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slower market

The problem of giving too much weight to previous sales (or not enough)

March 5, 2019 By Ryan Lundquist 15 Comments

It must be worth more than it sold for in the past, right? In many cases, YES. But sometimes NO. Let’s talk through some things to consider when pulling comps and noticing a previous sale. I find many of these points coming up lately in conversation, so I hope this is helpful.

Here’s some things I keep in mind about previous sales:

1) Context: Previous sales can be powerful sometimes because they help us see how a property has historically fit into the market. In other words, we get to see context. What were the comps at the time of the sale? Here’s an example where a home sold three times at a very similar price position in the market. When I see something like this I can get clues into comps and where this one might fit into the market today. Click thumbnail to see larger image.

2) Unique property: Sometimes when a property is unique though a buyer might have been willing to pay more than what current buyers will pay. Thus a prior sale doesn’t always paint the perfect picture for value. For example, a home in Granite Bay sold for $4.7M in 2013 and then $4.2M in 2018 despite the market showing hefty increases over the years. Thus we have to be careful not to give too much weight to a previous sale while ignoring current comps.

3) Unicorn buyer overpaid: Buyers overpay sometimes – especially if they’re paying cash. I can think of a property that sold at a lofty level a few years back and it’s been re-listed for a while now without any bites. In this case I wouldn’t give any real weight to the previous sale because it looks like it represented a unicorn buyer at the time rather than the market.

4) Appraisal waivers: One thing I’m watching is appraisal waivers. If there was no appraisal on a property and it ended up selling too high, the previous sale likely means very little for value.

5) Inflated & distressed: When a sale took place in an inflated market (like 2005) or a distressed market (like 2007-2009), I tend to give very little weight to these sales. I’m going to look at them and probably even graph them, but I might take them with a major grain of salt.

6) Neighborhood change: One of the things we need to consider is how neighborhoods have changed over time. In other words, it’s possible the market would look at a property differently today than the past. This is especially true with gentrifying neighborhoods, so I better be careful about giving too much weight to older sales.

7) Slower market: Previous sales sometimes remind us the market is slower. I find owners today often expect massive value increases from two years ago, but comps might not be astronomically higher since price appreciation has been slowing. We just haven’t had recent 20% increases like we did in 2013.

8) Not penalizing because it sold too low: If a property sold too low in the past, it shouldn’t penalize the value for today. This is why appraisers have to take a previous sale with a grain of salt and not give too much weight to it. Let’s remember value is found in the comps – not in a previous sale.

CLOSING ADVICE: I recommend paying close attention to previous sales to get clues to understand how a property fits into the market. But don’t get so stuck that you don’t see the most important thing – current comps.

VIDEOS: If you need some background noise, here’s two videos. The first is a presentation to Realtors and the second is a Q&A after a talk I gave to investors.

10 things to tell your clients about the market (or not) – 30 min
Q&A after a presentation I did to investors – 20 min

Questions: What point stands out to you the most? Anything to add?

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Filed Under: Appraisal Stuff Tagged With: appraisal waivers, apprasiers analyzing sales, cash buyers overpaying, disclosure of previous sales, Gentrification, giving weight to previous sales, not enough weight to prior sales, slower market, too much weight, unicorn buyer, unique property, USPAP

7 tips to NOT stress out when the real estate market changes

October 23, 2014 By Ryan Lundquist 6 Comments

Change can be stressful. That’s obvious. I don’t know about you, but I’ve picked up on a slightly stressed vibe when talking with the real estate community lately. We had such an aggressive market for the last couple of years, but now that things are slowing down, it can feel a bit stressful for some. For what it’s worth, I wanted to share a few thoughts for anyone who is feeling edgy right now about the market.

