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The invasion of institutional investors in the housing market

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A couple weeks ago a viral story came out about a fund called BlackRock who was reported to be buying everything in sight and paying 20-50% above market value. Let’s talk about this as well as other institutional investors right now.

This is a longer post, so scroll topics (or digest slowly).

Market update on Thursday: On June 24th 10-11am I’m doing a big market update for the Sac Assn of Realtors. I can’t wait. Sign up here.

Some things on my mind:

Big news – Invitation Homes is back: Invitation Homes is back to buying homes in the Sacramento market. Over the past month or so they started buying again and they’ve had seven deals close between $410,000 and $495,000. All properties were purchased on MLS for reference. So far this doesn’t look like it will be 2012 again where Invitation Homes purchased thousands of units in a very short period of time, but we’ll see how it shakes out. I’ll be paying close attention, so stay tuned. What I find striking is that institutional investors are even able to make the numbers work after ten years of price growth in the region. This underscores how much rents have increased to facilitate this type of activity. For reference, KCRA shows Invitation Homes is the second largest landlord in Sacramento County behind the City of Sacramento. 

If you are in a different market, what are you seeing with Invitation Homes?

How much do institutional investors own? Here’s an image from John Burns Real Estate Consulting via Rick Palacios Jr. See this tweet with additional cities. I know the font is tiny, but in Sacramento about 5% of the market is said to be owned by institutional investors. I honestly have questions about what this 5% figure represents, but I figured it was still worth sharing.

Not Blackstone: By the way, Invitation Homes is not Blackstone. Blackstone sold their interest in Invitation Homes years ago, so it’s not accurate to say Blackstone is currently buying homes in our market.

The skinny on BlackRock: When viral news about BlackRock broke I read this Wall Street Journal piece like many others. This may not be a popular take, but I felt the article was lacking data to support some of the sensational narratives being spun. Look, I’m not a BlackRock fanboy and I’m not glossing over the reality of institutional investors targeting residential real estate in the midst of a housing shortage or some of the horror stories we hear from tenants. I’m just saying I’d like to see data to support if they really are looking to buy everything in sight and pay 20-50% above market value like so many threads have been discussing. And yes, I know BlackRock was involved in the acquisition of an entire brand new neighborhood in Texas from D.R. Horton, though Financial Samurai states this neighborhood was already fully leased as it was built to be rented and was not going to be offered to individual owners. Again, I’m not pro-BlackRock and I could care less if people despise the company. I’m only thinking critically about the narrative and I haven’t seen data to back up some of the ideas. For reference, I haven’t been able to confirm any BlackRock activity thus far in the Sacramento market.

Not easy to track: One of the problems with tracking institutional buyers is they don’t always acquire properties under only one name, so it’s not so easy to gauge their activity. For instance, Zillow has four names they are currently using to buy in the Sacramento market and Invitation Homes has had at least a dozen names they’ve used through the years. As an example, here is a post I wrote in 2013 to show my numbers compared to a few other media publications and everyone had slightly different numbers (at the time I was using Blackstone and Invitation Homes interchangeably too).

The iBuyer Model: The most dominant expression of institutional investors in real estate right now is the iBuyer model (in Sacramento at least). Unlike Invitation Homes, these companies are flipping rather than holding and some of them are attempting to make their money by becoming a one-stop shop for consumers. Here are some stats and a few observations:

FOUR THINGS TO KNOW ABOUT THE iBUYER MODEL:

A) Beyond pre-pandemic levels: When the pandemic started the iBuyer model pretty much paused, which brought criticism because the idea was this model could only exist in an up market. Anyway, after a hiatus these companies ramped up their efforts and have now surpassed pre-pandemic buying levels. Well, technically this is more about Opendoor since Zillow and Redfin weren’t much of a factor as iBuyers before the pandemic.

B) iBuyers have a 1.4% share of the market: iBuyers get a ton of attention, but they only have a 1.4% share of all inventory in the Sacramento region (this includes pendings and listings). In other words, 98.6% of all listings and pendings are the traditional real estate model. In specific terms, among over 5,000 pendings and listings throughout the region iBuyers have 1.4% of that total right now. Granted, it looks like 68% of the properties they own are not on the market yet, but for what is on the market it’s only 1.4% of everything. At some point I’d like to track total volume of iBuyer sales, but that’s likely going to be impossible unless local iBuyers give me their numbers. So for now this is the best I can do.

C) Evolving strategy: Some iBuyers have seemed to increase their price threshold to compete in a market with rapid price increases. See visuals below.

