picky buyers

An open letter to homebuyers

January 29, 2020 By Ryan Lundquist 44 Comments

Dear Buyers,

Can we chat? I’ve been having SO many conversations about buying in today’s market, so I wanted to stir some thoughts and maybe offer some perspective. I hope this will be helpful.

Things to keep in mind about buying a home right now:

Starter home vs dream home: We all want that pristine HGTV flip, but we can’t expect a dream home on a starter budget. In other words, a first home might not have the best upgrades or condition and it probably won’t be found in the best neighborhood either.

Be realistic: Sellers are prone to overprice and that’s their glaring real estate “sin” so to speak, but for buyers I’d say being unrealistic about what you can buy is a big issue. The dream is to pick up a $150,000 brand new modern home in Midtown, but that’s nowhere close to reality. At times it can be sobering to see what you can honestly afford, but if you’re serious about buying it’s best to get up to speed with that. You don’t want to be like Jim Carrey in Dumb & Dumber saying, “So you’re telling me there’s a chance?” No, there’s not a chance to buy that house with your budget.

It’s okay to be picky and patient: Buyers get flack today for being patient. My sense is buyers are picky about getting into contract at the right price and staying in contract. That’s okay and I think you’re wise for being discerning rather than making a flippant decision (like many of us made in 2005). So take your time rather than being hasty. Just be sure you’re realistic that the home you want actually exists in your price range.

Waiting for the market to crash: Quite a few people say they are waiting for the market to crash. The idea is to hold out until prices are low and then swoop in for something cheap. But if a market implodes you might not be able to buy. The temptation is to talk about a crash as if it’s isolated without any effect on income, jobs, consumer confidence, credit scores, etc… But a crash in prices could mean other parts of the economy and life are plummeting too.

The last implosion: There is real concern about buying at the top of the market and I understand why buyers are hesitant. Just remember the implosion that happened last time isn’t the new formula for every future market change. On one hand it’s normal to see prices go up and down, so we can expect to see prices decline at some point because that’s what markets do. But the severe collapse during the last decade isn’t the new template for the future either.

Timing a market perfectly is hard: It sounds easy to time a market perfectly and buy at exactly the right time, but it’s not so easy to pull off in real life. In my experience most people buy because of lifestyle and being able to afford the mortgage payment rather than being technical about where we’re at in a price cycle. I don’t say this to gloss over a growing lack of affordability or frothy prices in some markets, but only to share a real issue. Your lifestyle is likely to be the trump card here. Where do you want to live? What school district do you want for your kids? Or if the market did decline, where do you want to ride it down? (my friend Mike Gobbi asks this honest question). Realize there is no right time for everyone either. I say it’s best to weigh your goals and lifestyle with current market trends. Does buying make sense for your lifestyle and wallet? If the market did go down, would you still be comfortable with the monthly mortgage payment? Those are reasonable and honest questions.

Bring a strong offer: If you are playing the market, bring a strong offer rather than lowballing. I just saw a Realtor on Facebook talking about a client who wanted to offer at 50% of the list price. Yeah, don’t do that. We all know sellers are smoking pricing crack and they need to come down from their “high” expectations, but at the same time sellers are in tune enough to sniff out offers that have no chance.

Fear of missing out & pressure: I recently spoke with a young man who just graduated college and wants to get into real estate. He asked me for advice since he was worried about missing out on the market if he didn’t buy right now. I told him: “Do what you want and be sure you can afford the mortgage. If you can though, get aggressive first about paying down student debt so you have more freedom for future real estate opportunities.” I mention this because there is often pressure to buy RIGHT NOW when in fact timing might not be right for every individual. For this recent grad, I’ll respect whatever decision he makes, but he won’t lack opportunities in the future if he doesn’t buy now.

Pulling the trigger: At some point you have to decide if buying is right for you. I’ve watched friends obsess over prices for years and become paralyzed in making a decision because they’re so worried about the future. Look, either do it or don’t. That’s entirely up to you and there’s no pressure from me. But my hope is for you to come to a place where you have confidence and peace about your decision rather than being anxious for years without any progress.