stressed guy - image purchased by sacramento appraisal blog

7 tips to NOT stress out when the real estate market changes

  1. It’s normal for markets to change: This is what we tell our clients, and this is what we need to tell ourselves. Real estate markets are constantly morphing, so we should expect change and plan for it too.
  2. Sellers will eventually catch up to the market: Right now sellers have been lagging behind the trend, meaning they’ve been wanting to price their properties higher than the market will bear. Sellers will eventually catch up to the market though, which will help put sellers and buyers on the same page. Kevin Cooper and Tom Lichtenberg reminded me of this point last week.
  3. Find some optimism: There are always two sides to stats. Sellers might look at a softening trend as a threat, but on the positive side buyers have more opportunity to afford the market and actually get into contract. I’m not saying to turn a blind eye to stats or perpetuate real estate spin, but simply keep things in perspective.
  4. Think about your marketing strategy: When you consider how the market is moving, who are your clients going to be next year? Now is the time to work hard and diversify your clientele if needed. Also, when a market changes, sometimes that means employing different strategies instead of doing the same thing that worked last year.
  5. Keep connecting with people: Business is about people. When we start to stress about market trends, the focus is removed from the most important thing. People. Yes, watch trends carefully, but be sure to let them serve and guide you instead of stress you out.
  6. Try to keep your emotions grounded: The plight of any self-employed person or sales professional is that our emotions are often contingent on how business is going. If things are booming, we feel great, but if things are slower, we feel down. The key is to find a way to stay grounded and put your confidence in something bigger than work. I’d love to hear what you do. I’ve yet to meet someone who does not struggle with this to a certain extent.
  7. Know the context of your stats: Lastly, when a market changes we can often look at stats with tunnel vision rather than the broader picture. For instance, on one hand it’s taking 40% longer to sell a house in Sacramento compared to last year, but four years ago it was taking twice as long than it is now. Additionally, inventory more than doubled in the past 18 months, but it’s actually at a fairly normal level right now.

Three graphs to provide context for the current market:

CDOM in Sacramento Region

Regional housing inventory in Sacramento

I hope this was helpful.

Questions: Which is your favorite point? Any other points you’d add?

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Filed Under: Random Stuff, Resources Tagged With: Appraisal, Appraiser, home apprasiers, markets change, real estate in context, real estate market trends, real estate slowing down, real estate stats, Sacramento Real Estate, slower market, stress in real estate, tips

What market value looks like in real estate

August 19, 2014 By Ryan Lundquist 6 Comments

What is market value? Does it depend on who you ask or is there a definitive answer? Let’s take a look at an image below to help illustrate Fannie Mae’s definition of market value – which is what appraisers use in their reports. Knowing how to think about and explain this definition can be really helpful when working with buyers, sellers, and appraisers – especially in a market with many overpriced properties right now. I created the image below, and I hope it’s a helpful visual.

KEY POINT: One buyer might be willing to pay more than anyone, but how much would most buyers pay? If you lined up 100 buyers, what would most of them pay for the property? That’s what the appraised value should represent.

what market value looks like - sacramento appraisal blog - 530

The Definition of Market Value from Fannie Mae: Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

NOTE: There are other definitions of value that appraisers use for different types of appraisals, but most mortgage finance transactions will use Fannie Mae’s definition of value.

I hope this was helpful.

Question: Any thoughts on stories to share? I’d love to hear your take.

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Filed Under: Appraisal Stuff, Resources Tagged With: appraiser job, Fannie Mae definition of market value, infographic, Market Value, real estate 101, Sacramento Home Appraiser, Sacramento Real Estate, slower market, understanding real estate, what appraisers are doing

The real estate train is slowing down in Sacramento

August 12, 2014 By Ryan Lundquist 4 Comments

Slow. Flat. Price sensitive. Competitive if priced correctly. These are words that describe the Sacramento real estate market. Some consumers may not be in tune with this reality because last they heard the market was “on fire”, but those in the trenches of the industry know the real estate train is slowing down. Let’s take a look at ten quick talking points to help explain how the market is unfolding and why it is moving the way it is. I hope this is helpful for you and your clients.

Two ways to read this post:

  1. Scan the highlighted text and graphs quickly.
  2. Grab a cup of coffee and spend a few minutes digesting what is here.

free graphs from sacramento appraisal blog

1)  The median price has been the same for three months in a row:

median price and inventory since 2013 - by sacramento appraisal blog

The market saw a normal seasonal uptick for the spring of 2014, but the median price has been flat now at $270,000 for three months in a row. Keep in mind that not every neighborhood and price segment in Sacramento are experiencing the same flat trend as shown above, though charts for surrounding counties do have a similar flatness. Remember too that real estate markets are constantly changing, so it’s not a surprise to see the market has been flat – especially as summer begins to fade away.

price metrics in sacramento county

In the midst of a flat median price and average price per sq ft, the average sales price did see an uptick last month. If we were to isolate the average sales price, we’d say the market is increasing in value, but this is why it’s important to look at more than one metric. What are all the metrics saying together?

2) The number of listings is increasing (so are price reductions):

Active listings in Sacramento County by sacramento appraisal blog

number of listings in sacramento - July 2014 - by home appraiser blog

There were 8% more listings that hit the market in July. It’s normal to see more listings during the spring and summer, yet what is happening with these listings is the real story. Over the past two months in particular there have been increasingly more price reductions, which shows many properties are simply overpriced and that the market is getting soft. If inventory continues to increase, this trend of price reductions will likely persist since sellers will need to compete for a limited pool of buyers. This is important news for sellers because it underscores the need to price properties correctly. At the same time this is welcome news for buyers since they can be slightly more selective.

3) Inventory increased again last month and is now at 2.2 months:

inventory in sacramento county - by sacramento appraisal blog

Inventory increased again this past month and is now at 2.23 months of housing supply, which is about where it was when the market bottomed out in early 2012. This essentially means there are 2.23 months worth of houses for sale based on how many sales there were last month.

months of housing inventory by sacramento appraisal blog

number of listings in sacramento - by home appraiser blog

Inventory is increasing, and that is causing the market to slow down, but inventory is ultimately still fairly low. It is still a sellers’ market, but buyers are very noticeably gaining power. As you can see above, inventory is not the same at each price level. Generally speaking, the higher the price, the more houses there are for sale.

4) Sales volume is down 8% from last year but up from last month:

sales volume in Sacramento County since 2008sales volume in Sacramento County

Sales volume in July 2014 is down 8% from July 2013. When looking at the past 90 days in 2014 compared to the same time last year, volume is down by 10%. In the Sacramento region, sales volume is about 11% lower. However, the good news is that sales volume increased from last month to this month, and has been increasing all year mostly (after a couple of very slow months to begin the year).

5) FHA sales were 25% of all sales in Sacramento County last month:

FHA and cash sales since 2009 in Sacramento County by sacramento appraisal blog

FHA and cash sales under 200K in Sacramento County by sacramento appraisal blog

FHA has been making quite the comeback over the past year and has been filling some of the gap left by cash investors exiting the market. In fact, FHA sales represented 25% of all sales in Sacramento County last month and 32% of all sales under $200,000. We have not seen FHA percentages this high since 2012. Keep in mind FHA sales used to be 30% of all sales in Sacramento County between 2009 and 2011, so there is a precedent for FHA buyers being able to absorb even more of the market. As the market inches toward a buyers’ market, be sure you are familiar with FHA minimum property requirements.

6) There have been 40% less cash purchases in 2014 compared with 2013:

cash sales and volume in sacramento county - by home appraiser blog - Copy

Cash sales since 2009 in Sacramento County by sacramento appraisal blog

Cash investors drove the market for quite some time until they began to pull back just over one year ago. In fact, there have been about 40% less cash sales so far in 2014 compared to the same time period last year. When investors stopped buying it created a gap of sales, and over the past year the market has been trying to figure out how to respond to this gap. In other words, if we added in the number of extra cash sales from last year to this year’s total sales volume, we’d have a very similar number for both years. Remember, if cash volume was still as high as it was last year, inventory would be incredibly low, and the market would feel much like it did in early 2013.

7) It’s taking 37 days on average to sell a house:

CDOM in Sacramento County - by Sacramento Appraisal Blog

On average it’s taking 37 days to sell a house in Sacramento County and 40 days in the Sacramento Region. Last month it was taking 35 days to sell a home in Sacramento County. When a property is priced correctly it will sell very quickly and even have multiple offers, but an overpriced property is going to sit on the market. Generally speaking, the higher the price, the longer it takes to sell. For further context, it was taking almost 90 days to sell a house just a few years ago.

8) Interest rates are hovering in the 4% range:

interest rates by sacramento appraisal blog since 2008

interest rates by sacramento appraisal blog

Interest rates took a very slight dip last month, and they’ve been hovering in the lower 4s all year. What happens with interest rates will impact affordability for buyers over the long haul, but very minor changes probably won’t impact the market like increases in housing inventory will. The Fed hasn’t given any indication they will raise rates aggressively since they know how fragile the housing market is these days. Remember that one of the reasons why values increased so rapidly these past two years was because interest rates went below 4% for the first time ever. You can see in the graph above how the Fed deliberately lowered rates when the recession hit in 2008.

9) Today’s market is being driven by other factors compared to 2013:

layers of the market since 2011 sacramento county - by sacramento appraisal blog

layers of the market sacramento county - by sacramento appraisal blog

layers of the market sacramento county since 2001 - by sacramento appraisal blog

Part of being in tune with real estate or becoming a local expert (for agents and appraisers) is being able to explain how the market is moving and why the market is moving. The real estate market has many “layers” that impact value, and the key factors that were driving the market in early 2013 were cash investors, interest rates in the 3s, and a housing supply of less than one month. Now the “layers” of the market have shifted where inventory is over 2.2 months, interest rates are in the 4s, cash is now at a normal level (about 20% of sales), and the local economy is bound to be a bigger player in shaping the real estate market. While our economy seems to be slowly improving, it’s still not easy to get a job.

Median price & unemployment in Sacramento County since 2008

The unemployment rate in Sacramento County and California have both been declining, but take the jobless rate with a grain of salt when you see it on graphs like the ones above. An improving job market does help real estate values, and it’s important to watch over time, but since there are essentially less people participating in today’s job market, it’s only natural to see unemployment decline.

10) The median price is 32% lower from the peak in 2005:

context for median price since the real estate bubble by sacramento appraisal blog

Lastly, in case you needed some market trivia to impress your friends or you’re playing a game of real estate Jeopardy, the current median price in Sacramento County is about 32% lower than the peak in 2005. At times the real estate community is fixated on comparing current values with the previous peak of the market, and sometimes we even hear conversations about values getting back to those levels. But let’s remember how unaffordable and unsustainable that market was at the time. At the same time there is surely value in knowing the peak of the market and how far we’ve come since then, but ultimately what the house is worth right now is probably more valuable for current sellers and buyers.

Summary: After a typical seasonal uptick during the spring, the market has definitely changed over the past few months and is showing clear signs of slowing down. We are seeing this change show up with properties taking longer to sell, a flat median price, an increase of price reductions, higher inventory, more credits from sellers to buyers, and generally buyers starting to feel like they have more power to negotiate. The market is still competitive because inventory is still low, but it is extremely price sensitive, which is seen with buyers being more picky. Keep in mind it is fairly normal to see the market slow down as summer fades away, though the slowness seemed to slow up a bit sooner than usual this year, which means it will be interesting to see how this trend unfolds in coming months.

Sharing Trends with your Clients? If you want to share graphs online or in your newsletter, please see my sharing policy. Thank you for sharing.

Questions: How else would you describe the market? I’d love to hear your take.

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Filed Under: Market Trends Tagged With: appraisals, Appraiser, cash investors, FHA buyers, FHA increasing, interest rates, less cash investors, price sensitive, real estate graphs, real estate trends, Sacramento Real Estate, sales volume, slower market, Unemployment

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