D) Playing it safe: These models tend to focus on standard homes that can be easily flipped, though lately there are a few units hovering around the lower end of luxury prices. Most of what these companies buy is built after 1950, has three or more bedrooms, is located on a 0.25 acres or less, and is below 3,800 sq ft.

What iBuyers own in the Sacramento region:

At some point I’ll likely move away from scatter graphs to help visualize iBuyer purchases, but for now this is what I have.

Region = Sac, Placer, Yolo, El Dorado

CLOSING TRUTHS:

1) A growing trend: Institutional investors have been in the real estate space for years, so this isn’t something new. Yet there is no mistaking a growing focus on residential real estate whereas in the past it was all about multi-units. In short, we are still at the beginning of this trend and it’s to be determined how much it grows in the future and what sort of effect it has on the market.

2) Sifting hype: These companies are not playing a massive role in today’s housing market for now. I know that’s not popular to say, but that’s what stats indicate. I’m not downplaying the importance of watching BlackRock and this certainly doesn’t mean consumers shouldn’t be alarmed to see institutional investors flex deep pockets. This is a huge deal. It’s just not a huge chunk of the market for now.

3) Watch investors and iBuyers closely: We have to watch what happens between investors and iBuyers. For instance, this Bloomberg piece reported an investment fund named Cerberus Capital Management bought a few hundred homes directly from Zillow before the public had the chance to see them. This seemed to fly under the radar. I would think the public would be upset, but maybe everyone just loves Zillow too much to say something? Ultimately how will institutional investors and tech companies leverage their relationships with each other and big banks? We’re often so focused on how companies interact with consumers, but how about with each other?

4) Food for thought for real estate pros: For my real estate friends, I know it can feel stressful to be in the midst of change and to wonder what the future looks like. Believe me, I know this well as an appraiser as my profession especially feels like it’s on the chopping block. My advice? Focus on what you can control, have a vision for the future, realize the VAST bulk of the market has nothing to do with the iBuyer model, become your market’s expert, don’t keep doing the same thing, find ways to be more efficient, and serve like no other. Sorry for the unsolicited advice, but that’s what’s on my heart.

UPDATE: Here is a video Mike Delprete put out about iBuyers. This came out the day after my post. I figured others might like to listen.

Okay, this is getting long.

Thanks for being here.

SHARING POLICY: You can share my stats and visuals above, but please attribute the source. Here are 6 ways to share my content (not copy verbatim).

Questions: What stands out to you most above? What do you think about institutional buyers? I’d love to hear your take.

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When selling way above anything else (Q&A)

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There’s no way it will sell for that much…. But then it did. Today I have an interview with a local real estate agent about a property that recently commanded easily about $100,000 more than it looked like it could have on paper. I hope you enjoy this Q&A with Ted DeFazio and my takeaways below. I’d love to hear your take in the comments. Any thoughts?

Ryan: On paper it looked like this property on Clear Circle was going to sell for way less, right? What do you think happened to get the price so much higher?

Ted: I thought the listing price was optimistic from the start. I even fielded emails from other agents asking how I came up with the price and a couple “good luck, you’ll need it” text messages. I think it was the perfect storm of a turn-key property in a low-inventory market. Added to that, it was a mid century modern (which some thought was bastardized by the previous remodel), had a pool (Bay Area and LA people think they will melt without one), and a somewhat walkable location on the southern end of Carmichael. I know a few buyers who mapped out the distance to Whole Foods and the American River Parkway.

Ryan: I get how agents were texting you “good luck” because based on two previous sales it looks like this one easily closed $100-125K+ above where it theoretically would have been able to.

NOTE: The black dots are the subject property sales through the years compared to yellow dots which are properties of similar size. As you can see the most recent sale at $815,000 looks to have gone well above the historic trend. By the way, the subject was remodeled during each of these sales.

Ryan: Are you seeing buyers pay more for unique properties throughout the market? Or is this just in certain price ranges?

Ted: There is another one that comes to mind in Fair Oaks that recently sold in Curragh Downs. Same situation. Mid century vibes and a cul-de-sac lot backing to a greenbelt. I once again thought the listing price was optimistic but every offer was above asking. The seller purchased the home less than a year ago for over $200K less and didn’t really do much as far as remodeling goes. These were both in the $700-800K range. Another I can think of was recently sold on Garfield in Carmichael. I fielded emails and texts from agents asking where the price came from. I have two others in the $500-600K range which are both in contract at nearly 10% above asking.

