sacramento regional appraisal blog

An open letter to sellers about today’s housing market

May 16, 2022 By Ryan Lundquist 18 Comments

Dear Sellers,

How are things? I hope all is well. It’s been such a crazy market, but things are starting to change. So, let’s chat. This is coming from a good place, and it’s based on observations and what I’m hearing from real estate professionals.

A picture of an envelope with a piece of paper sticking out that reads, "An open letter to sellers."

WEBINAR ON THURSDAY: On May 19th at 10am I’ll be doing a deep market update for SAR to unpack the latest trends. We’ll have an hour to talk through lots of stuff. SIGN UP HERE.

THINGS TO KEEP IN MIND ABOUT TODAY’S MARKET:

1) You’ve lost power: The market is still competitive, but it’s not what it was in February. The truth is buyers have gained more power lately. Most agents I talk to say they are easily getting about half as many offers compared to a few months ago. So, instead of getting eight offers, you might only get a few. And if you’re priced too high, you’ll probably get zero offers.

2) Buyers are growing more sensitive: Mortgage rates skyrocketing means affordability has taken a beating. Seriously, buyers are easily paying $500 or more each month to get a mortgage this year compared to last year at the same time. This means buyers are becoming more sensitive to price, condition, and location. In other words, if they are paying top dollar, they are growing pickier about what they buy.

A meme with Adam Sandler and Bob Barker fighting (from the movie Happy Gilmore). It says, "The price is wrong...." which is from the movie.

3) Don’t aim for unicorns: Be careful of the idea of a unicorn buyer who is going to swoop in, ignore the comps, and pay top dollar in cash for your home. If that happens, great. Keep in mind only about 15% of sales this year have been all cash in the region. This means 85% of buyers are getting a loan.

4) But Zillow says: Don’t get hung up on what Zillow says your house is worth. The only thing that matters is what real buyers are willing to pay. Nobody gets stuck on a low Zestimate, so why get hung up on a high one?

5) Avoid strongarm moves: “Remove the appraisal contingency, pay me an extra $25,000, and give me your firstborn child.” These things still happen in some price ranges (okay, not the child thing), but the market is starting to see just a little bit more sanity lately. I’ve heard quite a few stories of buyers bailing after the seller countered with a strongarm move that might’ve worked a few months back. In short, buyers are picky about getting into contract AND staying in contract.

6) Sales are old and crusty: Sales tell us what the market used to be like probably 30 to 60 days ago when the properties got into contract. In other words, sales are like historic artifacts that tell us what the market used to be like. In contrast, we see the current temperature of the market with what is happening with listings and pendings. This means it’s key to know the sales, AND gauge any temperature change since.

A meme to show the most interesting man in the world saying, "I don't always overprice, but when I do, I expect a Bay Area unicorn buyer."

7) Be ready to negotiate if needed: I am hearing more stories of buyers asking for credits for repairs, concessions, and price reductions. Sometimes sellers feel they’re losing when this happens, but in some situations it’s simply the ticket to selling for top dollar. In short, listen to what buyers are asking for, and help the deal feel good for them too. This isn’t just about you. Don’t be afraid of FHA and VA buyers either.

8) It’s not time to push the price: Look, sellers aren’t entitled to always netting more than recent sales. My advice? Price reasonably and see what the market gives you. There are some situations where you might need to price lower than recent sales too to generate interest. Forget about record-breaking sales or your overpriced neighbor. What is getting into contract right now? That’s the ONLY thing that matters.

9) Tighten up the details: Buyers have become more sensitive about condition, so it can help to address minor cosmetic repairs before you hit the market (if you can). I’ve talked to a number of buyers who feel discouraged about the condition of homes right now for the price, so a good way to stand out is to be sure your property is tight. Buyers notice details, and solving minor issues only helps give them fewer reasons to say NO.

10) Watch for symptoms of softening: Talk to your agent about the temperature and be in tune with signs of softening. As you see stuff like this, let it influence your strategy for pricing and negotiating.

Symptom of a slower market bubble visual

11) Don’t expect to go $100,000 over: A seller got two offers and said, “Let’s hold out for something higher.” I’m not saying to be hasty about accepting offers, but don’t embrace unrealistic expectations. Headlines from the past talked about bidding wars, but right now headlines are starting to say stuff like, “The temperature has changed,” or “It’s still competitive, but it’s not what it was.” On that note, don’t be afraid to reduce the price if needed. You are not giving up value if value wasn’t ever there in the first place.

12) Other: What other advice would you give? Please comment below.

I hope this was helpful.