Talk to a loan officer: Some people can afford the market but they don’t realize it because they haven’t explored options with a professional. This is why the first step is talking to a reputable loan officer. Find out about different financing options and special programs that might be available. Remember, we don’t live in a world where everyone has to bring 20% to the table either.

Prophets: Everyone has ideas about the future, but nobody really knows what will happen. I’m not saying to ignore trends or red flags, but only to be humble about predicting. Also, realize many who make predictions simply move their prophecies to the next year when they don’t come true.

Other: What am I missing? Please speak up in the comments.

That’s my two cents. I hope it was helpful.

Questions: Buyers, any stories to share? Is there any helpful advice here? What are you most concerned about? What am I missing? Anything to add?

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

Real estate trends to watch in 2020

January 7, 2020 By Ryan Lundquist 27 Comments

What’s the real estate market going to do in 2020? Let’s talk about some of the bigger emerging trends. Scroll quickly or digest slowly. Anything to add?

Class I’m teaching on Jan 16th: I’m doing a big market update at SAR from 9-10:30am. We’ll talk through where the market is at, tips for talking to clients, and ideas for where to focus business. I’d love to see you there. Sign up here.

TRENDS TO WATCH IN 2020:

Affordability: Buyers are struggling to afford higher prices. Despite positive economic news lately the truth is home price growth has outpaced wage growth and rents have also risen substantially. This means many buyers and renters are having a difficult time with higher prices.

Blue is the color of the year: This year the Pantone color of the year is Classic Blue. Does this mean we’ll see more blue? Maybe. Maybe not. In recent years we’ve already been seeing blue in kitchens especially. No matter what, when looking through home magazines there are many vibrant colors instead of just gray and white.

Sliding sales volume: A byproduct of shrinking affordability is a smaller pool of buyers able to handle higher home prices. This is something to watch and even more important than prices in my opinion. Often we fixate on what prices are doing, but the number of sales happening is the best indicator of the temperature of the market. Are buyers putting their foot on the gas or brakes? Show me the number of sales and I’ll let you know.

Addicted to low rates: We’ve had eight years of historically low rates and we’re now feeling the effects. Prices have risen dramatically, people are staying in their homes longer, and the market feels hyper-sensitive to rate changes. Thus what happens with mortgage rates this year will play a huge role in how the market feels and unfolds. Check out this mortgage rate table from Len Kiefer below (or here). Can you see why 2018 felt so dull? I know it seems crazy that buyers would freak over rates just above 4.5%, but that’s where we’re at (and climbing rates lessens affordability).

Ending single family zoning: There’s a movement to do away with single family zoning in order to help create more housing. In 2019 we saw Minneapolis do this by allowing up to three units to be built on a single family lot, and this is definitely something to watch in many markets across the country. By the way, if you own land, could it become more valuable if zoning changed?

Tech company invasion: It almost feels like there’s a tech bubble because so many companies are trying to get a piece of the real estate pie. On one hand some start-ups are going to fail because their algorithms are designed for labs rather than a relationship-centric real estate market. On the other hand some tech companies are poised to gain market share this year. In Sacramento Opendoor looks to have sold about 1% of transactions last year and they currently own 90 homes. I’m guessing Zillow is aiming for 1-2% of market share this year. Will they be successful? I’ll let you know next year… In all of this it’s good to remember the traditional model represents the vast bulk of the housing market despite the massive attention these companies are getting. Yet we can’t ignore this trend because it’s bound to spur the traditional model to become more efficient.

Overpricing will still be an issue: Price growth has clearly slowed, but sellers still think it’s super hot. This is a glaring issue because sellers tend to think they’re going to get ten offers at any price they choose from very desperate buyers longing for their home. It’s like sellers have shown up at the end of a movie and they have no idea what the movie is about (but they think they do). My advice? Price for the dynamics of the current market rather than a hot market from yesteryear.

Buyers grow even pickier: In 2019 there was a greater sense of hesitancy about the market. Lots of buyers felt leery. Am I buying at the top? Am I going to get stuck if the market changes? What does the future hold? These questions aren’t easy to answer of course until the future actually happens (sorry, but it’s true). The reality is uncertainty is bound to cause buyers to become even more discerning about condition, location, paying the right price and waiting for the right house.

