Sacramento

Coronavirus & the housing market

March 3, 2020 By Ryan Lundquist 26 Comments

The world probably doesn’t need another coronavirus real estate post, but here we are. Over the past week I’ve had countless conversations on the topic so I wanted to share some thoughts. How might the coronavirus affect the housing market? Here are some things to keep in mind.

Things to consider about the coronavirus & real estate:

1) Uncertainty: Markets don’t tend to like uncertainty. It’s been true in the stock market over the past week and it’s true in real estate also.

2) Severity matters: If this virus doesn’t spread much there might not be much effect on the housing market. But if it begins to spread in mass it’s easy to imagine sellers postponing listing their homes and buyers choosing to sit on the sidelines. Ultimately as we consider the immediate future there’s a huge difference between having a handful of coronavirus cases versus a devastating outbreak like the movie Contagion (probably not a helpful film to watch right now). Keep in mind if we’re dealing with something that ends up being very temporary it’s not likely to have a lasting effect.

3) Consumer behavior: One of the most relevant things to consider is whether the coronavirus starts to affect consumer behavior and confidence. No matter what you think about this whole thing, if people begin to postpone or halt financial decisions, that’s when it can begin to matter more for the economy and housing market. Let’s remember many buyers are already struggling with a feeling of hesitancy about the market, so for some the coronavirus could end up magnifying that feeling. Are consumers going to dine out fewer times? Will they stop buying stuff? Will they sit on the sidelines of the real estate market to wait and see what happens? We’re at the beginning stages of this and we’ll have answers to these questions over time. Obviously if there was a massive outbreak though it wouldn’t be a surprise to see the housing market stall or decline. In case you wanted to follow consumer confidence closely, here is a source tracking it daily (found via Len Kiefer):

4) Swine Flu & Ebola: Someone asked if I had any market stats from previous decades when we dealt with SARS, Ebola, or Swine Flu. No, I don’t. The struggle with these examples is we didn’t have a local epidemic, so there wasn’t any real impact on the market.

5) The economy: One of the more gloomy elements to watch is the Chinese economy as well as our own. Some writers are talking about the potential for a worldwide recession in light of how tied the world is to China. That’s a sensational idea bound to get lots of attention. Is it real? We’ll see what happens.

6) Rates doing the limbo: In the midst of this we’re seeing mortgage rates drop and some are saying they’ll continue to dip. I’ve even heard claims they could drop below 3%. That would be insane!! So if anything it’s possible we could still have a very competitive real estate market in the immediate future. As a side note, it’s actually been an aggressive start to the year in terms of price growth in Sacramento and I’ll have more thoughts on that next week. For now buyers and sellers seem more focused on low rates than the coronavirus, but let’s keep watching because that could change.

7) Sifting data: Hopefully this will all blow over and we won’t have any worst-case-scenarios play out. If you want to watch real estate data though, be sure to pay attention to the number of listings and sales volume – not just prices. Remember, prices are the last place we see change show up even though it’s usually the first place we look. In other words, we see a market shifting first in consumer sentiment, what is happening with listings, whether homes are selling, and then eventually down the road with price changes. So like I always say, the trend happens before we see it in the prices.

8) Peace: On a personal note, I hope you find peace in coming time no matter what happens in the future. If you’re feeling stressed by all these conversations, maybe get intentional about filtering information and finding ways to add peace into your life.

Anyway, I hope that was helpful. Thanks for being here.

Questions: What are you talking about in coronavirus conversations lately? What are buyers and sellers saying? Anything to add? What did I miss?

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Tax Records is not the definitive source for square footage

January 22, 2020 By Ryan Lundquist 49 Comments

Why is the appraiser saying it’s only 1,400 sq ft? Tax Records shows the home is 600 sq ft larger. This issue comes up ALL the time, so let’s talk about it.

MY BIG POINT: I can’t speak for every market across the country, but I’ll say there can be a difference between what the building department has on file for a house and what is listed in the Assessor’s Records. In my market Realist is what we call Tax Records and that data comes from the Assessor. In my experience it is usually pretty good, but sometimes it’s completely off because it doesn’t actually reflect what is permitted. This means we need to look to a source that does (or should) keep reliable records on building permits. And that source would be the building department instead of the Assessor.

The truth: The Assessor’s records are generally reliable, but I’m just saying sometimes they’re not. Why is this? At times it’s as simple as the original builder not turning in accurate information when a house was built. Or maybe an owner took out permits but official records were never updated. Of course we’ve all seen instances where the tax roll shows two units on one lot, but there’s really just one house nowadays. Let’s not forget sometimes owners do an addition without permits, so the Assessor might actually be correct even though the house is technically larger or has even sold on MLS as a larger home. For reference, here are ten reasons why an appraiser’s sketch might be different.