Sincerely,

Ryan Lundquist
Certified Appraiser / Housing Market Analyst
Sacramento Appraisal Blog

p.s. Thanks for picking up the dog dookie before the appraiser shows up

The housing market temperature has changed

April 11, 2022 By Ryan Lundquist 21 Comments

Do you feel it? The temperature of the housing market has started to change. Let’s talk about what’s going on, and what this means and doesn’t mean. I’d love to hear your take in the comments.

a photo of a tea pot with steam. A caption states, "The housing market temperature has changed."

Think Like an Appraiser Class: I’m teaching my favorite class on April 28 from 9am-12pm. We’ll talk through choosing comps, making adjustments, and lots of practical scenarios. Hope to see you there.

DON’T CALL IT A DULL MARKET:

The housing market is still lopsided. We are far from normal, but we are likely starting to feel some of the effect of 5% mortgage rates. In short, the real estate market is ultra-competitive, but the temperature has begun to cool from ultra white hot to white hot. Or like my friend Jonathan Miller said when describing Manhattan, “Not as frenzied, but still blistering.” If you have a better word picture, speak on.

WHAT THIS MARKET LOOKS LIKE:

A few days ago, on my Facebook page, I mentioned there was a temperature change, and Realtor Tony Yuke shared the following. I think this helps describe how the current market feels. Still very competitive, but not as competitive as 30 days ago.

Screenshot of Facebook conversation with Tony Yuke

WHAT THIS DOESN’T MEAN:

I’ve heard some people talk about the housing market starting to correct, but there isn’t any statistical support for that right now. What we know is the market is starting to show a temperature change, and we’ll see that change in sales stats down the road. Frankly, a cooling should be happening somewhere around April anyway, so we need some time to understand if this is a normal seasonal thing or something else. For now, we are far elevated beyond a normal market, and demand is still outweighing supply. My advice? Be objective, pay attention to stats, avoid sensationalism, and change your narrative based on the numbers.

One more thing. It would be healthy to see price deceleration ahead. We need this wild stallion of a market to stop growing so rapidly.

THE WORD ON THE STREET:

The stories of today become the stats of tomorrow. A couple of weeks ago I asked Instagram if they’ve been seeing fewer offers, and the results were definitive. I know, this isn’t a scientific poll, but the word on the street matters in real estate. And this lines up with what I’ve been hearing on my social feeds from boots-on-the-ground people. However, I also had a number of agents tell me it’s a bloodbath at entry-level price points still.

Results of an Instagram stories poll where I asked people if they were seeing fewer offers. In short, 74% of people said YES.

ACTUAL STATS:

Sales stats from March are insane, but glowing sales stats really tell us what the market used to be like in February when these properties got into contract. This is why it’s key to watch other metrics beyond just sales. Here are a few things on my radar (without writing a dissertation).

Mortgage applications have dipped:

Across the country we’ve started to see fewer mortgage purchase applications. This is something to watch. Will fewer mortgage applications lead to fewer pending contracts? And then fewer sales?

Line graph to show mortgage applications nationally from 2016 to 2022.

Price reductions are starting to increase (barely):

We’re starting to see price reductions inch up according to Altos Research. However, the number of reductions is WAY lower than a normal year (but slightly higher than last year). Keep in mind around April we should start to see an increase in price reductions as a part of a normal seasonal trend.

Mortgage payments are skyrocketing:

Added later on 4-14-22. I wanted to post this image from Tim Ellis of Redfin. This is what is happening in the background. Mortgage payments are skyrocketing. Keep in mind this doesn’t affect everyone the same way though. I suspect this will disproportionately impact buyers at lower prices. This type of massive change in a short period of time means it’s important to do a housing market play-by-play each week to gauge any difference in buyer demand.

A chart from Redfin to show mortgage payments have increased exponentially in 2022 so far. This is a line graph where each year has a different line.

More listings are hitting the market (not enough):

The number of listings has been increasing. Yet, we still only have about three weeks of supply in the Sacramento region, which is ridiculously low. On one hand, an increase of listings can help tame the temperature a bit, but be careful about getting sensational. So far, the level of new listings looks very seasonal, and it’s not at an elevated level beyond the appetite of buyers. By the way, we’ve now had twenty-one months in a row with less than one month of supply.

Sac region number of listings compared to pending contracts

Paying above the list price has started to “soften”:

We’re starting to see buyers get into contract at slightly lower levels. The irony is the “lower” numbers are completely elevated. What I mean is during a normal year, buyers should be paying 1-2% BELOW the list price around this time. But buyers have been paying more than 3% ABOVE the list price on average. So we might see a subtle sign of “softening,” but we need to take this “slower” trend with a grain of salt. If anything, this reminds us the market is still quite lopsided.

