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Seven things to watch in real estate during a pandemic

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What’s the market doing? What can we watch right now to get a better sense of housing trends during the pandemic? Here are seven things I’m keeping my eyeballs on these days. Anything to add?

SEVEN THINGS I’M WATCHING DURING THE PANDEMIC

1) Listings: We often think about listings increasing as a way to see the market changing, but right now many markets across the country are seeing fewer new listings. So at times change is best seen with less of something rather than more. It’s not a surprise to see fewer new properties during a pandemic, right?

2) Pendings: When the number of pending contracts declines it’s likely a sign that buyers have begun to back off the market. Like many areas across the country, pendings are down 40% right now in the Sacramento region. There are simply fewer buyers willing to engage with the current market. Also, one of the things we want to watch is the gap between all listings and current pendings. If this gap widens it will soften prices and give buyers more power.

3) Sales volume: When fewer sales start to happen, it’s a sign the market has changed for some reason. This image below shows we are at the beginning stages of seeing sales volume dip due to the pandemic. In other words, the second week of April clearly saw FAR fewer sales compared to last year at the same time. From here on out it’s likely we’re going to see bigger changes in sales volume since many homes beginning to close got into contract over the past month during the pandemic.

4) Canceled / Hold: A market isn’t just about what is listed, but what used to be listed. There have been over 1,000 listings taken off the market in the Sacramento region over the past four weeks. The removal of these listings has helped the market feel much more balanced than had these listings still been active. Key questions: How many of these listings will come back? When will they hit the market? Will there be enough pent-up demand to meet the supply?

5) Word on the street: What are buyers, sellers, and real estate professionals saying? The stories of today become the stats of tomorrow, so paying attention to what people are saying is huge.

6) Other metrics: There isn’t one end-all metric to tell us everything we need to know about the market, so it’s important to pay attention to lots of little things such as days on market, changes in financing, the average list price, the sales to original list price ratio, price reductions, the number of multiple offers, changes in various price ranges, concessions offered by sellers, etc… Let’s remember the market isn’t going to be the same for every property type or in every price range or neighborhood.

7) Prices: In real estate we are so obsessed with prices, but that’s really the last place to look to see the market. What I mean is change happens first in the areas above before showing up in sales stats a couple months down the road. In short, for now the slower pandemic trend hasn’t infiltrated sales price figures as of yet in Sacramento. This doesn’t mean the market is stable in every price range and location. All I’m saying is regional and county stats don’t show price declines right now. Normally I pull monthly price data, but I’ve switched to weekly in order to see the trend sooner rather than later.

I hope that was helpful. And yeah, that was long. But hopefully it was worth digesting whether you’re local or not.

Okay, moving on.
 

A FEW RESOURCES:

New market video: Here is a fresh market update video. This is 30 minutes and perfect for the background while quarantining. Check it out below or here.

Q&A video: Here is a video I did recently with Doug Reynolds to talk about the market and appraisal stuff. I have many of these lined up and I’m glad to share them in the future. As a side note, I’m not an advocate for any brokerage and I’ll never take sides. I’ll do interviews with just about anyone as long as there is mutual respect and I have time to do so. I’ll share videos here only if the end-product is worth sharing.

Zoom with Grounded: I mentioned a Zoom meeting last week hosted by Grounded and some of you were able to join live (thank you). I have about four to five Zoom sessions per week these days, though most aren’t public. I look forward to doing these with many brokerages. Watch below or here.

BIG MARKET UPDATE (ON HOLD): I normally write a huge market update around this time of the month, but my entire life and social media feed has been one big market update lately. So I’m putting my typical format on pause so I can spend time on more pressing visuals.

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

Questions: What are you watching in today’s market? Did I miss anything?

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Explaining how price per sq ft doesn’t work (with a Lamborghini)

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If there’s one conversation to master in real estate, it’s explaining how price per sq ft works. Or rather how it doesn’t work. In the past I’ve used Starbucks cups and even toilet paper to explain things, but today let’s use price per pound. What do you think? Let me know.

Seller: I used price per sq ft to price my property.

Me: That’s great. Did you pick the right number?

Seller: What do you mean?

Me: Imagine your neighbor just bought a Toyota Camry for $24,000. If we do some quick math, she paid $7 per pound based on the weight of the car.

Seller: Okay.

Me: Now imagine a different neighbor wants to buy a Lamborghini. It’s been his dream since middle school, but it’s way out of his budget. Well, not any longer though since he just learned the price per pound for a vehicle is $7. He can now afford the Lambo. Pretty cool, right?

Seller: It doesn’t work that way. 

Me: Exactly. Why not?