TWO SITUATIONS ON MY DESK:

1) Garage included in the square footage: I recently measured a house for a Realtor that was about 1,100 sq ft despite Tax Records stating it was nearly 1,600 sq ft. Based on my sketch it looks like the Assessor had the garage included in the square footage for whatever reason. I’ve definitely seen basements included in the square footage too.

2) Non-permitted area included: I’m also working on something where the tax roll shows an area at nearly 2,500 sq ft but about half this space isn’t actually permitted. Look, most of the time Tax Records is pretty much right (especially in tract areas), but in this case it’s scarily inaccurate. One of the problems is in Sacramento County home owners can “correct” property characteristics in Tax Records by submitting a sketch from an appraiser. I get the idea here, but what if the area in the sketch was not actually permitted (and the appraiser hopefully disclosed that in the report)? It would seem like verifying square footage as permitted would be a nice touch when adding square footage into the tax roll, but I’m afraid that doesn’t always happen. It certainly didn’t happen in the case on my desk and I’ve seen many other instances where an area that was not permitted ended up being reflected as square footage in the Assessor’s information (and then Realist).

UPDATE: The chief appraiser at the Sacramento County Assessor’s office commented on my post and I wanted to link to it here. I think he provides some helpful context (and he’s a really nice guy).

Closing advice: If something doesn’t seem right about the square footage, start digging further. Most of the time you’re likely going to be able to trust records, but sometimes they’re going to be off. So when something doesn’t smell right about the size, quality of work, setbacks, etc… it’s time to call the building department to see what permits are on file. I never rat out an owner either, so I don’t call and say, “Hey, this house measured 2,300 sq ft, but what do your records say?” Nope. I would call and ask, “Can you help a brother out? What do your records show for square footage and anything else that has been permitted?” Also, if you’re in Sacramento, here is a link that shows building permits online (you’re welcome). Lastly, remember that it’s not enough that permits were pulled. Were permits finaled? That’s the real question.

I hope this was helpful. This could honestly be a dissertation and what I’ve written only scrapes the surface. Please add your comments below.

Questions: Any stories to share or advice about relying on Tax Records (or not)? How is your market different than mine? Anything to add?

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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.

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Does the market really change every seven years?

October 22, 2019 By Ryan Lundquist 19 Comments

The market changes every seven years. And now it’s ready to take a big turn. Have you heard that? Is there really such a thing as a “seven-year rule”? Is it legitimate? Let’s talk about it.

A FEW THINGS TO CONSIDER

1) Behavior: The market doesn’t have to behave a certain way every seven years. Bottom line. Case-in-point: We’ve had almost eight years of price growth in Sacramento in the current price cycle.

2) There is a cycle: Sometimes we only hear about the market being “hot”, but there really is a rhythm over years where prices go up and down. In many locations the market tends to change every decade or so, so I get why people believe in the seven-year rule. But keep in mind some markets are more flat over time rather than super cyclical like California (big point).

3) Talking in a range: I’m not a huge fan of being dogmatic about seven years, so I prefer to hear things like, “The market tends to change every 7-10 years or so.” Of course this type of statement might be totally off in some areas of the country, but in my market I get it when people say this because of historical data.

Now to some new images…

PRICE CYCLE IMAGES: I used the Freddie Mac Price Index to tell the story of the market over four decades. I like this price metric because it goes back 40 years. I’d love to use MLS instead, but that only goes back 20 years. Anyone have a different metric suggestion?

How long were the past few UP cycles before the market turned?

CALIFORNIA
1980s: 7.9 years
1990s: 10 years
Current: 7.5 years

SACRAMENTO
1980s: 7.1 years
1990s: 8.6 years
Current: 7.7 years

How long did the past few DOWN cycles last?

CALIFORNIA
1980s: 9 months
1990s: 5.5 years
2000s: 5.6 years

SACRAMENTO
1980s: 17 months
1990s: 5.9 years
2000s: 5.9 years

NOTE: It’s tempting to try to predict this next cycle based on the past few, but be really careful with that. There is no rule that says the market always has to behave the same.

Bonus (Adjusted for Inflation): I adjusted for inflation here to help compare dollar amounts over decades (and to satisfy econ / grad student friends who prod me about this).

OTHER CYCLE CHARTS: I have other price cycle charts based on MLS data over the past 20 years. I have charts for Sacramento, Placer, Yolo, & El Dorado County. See my big monthly market update (scroll to “price cycles”).

I hope this was interesting or helpful.

MAKE THIS GRAPH FOR YOUR MARKET?

Do you want to know how to make a price cycle graph? I made a template to help you do this. Download my template and follow the instructions in the Excel file. If you make something, please tag me online or email me. I’d love to see what your market looks like. Here’s a video tutorial. Here are a few more tutorials also.

Questions: What stands out to you in the images above? Any other thoughts about price cycles?

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Sacramento

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