When looking at these visuals, do you see what looks like a spring peak a couple of weeks ago? Technically, we need a few more weeks to understand if this was a peak or not. Keep in mind it’s not uncommon to see demand crest around April. This is in part why I think it’s premature to call this temperature change a price cycle peak. We need time to see the trend.

A line graph to show the average amount buyers are paying above the list price since last year

A line graph to show the percentage buyers are paying above the list price

More analysis soon. In the meantime…

I hope that was helpful. What else are you watching?

Thanks for being here.

—–——– BIG MARKET UPDATE FOR THOSE INTERESTED ———––

This image says "Caution" and it's yellow and black. Then it says "big monthly market update below." Skim or digest slowly.

QUICK SUMMARY:

The market has seen explosive price growth during the first quarter in the Sacramento region. Frankly, the growth has started to feel unhealthy because it’s just been too quick. But this is what happens when supply is next to nothing AND buyers rush the market to lock in a low rate.

As I mentioned, the temperature has begun to change though. I suspect I’ll get some hate mail from a few people accusing me of saying the market is slow (I didn’t say that). The truth is the temperature in real estate is constantly changing, so it’s important to recognize that. If you cannot embrace that, ask yourself why.

In short, March stats are unreal. Two words. Freaking bananas.

A quick recap:

Some visuals eh…

SHARING POLICY: I welcome you to share some of these images on your social channels or in a newsletter. In case it helps, here are 6 ways to share my content (not copy verbatim). Thanks.

SOLID SALES VOLUME IN 2022:

So far sales volume has been strong in the region in 2022. The black line represents monthly sales this year compared to last year (red line). The key will be watching what happens with volume over time. If buyers start to pull back, it’s possible we’ll see lower volume. That’s what some bigger data firms are predicting, and it seems plausible.

SELLING QUICKLY:

Properties have been selling very quickly. Technically it took one extra day to sell this March in Sacramento County, but look how fast properties have been selling compared to normal. Moreover, current pending contracts in the region over the past two weeks have spent two days fewer on the market compared to March sales. This reminds us the market is moving quickly and there is still heavy competition out there.

MASSIVE PRICE GROWTH:

We’ve seen massive price growth in the region in 2022. It’s normal to see prices rise through March and beyond, but this has been really hefty growth – especially in the eleventh year of this price cycle.

BUYERS ARE PAYING WAY ABOVE NORMAL:

On average buyers paid nearly $23,000 over the asking price last month. This is far above a normal March where buyers tend to pay closer to $10,000 BELOW the list price. It’s important to note March 2022 was about twice as much as March 2021 (which was previously our most aggressive market ever). Keep in mind this is the average of every single escrow. This number doesn’t perfectly describe every individual transaction. In other words, some buyers went way above this number and some went lower. The takeaway here is to know how disconnected this number is from normal. Also, when people talk about the market temperature changing, ask yourself how disconnected we are from normal still.

BUYERS MADE MORE AGGRESSIVE OFFERS:

These numbers are freakish. It’s wild to see only 6.47% of homes sell below the list price. We should be seeing easily about twice as many homes selling at or below the list price. Again, this tells us the market is still imbalanced. But in the background, sellers ought to pay attention to any temperature changes. My advice? Price reasonably and see what the market gives you.

YEAR OVER YEAR:

Year over year stats are important to digest, but don’t forget to look at month to month stats to understand what the market is doing right now. Also, not every location and price range have the same trend.

MONTH TO MONTH:

Looking at sequential months is key too so we don’t just get stuck or hyper-focused on last year (the past).

OTHER VISUALS:

As if anyone really wanted more…

MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.

Thanks for being here.

SHARING POLICY: I welcome you to share some of these images on your social channels or in a newsletter. In case it helps, here are 6 ways to share my content (not copy verbatim). Thanks.

Questions: What are you seeing out there in the market?

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

Freakish home price growth so far in 2022

March 8, 2022 By Ryan Lundquist 21 Comments

Freakish price growth? Yes. That’s exactly what we’ve been seeing. Here we are again with what feels like a carbon copy of last year, which was our most aggressive market ever. In short, 2022 is doing its best to crush 2021. Let’s talk stats and perspective. I’d love to hear your take.

UPCOMING PUBLIC SPEAKING GIGS:

3/15/2022 NARPM Luncheon (details)
3/22/2022 SAFE Credit Union market update (details)
4/28/2022 SAR Think Like an Appraiser (details)

WHAT IS HAPPENING?