Seller: You can’t use the price per pound from a Camry to price a Lambo. Those are two completely different cars.

Me: Well said. And in the same way we can’t borrow a price per sq ft from a dissimilar property down the street and arbitrarily use it to price your house. That’s a bit like using Camry stats to price a Lambo.

———————————————————————————

UPDATED on 2/08/2018 (“Picking the right number”): Someone read this post and thought I was saying price per sq ft is a good metric to use. That’s definitely not what I’m saying. To be fair I think I can see why this person thought that because I mentioned “picking the right number” in the conversation above. I’m not suggesting there is a right number to choose, and that example question is really only a device to help move conversation forward (rather than something to be taken literally). The big point here is choosing a random price per sq ft to price a property is a really bad idea. I suggest actually paying attention to similar sales more than anything. Does that make sense? I hope so.

This car example isn’t intended to tackle all aspects of price per sq ft. It’s simply a way to start conversation. Read more on price per sq ft here.

Mastering this conversation: I highly recommend for real estate professionals to master this conversation. If you don’t like the car example, that’s fine. My sense is it’s critical though to have a few examples at hand to quickly explain how price per sq ft works (and doesn’t work). Why? Because when sellers overprice it’s often because they’re hung up price per sq ft.

I hope this was interesting or helpful.

Questions: Does this work? Why do some sellers and real estate professionals get hung up on price per sq ft? Did I miss something?

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3 ways price per sq ft is valuable in real estate (even for appraisers)

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My name is Ryan and I use price per sq ft in real estate. There it is. My confession. Are you surprised? I know you’ve heard me talk about how price per sq ft is one of the most abused metrics out there. I still believe that. Yet there are several ways price per sq ft is actually valuable and useful for real estate professionals (even appraisers). So let’s kick around some ideas together below. I’d love to hear your take in the comments. Any thoughts?

price per sq ft value in real estate - image purchased and used with permission by sacramento appraisal blog

1) Price Per Sq Ft Helps Us See the Entire Market: What have buyers been willing to pay in a neighborhood? It’s valuable to see the price per sq ft spectrum to help answer this question. What is the high, the low, and the average? I ran a CMA of sales over the past 90 days in the Mather neighborhood in Sacramento County (a tract subdivision), and the price per sq ft range is $112 to $206.

Mather all sales past 90 days - sacramento appraisal blog

2) Price Per Sq Ft Helps Us See The Competitive Market: Imagine we’re valuing a home that is 1569 sq ft. The question becomes, where does the 1569 model fall on the price per sq ft spectrum that we see above? After running a CMA for model match sales, the price per sq ft range is $184 to $193. That’s a much more narrow range compared to the overall neighborhood, right? Ideally it would be nice to have many more sales, but that doesn’t always happen as we know. This is why sometimes it might be best to look at more than just 90 days of sales and obviously expand the square footage range to maybe 1400 to 1800 or so. Whatever you do, just make sure you have enough data to produce meaningful results.

1569 model in mather - price per sq ft - sacramento appraisal blog

3) Price Per Sq Ft Helps us Talk to Clients About the Market: Some clients are so stuck on price per sq ft that they struggle to think about real estate in any other terms. Here’s how it usually goes. A home owner sees a figure of $206 from a different sale in the neighborhood, fixates on that number, and then expects a value for his own property based on that number (even though no similar sales have commanded a price per sq ft close to $206). After talking through Points 1 & 2, hopefully the client can understand that hijacking a random price per sq ft from the neighborhood isn’t a good valuation methodology. Lastly, it’s critical to actually completely set aside price per sq ft and ask two questions: What have similar properties actually sold for? (sales price) & What are similar listings actually getting into contract for?

price per sq ft in real estate - image purchased and used with permission by sacramento appraisal blog

Application:

  1. Real Estate Agents: Be sure to study the price per sq ft spectrum for the entire neighborhood AND competitive properties in the neighborhood. But make sure you spend a good amount of time finding similar sales and listings. Sometimes agents say to appraisers, “I used a price per sq ft of $215 to price the property”. Okay, but where did you get $215 from? Why not $208, $214, or $225? Remember, appraisers like myself can find value in using price per sq ft to see the context of the market, but at the end of the day we are fishing for comparable sales to tell us what the market has been willing to pay for something similar. So when you communicate with appraisers, I recommend talking about actual sales you used to price the property rather than price per sq ft figures. This helps you speak the language appraisers use, and your initial research with price per sq ft vs. actual sales might even help convince sellers to not get hung up on a list price that is far too high (based on a hijacked price per sq ft).
  2. Appraisers: Sometimes appraisers mock price per sq ft and treat it like a meaningless metric, but there is actually some real value in using it. Not only can we get a more detailed sense of the market, but we can also communicate well with clients. Consider paying close attention to competitive price per sq ft figures (I know, this may not work in rural markets). If you are coming in lower or higher than the competitive range in the neighborhood, just be sure you know why and can explain why. Also, consider using price per sq ft figures in your final reconciliation. For instance, along with statements about comps, I regularly find myself saying things like: “The final value is also supported by trend graphs as well as competitive price per sq ft figures in the neighborhood.”

