys too since their results often speak to the trend before we see it in published stats. By the way, here is builder market share nationally. Which builders are you most familiar with in your area?
APPRAISERS CAN’T TURN A BLIND EYE TO CONCESSIONS
In all the glowing news about new construction volume, let’s not forget to consider concessions as we value properties. Here’s the key. Did concessions affect the price of the comps we are using to establish value? In other words, if the comps have a 4.99% rate buydown and a credit for $20,000, did buyers pay an inflated price beyond what they would’ve had paid if there were no concessions? That’s a viable question, and it’s why we want to compare homes with and without concessions to understand if concessions had any effect on the price. I know, people say stuff like, “Bro, it sold for X amount, and that’s all that matters.” That’s not true though. Imagine a brand-new home sold from the builder, and the new owner listed it on the same day it closed without ever living there. Would the new owner be able to sell it for the same amount as the builder? That’s the big question. If the new owner can’t provide a rate buydown and credit back, could the same price be achieved? This isn’t the perfect example, but can you imagine a lender being interested in what a home might sell for without extra stimulus? That’s the issue here. Wouldn’t it be risky for a lender to lend on properties with inflated prices? In short, if a home only sold for a higher amount because of concessions, that smells like an important value consideration. Here’s more about why appraisers ask about concessions.
EXPECT A LARGER SHARE OF THE MARKET
New homes are becoming a larger share of transactions for the national market, and that’s definitely what’s happening locally too. For the time being we are seeing about 40% of local sellers sitting out of the resale market, so until we see a change with that, we can expect for new construction to be in a strong position for growth. Yet, the resale market is still massive compared to new construction, so we have to keep this in mind as we talk about trends. And there’s no way builders can build fast enough to make up for all the missing listings.
I hope this was helpful.
Questions: What are you seeing with new construction right now? And do you like Blink 182?