Buyers are essentially running to the market to get in before rates spike more. On one hand affordability has declined as rates have risen substantially lately, but so far this has only created a frenzy to buy. At some point theoretically we’d expect to see demand soften due to rate increases, but we haven’t hit any sort of inflection point yet where buyers are backing off the market. That’s something to watch though with the number of purchase mortgage applications, pending contracts, and sales.

FREAKISH PRICE GROWTH:

Below I’d like to show a few examples of what price growth looks like in the Sacramento region right now. I suspect many markets across the country look something like this too.

A QUICK RECAP:

Some quick stats. Feel free to share some of these images on your social channels too. But please see my sharing policy. Thanks.

1) MASSIVE MEDIAN PRICE GROWTH:

This visual shows the median price in February in black, and this year is so far above others. It’s normal to see prices rise in February, but this is massive growth – especially in the eleventh year of this price cycle.

2) RECORD-BREAKING DOLLAR GROWTH:

This year the median price ticked up $31,000 from January to February. This is essentially the largest dollar gain we’ve seen in the Sacramento area between these two months. From a percentage standpoint this was a 5.56% increase. This isn’t the highest percentage ever, but it’s the second-highest percentage gain from 2004 (2015 saw a larger gain).

3) WEEKLY PRICE GROWTH HAS STARTED TO RAGE:

Check out the black line. That’s 2022, and it’s been raging higher. Until the last week of February it looked like the median price for the month was going to be strong, but nothing too crazy. But then stats starting coming in, and we see a much different trend. Remember, closed sales from last week really represent the market from about a month ago when these properties got into contract.

4) BUYERS PAID WAY ABOVE NORMAL:

On average buyers paid nearly $16,000 over the asking price last month. This is far above a normal February where buyers tend to pay closer to $10,000 BELOW the list price. It’s important to note February 2022 was about twice as much as February 2021. Keep in mind this is the average of every single escrow. This number doesn’t perfectly describe every single transaction. In other words, some buyers went way above this number and some went lower. The takeaway here is to know how disconnected this number is from normal rather than offer $15,764 above list price thinking that is the winning number. It might have to be way more. Or in some cases it could be less.

5) FEWER MULTIPLE OFFERS TECHNICALLY

This month there were fewer multiple offers compared to last year at the same time, but we’re actually seeing a more aggressive market today. On one hand this stat suggests the market is slightly cooler in temperature, but it doesn’t feel cooler because the offers that are being made are higher.

6) BUYERS MADE MORE AGGRESSIVE OFFERS:

This month there were fewer multiple offers compared to last year, BUT the market was more aggressive since buyers offered higher amounts above the list price to secure properties. This speaks to buyers having a fear of missing out on low mortgage rates (and anemic supply of course).

7) MORE INVENTORY IS COMING

We are seeing more listings hit the market. Typically, the market really starts to hit more of a stride in March with listings coming, so stay tuned. We won’t have enough listings, but more is better.

YEAR OVER YEAR:

MONTH TO MONTH:

Year over year stats are important to digest, but don’t forget to look at month to month stats to understand what the market is doing right now. Keep in mind Placer County has a limited number of sales too, so I would take Placer with a grain of salt from month to month.

OTHER VISUALS:

As if anyone really wanted more…

MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.

Thanks for being here.

SHARING POLICY: I welcome you to share some of these images on your social channels or in a newsletter. In case it helps, here are 6 ways to share my content (not copy verbatim). Thanks.

Questions: What are you seeing out there in the market?

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

Choosing comps in a lopsided market

February 8, 2022 By Ryan Lundquist 21 Comments

How do we choose comps in such a lopsided market? I had a great question about this recently, so I wanted to share some thoughts. Anything to add? I’d love to hear your take in the comments.

Different colorful shapes wooden blocks on blue background, flat lay. The caption says "choosing comps in a lopsided market."

UPCOMING PUBLIC SPEAKING GIGS:

2/9/2022 Yolo Assn of Realtors market update (details)
2/18/2022 WCR El Dorado market update (details)
2/25/2022 Placer Assn of Realtors market update (details)
3/15/2022 NARPM Luncheon (details)
3/22/2022 SAFE Credit Union market update (details)
4/28/2022 SAR Think Like an Appraiser (details)

QUESTION: With so many listings receiving offers above list, and people having to pay the shortfall between the appraised value and the contract price, how do appraisers look at comps? If a property sold at $580,000, but it actually appraised for $547,000, and the buyer paid the difference, which number do you use? $580,000 or $547,000?