Ryan: How do you know if something is an outlier able to break away from the price trend?

Ted: The Clear Circle house, Canonero Ct and Garfield Ave properties all shared the unique architectural design theme. I think that is what truly sets these homes apart giving them the potential to be outliers. Check out Bonny Knoll in Roseville. The seller knew it was an outlier and priced it accordingly. I think that’s the constant. As agents and appraisers, we often think we know better. I responded to an email questioning value by saying: I’m going to let it ride and see what happens.

Ryan: What are you seeing happen with modern and mid-century modern home appeal during the pandemic?

Ted: I think these types of properties command a higher price point than that of the traditional Mediterranean or typical ranch home down the street. The Bay Area and LA types tend to appreciate these design styles more than the average Sacramento resident. With the influx of these buyers, we are seeing premiums added to the more modern properties. So I think it has further added to the delta between typical and unique homes.

Ryan: What sort of advice would you give to buyers right now?

Ted: It’s hard out there. The offers stack up and the sellers get overwhelmed. The common theme I am seeing with the winning offer is the high offer price and a removal of the appraisal contingency. This puts buyers who aren’t flush with cash in a tough spot. I am hearing buyers are thinking that the market is overpriced. I often tell them that I stopped commenting on the market. I thought it was overpriced back in 2016. What do I know? Buying in this market is tough but being able to sell helps neutralize the offset.

Ryan: Any advice for sellers?

Ted: You are in the driver’s seat. If you have considered selling or making a move, there is no time like now. What an opportunity.

Ryan: Anything else to add?

Ted: I am seeing a divergent trend of agents either sharing what the other offers are or not. I find this market as difficult as I have ever seen to be in the buyer’s shoes. Add to it the listing agent not sharing what other offers are on the table makes it even harder to do our jobs. I ask my sellers if they are okay with me sharing the current offer terms with the other agents (as long as there isn’t a NDA) and they are usually okay because they understand that it will most likely get them more money in the end. The shot in the dark offer mentality / situation is aggravating and makes me not even want to submit an offer in certain cases. I have seen some seller instructions added to listings of some brokerages and wonder if they are truly acting in the best interest of the seller.

Ryan: Thanks Ted. I appreciate your time and insight. Everyone, please visit Ted’s website and let us know what you are seeing out there.

NOTE: Once in a while I do a Q&A with a local professional. This is never a paid spot and it’s not done to highlight one person either. It’s only when something has piqued my curiosity and contributes to discussion.

——————— some quick thoughts ———————

QUICK TAKEAWAYS from an appraiser’s perspective:

1) Your opinion vs the market: It doesn’t matter what any of us think about a property. As Ted said above, quite a few people looked at Clear Circle and thought the remodel destroyed the character of the home, but the resale market blatantly favored this property despite what purists thought. There were four offers when priced at $749,000. This is a good reminder in the valuation space to divorce ourselves from personal opinions and focus on one question. What does the market think?

2) The previous sale: Sometimes a previous sale can be really useful because it helps us understand how a property has fit into the market. But in other cases we need to completely throw out a previous sale because the market is simply different today (or maybe the prior sale sold too high or low). This is exactly why we have to be careful to give the current market and current comps the most weight while not getting too hung up on a previous sale (even though at times a previous sale can provide really helpful context). This is especially true today where the higher-end market has come alive throughout the country, so what buyers are willing to pay right now could simply be a detour from buyer behavior a few years ago.

3) The pandemic x-factor: Buyers hunting for homes these days are willing to pay extra for something architectural distinct. Additionally, buyers are paying premiums for homes with stellar views and backyard amenities. The idea is people know what it’s like to spend more time at home now, so they seem more sensitive to location as well as what’s actually in the backyard (including the view).

4) Paying way too much: There are situations today where buyers are obviously paying way above normal. Let me be clear. I’m not saying this sale above represented market value at $815,000. I’m also not saying it didn’t. I’ll let you be the judge. I’m just saying buyers in general throughout the market are paying premiums for special properties right now. But backing up there is no mistaking there are quite a few situations where buyers are obviously paying well beyond a reasonable value and the appraisal rightly should be coming in lower.

5) Sellers, don’t price to an outlier: Sellers, this market feels totally lopsided, but buyers can still sniff out an overpriced home. My advice? Be realistic about your house and DO NOT price according to an outlier example like the one in this post. Remember, not everything is getting 20 offers and bid up $100,000. In fact, only 2.8% of all sales last month had twenty offers or more. This is actually a higher than typical number, but it’s important to realize this figure is nowhere near half the market like some real estate narratives might suggest.