Staying put instead of moving: We have a market of homebodies where nobody is moving. Okay, that’s an overstatement. It was reported recently that homeowners are staying put an average of thirteen years compared to just eight years a decade ago. There’s simply less incentive to sell in light of low mortgage rates and higher prices. Why move if you’re sitting pretty? This of course is one reason why we’re not seeing as many listings.

Checking out of California: Despite some residents staying put, this year there will be lots of Californians moving to all the usual places like Texas, Nevada, Arizona, Oregon, Idaho, etc… For the real estate community, I highly suggest you consider who has incentive to move this year. Remember, a California pension goes a long way in a lower-priced state. Check out a deep piece by CalMatters and you can dig around the U.S. Census Bureau site all day to try to find some data that might be insightful for your business. On a related note, let’s keep an eye on areas plagued with rising fire insurance too as that can unfortunately force migration.

More 1031 Exchanges: We’ll likely see more 1031 Exchanges this year as investors move their money. In my experience there are more in an up market than a down market, and we’re still going up, so be ready. I’ve seen quite a few Bay Area investors park their money in Sacramento, and I’ve seen some Sacramento investors move their money to lower-priced areas. That’s the dream, right? Cash out when prices are higher and buy something better elsewhere.

Consolidation in real estate: Having lower sales volume can be painful for both mortgage companies and real estate offices. Thus we’re likely to see some banks continue to lay people off, mortgage companies will join forces, and some real estate brands and brokerages will need to get creative about staying afloat and trimming the fat with less purchases flowing.

Election year hype: “It’s an election year, so it’s going to be a strong year.” That’s the sentiment we often hear in the real estate community, but an election year isn’t the silver bullet to alter the bigger trend the market is already experiencing. I have a deep blog post coming soon about this.

Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.

The narrative of Boomers & Millennials: Be on the lookout for Boomers who need to downsize and Millennials trying to get into the market. We’re bound to see lots of generational conversation this year as Boomers age and Millennials “come to age” so to speak to get into the market. One looming issue that’s been getting more press lately is there is an enormous Boomer population whereas GenX was a smaller generation. Thus at some point it makes us wonder who is going to buy the homes of aging Boomers in years to come. This is something to watch more thoroughly over the next decade. And to make a safe prediction, we’re definitely going to keep seeing “Okay, Boomer” references in articles.

Well, that’s what’s on my mind. I could go on and on, especially about things like fire insurance woes, PG&E, Prop 13 reform, rent control, cannabis laws, etc… But at some point I have to stop.

By the way, click to see 2019 market recap images for a few local counties.

I hope this was helpful or interesting.

Questions: What else do you think will be important in 2020? Did I miss something? I’d love to hear your take.

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

Real estate trends to watch in 2019

January 3, 2019 By Ryan Lundquist 20 Comments

What’s the real estate market going to do in 2019? Let’s talk about some of the bigger emerging trends in Sacramento and beyond. You can quickly scroll or spend a few minutes digesting things. Anything to add?

TRENDS TO WATCH IN 2019:

Affordability: We’ve had seven years of price increases without dramatic wage growth, so it’s no surprise one of the most pressing issues today is affordability. This is true for buying and renting.

Buyers gain power: It’s been a sellers’ market for years, but buyers have been gaining more power as price growth has slowed. Unless we see something happen to reverse the slowing, I expect buyers will continue to gain more power this year. If sales volume persists to slump, then it will turn into a full-fledged buyers’ market.

Uncertainty about future: For the past two quarters we’ve watched sales volume slough in many markets throughout the country. Was this simply a dull year or is it something more? Buyers seemed to take their foot off the gas pedal. Will they step back on? That’s the big question, and we’ll have to watch closely over the next two to three months to know how the market is going to unfold.

This is a poll I ran on Twitter yesterday. I know it’s only one random sampling, but it reminds me of an uncertain vibe I’ve noticed. When I ask people what they think the market is going to do I get quite a few, “I’m really not sure” answers. It seems like many people are floating the idea the market could be flat or experience something very modest – whether up or down.