I hope this was helpful.

reaa-north-bayClass I’m Teaching Next Week: By the way, I’m teaching a class next week in the North Bay to a group of appraisers. It’s called How to Tell the Story of Value in Appraisal Reports (good for 2 hours CE). Come on by if it’s relevant.

Questions: How do you use price per sq ft in real estate? Anything else you’d add to the points above? Did I miss something? I’d love to hear your take.

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How will you know when the market starts to decline?

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Property values are definitely increasing right now in the Sacramento area, but at some point in the future they’ll cool off or decline. Whenever that happens, what should we be looking for to capture the decline when it first starts? What will be the indicators of a slow down or declining trend? I asked a handful of experienced Realtors and investors in the Sacramento area, and here is what they said. Any thoughts?

Sarah Bixby - RealtorSarah Bixby – Realtor: There are 3 fairly clear indicators to show the market is in decline. Firstly, the buyer competition becomes less fierce. Instead of competing against 8-10 offers, you may only have 1 or 2 to compete with. Another sign of decline is longer DOM. If houses start sitting on the market longer this is another indicator that buyers are not purchasing or there is too much inventory available. The 3rd and most obvious indicator of a downward market is decreasing home values.

Jeff Grenz - Real Estate BrokerJeff Grenz – Broker: For my business, I look to “hits” and “phone traffic” as leading indicators. For building homes, the phone stopped ringing around 2007 for quite a while. You don’t recognize the Wile E. Coyote moment – that the business model has changed – until a few months have passed, then trends might show up in employment growth, which drives our long-term real estate market. Signs of an impending multi-year decline in the Sacramento region where government is our main industry would be some combination of two or more of these: • Major CA budget fiascos, creating layoffs, program cuts into the schools and local programs, etc. • Declines and/or slow downs in the Bay Area market, whose excess equity feeds ours. • Military action, prolonged on multiple fronts. • Hard cut offs or reversals of programs that send $$ to our market (FED quantitative easing, HARP, FHA..etc.). In most cases, these indicators will predict or precede employment, housing sales and the stats we’ll get 12-18 months later.

Eric-Peterson-Praxis-CapitalEric Peterson – Praxis Capital: I think when you’re trying to take the temperature of the market it’s as much art as it is science. We track a lot of data on a weekly basis at Praxis, and to me the best indication of a declining market is inventory. When you start to see that number grow you know you’ve got a market with more people selling than buying and that is inevitably going to affect pricing in an adverse way. That’s the science side. As far as the art of understanding market trends, I pay very close attention to what our resale agents are saying about the homes we have on market. Are they getting a lot of phone calls? Is traffic good? How are our days on market? These clues are often the leading indicators to where the market is going and will often signal a declining market well before the data lets you know something is wrong.

Zoritha May-ThompsonZoritha Thompson – Broker: My key Indicator of a slow in the market would be inventory of homes for sale. Currently with a lack of inventory, buyers are scrambling just trying to purchase a home and are making offers over the list price, which in turn makes prices increase. When there is more inventory it becomes more competitive and keeps prices level or may move prices lower. Prime example would be if the hedge funds put their inventory of homes on the market at the same time, this could cause prices to move downward. Another key indicator would be “Days on market” (DOM) climbing higher which means the market has reached a peak and may be coming down. I have been seeing a slight trend of homes coming on the market that are way over priced, they are just sitting there with no offers.

Warren Adams - RealtorWarren Adams – Realtor: I believe today’s market is strongly dictated by low inventory and interest rates. An increase in interest rates will also increase inventory and most likely put us back to a more “normal market”. Today’s MLS notes that there were 122 new listings with the last 24 hours and 158 pending sales in the same time period which shows homes continue to sell quicker than they are coming in.

What does the data say? These are fantastic responses above, and the two graphs below help illustrate how inventory and DOM (days on market) can help show what a market is doing (declines in both have been indicative of increasing values).

days on market in Sacramento County - Graph by Trendgaphix Description by Sacramento Appraisal Blog

months of inventory in sacramento county May 2011 to May 2013

Questions: Do you think the decline will be well publicized when the market does take a turn? With the massive use of social media, will the media and real estate community catch it (and report it) when it begins to happen?

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