Thanks for being here.

Questions: What are you seeing out there relating to modern homes or other “special” properties? Any stories to share? I’d love to hear your take.

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How much are buyers paying above the asking price?

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“Buyers are crazy!!! How can they be paying these prices?” That’s what we tend to hear from people who are NOT trying to buy a house right now. It seems like onlookers really don’t understand what it takes to get an offer accepted these days. But for anyone actually in the game, the truth is blatant. If you want the house you’re probably going to have to pay above the list price.

Fresh stats: Today I have some brand new stats. I’ve never broken out numbers like this before and I’m excited to share. Even if you’re not local I hope this gives perspective or ideas for how to visualize your market. 

Quick thoughts: On average properties sold four percent above their original list price last month in the Sacramento region. Or in other words, buyers on average paid $23,787 more than the original list price. Keep in mind these stats represent the average and there are many properties that went above and below this amount. There are also quite a few homes that sold at the original list price. In short, this doesn’t mean literally every buyer paid $23,787 above asking. Also, there are few sales below $300K, so take that stat with a grain of salt.

Four reasons why prices have risen so quickly:

1) Supply & demand: Prices have been increasing rapidly due to supply and demand being so lopsided. It’s no secret we have a shortage of listings and excessive demand. This has created a market that feels like chaos where the median price in April in the Sacramento region is up 11% since January. Of course rates below 3% have also played a role in supercharging the market.

2) Appraisal gap: Buyers are paying above the appraised value or bridging the “appraisal gap” so to speak (the difference between the appraised value and the contract price). In some cases appraisal waivers are also helping properties close at higher levels. 

3) Priced too low: Let’s be real. Some listings are being priced way too low and this causes properties to get bid up. I’m not minimizing how aggressive the market is. I’m just saying there are cases where listings are painfully low. 

4) More at the top: We’ve been seeing more sales at higher prices in the local market as well as across the country. Therefore when looking at lofty price stats we have to realize some of the massive growth has to do with what is selling rather than pure price appreciation.

I hope this was helpful. Thanks for being here.

Questions: What stands out to you about the stats or points? If you are a buyer, what are you experiencing out there? What did I miss?

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Fanny packs, pendings, and a slower market

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I guess I never thought I’d talk about fanny packs on my blog, but here goes. This is either a new high or low depending on your perspective, but I want to share an important concept to consider – especially during a slower market. Then for anyone interested I have a big market update for Sacramento. Any thoughts?

Fanny pack analogy: Imagine spotting a guy wearing a fanny pack. You might think, “Sweet, I haven’t seen one since the early 90s.” The truth is if we only saw one dude sporting a pouch, we’d probably just think this person is trapped in the 80s and 90s (like Uncle Rico back in ’82). After all, one guy’s fashion statement doesn’t mean it’s a trend for everyone. But if we started seeing more and more people wearing fanny packs everywhere we went, then it’s probably a fashion trend. The same thing happens with pendings. If we only have one pending at a much higher level than anything else in the market area, it’s probably an outlier more than anything. It might be an isolated incident that’s totally disconnected from the market (like one guy wearing a fanny pack) rather than a real indicator of value (a trend). But if we saw a group of pendings shifting higher or lower, then that’s probably a trend.

The big point: Sometimes we get so distracted by the bling of one high listing or pending that we fail to see the bigger picture of value in a neighborhood. It’s like we develop tunnel vision and get locked into one outlier rather than looking at everything else that is similar AND trending lower. Sellers in particular struggle with this during the fall because they sometimes only see the highest prices from the spring rather than current listings and pendings that might be generating slightly lower prices because the market has softened. Or it’s easy to see that one overpriced listing down the street and expect to fetch a similar lofty price rather than recognizing that zero properties are getting into contract that high. Thus let’s be cautious not to stake all the weight of value on one “lone ranger” pending or listing while ignoring all other data. Otherwise it’s sort of like seeing one guy wearing a fanny pack and calling it a trend…

Disclaimer: This post was in no way meant to offend anyone who used to wear, currently wears, or will wear a fanny pack.  🙂

–——-——- Big monthly market update (it’s long on purpose) ———–——-

The market has continued to soften, though it’s not really all that soft. Inventory is up, price reductions have increased, sales volume has been dropping, it took three days longer to sell last month in the region, and price metrics are down about 1% from the height of summer. Overall the market is clearly slowing down for the season, though it’s not painfully dull like it was in 2013 or 2014 during the fall. This is a key to understand because when saying values are “softening” some interpret that to mean the market is really slow or crashing. But that’s not what I’m saying.