ANSWER: Here are a few things on my mind.

1) Weigh the comps:

In any market (not just today) we have to weigh the comps. Or another way to say it is, we have to appraise the comps so to speak. What I mean is if something clearly sells for too much, it’s reasonable to give that property less weight in our analysis. Likewise, if a property sells for too little, we might also give less weight to that sale. Granted, selling for too little isn’t as common lately, but in past markets we regularly considered whether short sales or bank-owned sales sold below market value.

2) One sale doesn’t make or break the market:

It’s important to note one sale doesn’t make or break the market. This means one lofty “lone ranger” sale doesn’t all of the sudden mean the rest of the market will go to that level. This would be like saying that record-breaking $7M sale in Shingle Springs from August will pull the rest of the market up. Nah, I don’t think so. Or Zillow buying a house for $40,000 more than the comps will cause the rest of the market to rise. Nope. If one sale closes at $580,000, but the rest of the market is below $550,000, we won’t arbitrarily accept $580,000 as the new neighborhood price threshold. The same would hold true if a different house sold at $450,000. This one “low ranger” (sorry) won’t automatically drag the rest of the market down.

A picture of a unicorn with a statement saying, "One lofty unicorn sale doesn't all of the sudden mean the rest of the market is now going to be at that higher level."

3) Using the final sales price:

It’s a really good question whether appraisers will use $547,000 or $580,000. Realistically appraisers might not even know about the lower appraised value because it’s not automatically disclosed in MLS or from agents in the transaction. And there isn’t some sort of appraisal database where appraisers know about the appraised value either. Ultimately, even if I knew what it appraised for, I’m not going to use the appraised value because that wasn’t the official sales price. To be fair, is it possible it appraised too low? Yes. At the same time, if the property really was worth $547,000, maybe the buyer legitimately paid too much at $580,000, right? Again, this is where appraisers need to weigh the comps and ask whether they sold at a reasonable level or not. I realize this sounds subjective, but weighing comps has to do with looking at the entire market and weighing sales against other ones, so there is an objective element here. I’ll be checking out recent and much older sales, competitive sales, listings, pendings, withdrawns, lots of geeky metrics, and even similar neighborhoods. I’ll also be making graphs to help visualize where it looks like value is at right now. If something did sell for too much, it’ll probably stand out because it’s disconnected from the rest of the market – including pending contracts. So maybe I won’t use the higher sale as a comp in my appraisal. Or maybe I can use it but give it less weight. No matter what, I won’t automatically use a sale without thinking through why it sold for more than others. But here’s the thing. If pendings contracts are all around $580,000 too, and other neighborhoods have also risen quickly, maybe it’s the market… In that case I need to recognize prices are rising and then adjust my comps up accordingly.

4) Unfairly judging the original list price:

It’s important for appraisers to be cautious about judging the original list price. What I mean is the original list price is a starting point that could be reasonable, too high, or too low. I’m not saying it’s unimportant. I’m just saying it may or may not say something about value. The truth is value is found in the comps – not the original list price OR the contract price. For instance, a friend told me about a property that got into contract about $200,000 above the original list price recently. I know it’s easy to think it could have a problem appraising that much higher than the contract price, but what if the property was priced $200,000 too low? This is where appraisers (including me) need to be careful to be objective and not give the original list price so much weight to essentially say, “I can’t bring the value in that high.” Nope. Value is found in the comps – not the original list price.

5) Instagram and market value:

I’m seeing images floating around Instagram about market value. The images tend to say things like, “The appraised value is one professional’s opinion,” and “Market value is what a buyer will pay a seller.” That sounds maybe sorta kinda hopefully true, but let’s dive deeper. The truth is what one buyer is willing to pay could represent market value (what the bulk of buyers would pay), but sometimes what one buyer pays is more like individual value because it’s totally disconnected from the rest of the pack. So, if a buyer pays above all the comps and pendings, it doesn’t automatically represent market value. It would be like me buying a house for $750,000 in a $350,000 neighborhood. I can pay that, but just because the seller and I agree on the price doesn’t mean it’s market value. Does that make sense? And here’s the kicker. What if a buyer paid 20% lower than the comps? Would we say it’s market value since the buyer and seller agreed on the price? I doubt it.

The bubble question:

I did a YouTube Live last week and here’s what I said when someone asked about a real estate bubble. This was all off the cuff it the answer should start at 58 minutes. Enjoy if you wish.

Thanks for being here.

Questions: What do you think of the points above? What did I miss? Anything to add?

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

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