Mortgage companies merge: In 2018 we saw some mortgage companies merge as a way to hold on in this market, and I expect we’ll see more of that in coming time. The reality is certain companies are struggling because the refinance market died off and sales volume was weaker last year.

Color: The word on the street is we’ll keep seeing color complimenting gray. For reference, the Pantone color of the year is Living Coral. I’m not saying this orange-ish shade is going to be splashed everywhere, but maybe we’ll see it at some point. In 2016 the color of the year was a shade of blue, and we’ve certainly noticed blue in kitchens. I suppose the color of the year could be like the cerulean belt scene in The Devil Wears Prada where we mock the color until years down the road we realize we’re actually wearing it… Not that I wear cerulean belts.

Looking for an exit: Some homeowners are concerned about a “bubble” and they sense the top is near, so they’ll be looking to exit “before it’s too late.” This doesn’t represent everyone, but some have been waiting for the right time to list and they’re feeling more ready. I expect this will be more pronounced for those in a place to downsize or move out of state. The struggle for others is it’s expensive to sell and buy again in the same market, so it becomes easier to stay put. For locals, I’d watch for Bay Area migration to Sacramento as the dream is to exit a higher-priced market and purchase in a lower-priced area. And Texas, we are the “Bay Area” buyers to you.

Overpricing: Sellers struggled with overpricing in 2018 and I expect they’ll continue to struggle – though hopefully not as much. It’s normal to see sellers want to price higher, but the problem lately has been sellers pricing for a more aggressive market from the past instead of today’s slower market. And of course sellers have been aiming for “unicorn” buyers instead of real buyers.

Laws for Cannabis: Recreational cannabis is now legal in 10 states and medicinal use is legal in more than 20 additional states. Whether you like it or not, this is a trend, and we’re bound to see more states jump on board as cannabis is normalized. I don’t say this as an advocate, but as an observer paying attention to potential impacts to the real estate market. Locally I’m expecting at some point to see other cities besides Sacramento change their zoning code to allow commercial cannabis cultivation. Think about it this way too. With so much talk of a coming recession, it’s hard to imagine city councils are not considering this move to secure future tax revenue.

Emergence of concessions: Sellers have been in the driver’s seat for years, so they haven’t been in the habit of giving credits to buyers or offering concessions, but this year could be different as buyers presumably gain more power. Sellers are going to have to get used to the idea that they won’t have multiple offers on every deal and they might have to offer credits, make repairs, etc… to get escrows closed.

Smart homes: As Wi-Fi doorbells, security cameras, smart thermostats, and voice-activated light bulbs become common, we’re only going to see more “smart” features in homes.

Energy efficient construction: Green is all the rage and we’re seeing laws change to usher in more energy-efficient technology. For instance, in 2020 in California solar panels are going to be required on roofs for new construction.

Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.

Pickier buyers: Buyers are patient about finding the right house, they’re more informed than ever about price trends, and they have higher expectations about condition and location. In a market where buyers seem poised to gain power, it only makes sense to see them grow more finicky as they have a greater selection of homes to choose from.

Crowded for real estate pros: We’ve seen explosive growth in the number of real estate professionals. This makes for a crowded and competitive market – especially in light of slumping volume. I’d expect 2019 to begin to weed some people out of the market if there isn’t enough pie to feed everyone.

Getting rid of appraisers: Over the past couple years we’ve seen an increase in appraisal waivers and there is currently a move to not require appraisals under a certain threshold. There is a clear agenda to start using “evaluations” instead of traditional appraisals. This is a big deal and removing one of the systems of checks and balances (the appraisal) as the market slows might not be the best idea ever… Read more here.

Creative financing: Last but not least, underwriting has been strict for years, but lenders are feeling the sting of the refinance market drying and sluggish sales volume. Do you think there might be more pressure to loosen lending standards to help fuel more business? Right now lenders hold tremendous power and what they do in coming time can shape the next few years. If they help buyers artificially afford higher prices through creative financing, that can only inspire price growth or stall the slowing trend. Sounds healthy, right?