Big Point: We have a housing shortage, but that’s not a trump card to stop a slower seasonal trend.

Let’s get technical. Many price stats last month actually showed an increase in value by about 1%. What the? Does this mean the market increased? I thought you just told me the market is slowing? Let’s remember that sales from October really tell us more about properties that got into contract in August and September before they actually closed escrow in October. Thus that 1% uptick really happened in the market a couple of months ago rather than in October. In other words we’ll see the real trend of the market for October when the pendings from October close in November and December. This is so important because let’s not make a big deal about the market technically showing an increase because the uptick didn’t technically happen last month. Know what I’m saying? If we want to see the current market we have to look at the sales, but we cannot forget to give strong weight to the listings and pendings. Are properties taking longer to sell? Are there more listings hitting the market? Are properties starting to generate less offers or offers at lower prices? What are buyers, sellers, and the real estate community saying about the market?

A huge soft stat: Every year the median price and average sales price in Sacramento County tend to soften by about 5%. This doesn’t necessarily mean values decline by 5% in every neighborhood or price range, but it does mean we can expect price softening in most areas during the fall season.

By the way, here’s an article I wrote for Comstock’s magazine this month about some of the different layers of the Sacramento market right now.

I could go on, but let’s get visual.

DOWNLOAD 62 graphs HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

SACRAMENTO COUNTY (more graphs & stats here):

SACRAMENTO COUNTY STATS:

  1. The median price is currently $349,450. It’s up slightly from last month but down 1% from summer.
  2. The median price is 9.2% higher than the same time last year.
  3. Sales volume in October was 5.4% lower this year than 2016. There were 1456 single family detached sales last month.
  4. It took an average of 29 days to sell a home last month (one year ago it was taking 4 days longer).
  5. The median days on market last month was 15 days.
  6. It took 1 more day to sell in October compared to September (median days).
  7. FHA sales were 19.9% of all sales last month in the county.
  8. Only 0.7% of sales last month were bank-owned & 0.7% were short sales.
  9. The avg price per sq ft was about $221, which is about 1% lower than last month (9% higher than last year).
  10. The avg sales price increased about 1% last month and is currently $386,000. This is 9.4% higher than last year.
  11. Cash sales were 12.2% of all sales last month.

SACRAMENTO REGION (more graphs & stats here):

SACRAMENTO REGION STATS:

  1. The median price is $392,000. It increased about 2% last month, but it’s down 1% from summer.  
  2. The median price is 9.8% higher than the same time last year.
  3. Sales volume in October was nearly the same as October 2016. There were 2380 single family detached sales last month.
  4. It took an average of 34 days to sell a home last month (one year ago it was taking 3 days longer).
  5. The median days on market last month was 18 days, which means properties are selling really quickly.
  6. The median days on market increased by 3 days last month, which shows a slowing in the market.  
  7. FHA sales were 16.5% of all sales last month.
  8. Only 0.8% of sales last month were bank-owned & 0.8% were short sales.
  9. The avg price per sq ft was about $227, which is down slightly from last month (9% higher than last year).
  10. The avg sales price increased about 1% last month and down about 1.5% from summer (but up 9.4% higher than last year.
  11. Cash sales were 15% of all sales last month.

PLACER COUNTY (more graphs & stats here):

PLACER COUNTY STATS:

  1. The median price is currently $455,000 and increased about 1% last month.
  2. The median price is 3.8% higher than the same time last year.
  3. Sales volume in October was 10% higher than 2016. There were 533 single family detached sales.
  4. It took an average of 37 days to sell a home last month (one year ago it was taking 4 days longer).
  5. The median days on market last month was 22 days, which means properties are selling really quickly.
  6. The median days on market increased by 4 days last month, which shows a slowing in the market. 
  7. FHA sales were 9.5% of all sales.
  8. There were only 4 bank-owned sales last month and only 4 short sales.
  9. The avg price per sq ft was $232, which is slightly higher than last month (9.2% higher than last year).
  10. The avg sales price is currently $511,121. This is 6.4% higher than last year.
  11. Cash sales were 18% of all sales last month.

DOWNLOAD 62 graphs HERE: Please download all graphs in this post and more here as a zip file (includes a stat sheet too). See my sharing policy for 5 ways to share (please don’t copy verbatim).

Questions: On a serious note, did you wear a fanny pack back in the day? Anything else you’re seeing in the market? I’d love to hear your take.

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