I hope that was helpful or interesting.

Questions: What else do you think will be important in 2019? Did I miss something? I’d love to hear your take.

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

6 ways buyers have changed since the housing bubble

September 25, 2018 By Ryan Lundquist 16 Comments

There’s lots of focus on how home prices have changed since the previous “bubble”, but let’s talk about how buyers have changed. Here’s some observations. What else have you noticed?

1) More picky: During the previous housing “bubble” buyers seemed so desperate to purchase that they pulled the trigger on about anything, but they’re much more discerning these days. Of course let’s remember underwriting has changed dramatically though too. In the past many properties flew through the loan process without hardly any scrutiny, but lenders today are incredibly strict, which has certainly propelled a more picky feeling in the market.

2) More patient: Despite a housing shortage buyers aren’t willing to pull the trigger on junk. They’re simply more patient for the right house and they want to make an informed purchase (and even feel like they’re getting a good deal where possible too).

3) More informed: Just as the “bubble” began to pop we had companies like Zillow and Redfin coming to the forefront. Well, now they are household names and buyers are basically obsessed. Seriously, buyers scour these sites day and night, and they know about every single new listing, price reduction, and sale. This doesn’t mean buyers don’t make value mistakes still, but it does mean they are more informed than EVER about prices. At the same time, guess who is not looking at Zillow as much? Sellers. This is a huge issue because it means sellers are not as in tune with the market these days, which means they’re prone to overprice.

4) Financial mistakes: Buyers remember the pain of financial turmoil in the past, so they’re sensitive to repeating mistakes. For instance, I talked with a buyer considering purchasing the highest-priced listing in a neighborhood, but he’s concerned we’re at the top of the market. This buyer asked, “If a buy right now and the market turns, would it be possible I’d have to hold on to the house for 10 years before values come back?”

5) Higher expectations about condition: These days buyers have higher expectations about homes being in good condition. In other words they are much more picky about properties that are not in “move-in” shape or upgraded. Wait, there aren’t granite counters? What the? There could be many reasons for this, but I think heightened investor flipping activity played a huge role. In a fairly short period of time investors had a gluttonous real estate feast by purchasing an avalanche of bank-owned homes, rehabbing them, and selling them. This helped quickly upgrade the housing stock, and also widen the price gap in some areas. What I mean is values used to be very tight together as you can see in the graph below, but now the price spectrum is simply wider since buyers are willing to pay more for rehabbed homes in today’s market. I’m not saying this dynamic is in every neighborhood, but I definitely see it in quite a few areas.

6) Less cash-out refinances: Everyone and their Mom had a boat before the “bubble” burst because people were using their house like an ATM to buy toys. Well, today we don’t have that dynamic (image from Leonard Kiefer). Home owners are clearly cashing out less, which makes them sound financially wise, but let’s realize lending guidelines have changed to make it more difficult to ATM your house. Moreover, many owners are sitting on 3% interest rates, so why the heck would they trade pulling out cash for a much higher rate?

NOTE: I updated this post with “more informed” above after Peter left a stellar comment (thanks). This is such a big point. I can’t believe I didn’t mention it while writing this, but it didn’t come to mind at the moment. The irony is I’ve been talking about this in other posts and in person so much lately. Ha. Well, it’s fixed now.

I hope that was interesting or helpful.

MARKET UPDATE VIDEO: A few days back I did a screencast to talk through trends. Lots of people are wondering if the market is tanking or softening, so I wanted to pitch in two cents. Well, the video is actually 20 minutes (there’s lots to say). Anyway, give it a view if you’d like here (or below).

SPEAKING GIGS: If you’re around, I’m doing a blogging class on October 11th at SAR. I’ll be speaking at the AI’s 2018 Fall Conference in San Francisco on October 19th and AppraiserFest in San Antonio on Nov 1-3.

Questions: What else do you think has changed about buyers since the “bubble” burst? Any stories to share? I’d love to hear your take.

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

picky buyers

Share:

Share:

Share:

Share: