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Sellers have been chasing the ball down the road. What I mean is prices have been going down lately, and sellers are trying to find the market through price reductions. I can’t speak for the entire country, but I’d like to talk about what’s happening locally. I’m not writing as a housing bull or bear either, but as a stats guy with the goal of objectivity. Anyway, some thoughts.
UPCOMING (PUBLIC) SPEAKING GIGS:
10/07/22 Market update with SAR (Sign up here – On Zoom)
10/13/22 Market update in Midtown (details TBD)
Expecting to pay less: Before getting to any stats, I wanted to mention that most people I talk to right now are aware that prices have been dipping. Well, besides some unrealistic sellers right now… Haha. Just yesterday I talked with two homeowners who spoke about prices softening as if it was common knowledge. Or someone called a few weeks ago wanting an appraisal very quickly for PMI removal to lock in a higher value before prices dipped. Have you seen offers from Opendoor in the mail lately? They are definitely lower. And let’s not forget actual market stats, which I’ll get to below.
Here is a visual from Len Kiefer to get at what I’m saying. There is an expectation of softer prices ahead. We’ll see what happens of course, but we want to pay attention to the psyche of buyers and sellers right now.
The median price is down 7% so far: The median price has gone down about 7% since May in the Sacramento region and Sacramento County. This is a much bigger change than usual for the time of year since the median price in August is usually down about 2% or so from the height of spring. This isn’t really a shocker though because we saw such a dramatic change with mortgage rates. In short, a sharp change in rates is causing a sharp change in the stats (including prices). But to be fair, this year is a bit awkward since prices crested one month early in May (usually prices peak in June). This means we have one extra month of declines to pad into the stats.
Seasonal decline or new downward cycle: Is this only a seasonal decline, or is it something bigger? Look, the truth is we need time to see the trend and understand it. For now, we’ve clearly experienced a huge contraction where about 25% of buyers have stepped back from the market. Moreover, we’ve seen sharp price declines for the time of year, so at the least we are in the midst of heightened seasonal declines. Could it be more? Yes. But we need time to understand how the market is going to go. I realize this is frustrating for some people to hear, but let’s remember the future hasn’t happened yet. For now, we are living in the midst of change and uncertainty. Here is something I wrote six months ago to talk about price cycles in case it’s useful.
There is still competition: The market is completely different than it was earlier in the year, but there is still competition. In fact, 25% of sales sold above the original list price last month and 43% of sales in August had more than one offer. These stats are lower than normal actually, but I wanted to mention this because sometimes we hear about softening prices and think literally everything is tanking and selling at a severe discount. It’s a mistake to impose a doom narrative on the market. Remember, there are many stories in real estate, and the story isn’t the same for every seller, buyer, or escrow. In case it’s helpful, here is advice for buyers and sellers in today’s market.
Affordability: The market has taken a beating with affordability, so there are fewer buyers able to play the game right now. There is no such thing as rates doubling and prices remaining the same. The math just doesn’t work. Check out this Redfin visual to show mortgage payments being 37% higher than last year at the same time (or about $600 more PER MONTH).
Here are some affordability images I put together for local counties. In Sacramento County, 27% of households can afford a median-priced home. These images are based on CAR stats.
Appraisers saying “stable” or “declining” in reports: Appraisal forms ask appraisers to select a box to describe what prices are doing. Are they declining, stable, or increasing? I suspect these days we’ll have a mixture of some appraisers saying “declining” and others selecting “stable.” Honestly, at this moment in time I care way more about whether market change is accounted for when looking at the comps than I do about a box. In other words, I can see some appraisers checking “stable” since we are living in the midst of change and not certain yet about whether this is an inflamed seasonal trend or the start of a downward trend. However, I have a massive problem if appraisers right now are not adjusting comps down since we’ve seen clear price declines over the past few months. Again, I’m not talking about every market, so save your hate mail. But many markets across the country have seen more inflamed seasonal declines, which means some older sales need a negative adjustment since value is lower right now.
Commentary from an appraisal: Here is a bit of commentary in one of my recent appraisal reports. This is only part of what I say because I’m a man who needs a few paragraphs. One box just isn’t enough.
“At the least we ought to describe the market as showing a downward seasonal shift, though it’s possible we can call this a downward cycle if the trend persists over time. For now, it is most reasonable to categorize the market as having growing uncertainty and blatantly inflamed downward seasonal price declines compared to a normal seasonal trend. At the least, properties are clearly selling for less than they did several months ago. The regional median price has ticked down about 7% since May, which is $45,000. This doesn’t mean every property is worth $45,000 less, but it’s been clear buyers have been resisting paying higher prices.”
One last note about home size: Keep in mind some of the price change lately has to do with smaller homes selling. I know the visual below is chaotic, but check out the dark blue line, which represents the average monthly square footage. Normally the size of homes peaks during May or June, and then we see smaller homes sell for the rest of the year. Can you see how when the dark line goes down, the lighter blue lines also go down (average sales price)? This is a good reminder that price change is also about what is being sold. And for the record, I’m not saying the median price is down by 7% due to size. I’m just saying some of the change lately has to do with smaller homes rather than only the market.
Okay, one last thing about size: During the beginning of the pandemic there was a blatant spike in home size due to a greater focus on larger homes at higher prices. This spike basically peaked one year ago as size has started to normalize. Now let’s keep watching to see what happens to size. Will we see smaller homes more often as first-time buyers flood the market? Will we see fewer sales at the highest prices? To be determined.
Closing thoughts: The market is always moving, and we are in the midst of change right now. Let’s keep watching the trend and being objective about the stats. It’s really easy today to get sucked into sensational narratives, so my advice is to stay grounded in the stats. And for my real estate friends, keep finding the players of the market. Who has incentive to buy, sell, and invest in today’s market? The key is to identify those people and support their goals.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
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Questions: What are you seeing happen with prices?
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Filed Under: Market Trends
Here’s hoping everyone who got a mortgage is truly qualified and not overextended. I know there was a lot of speculation (including from lenders I spoke with) that the fed would raise rates but then within a couple years would be forced to drop them again to combat recession. If people bought into this narrative and purchased more home than they could afford, assuming they would “just refi in a couple years at a lower rate!”… they might be SOL.
Other than that, I’m still wondering WHO TF is SELLING? I mean, where do they go? Assisted living facilities? Renting? Or are they selling off second/vacation homes? …Cuz who wants to sell right now with crashing prices and have to buy while rates are so high as to make payments insane?
Hi Joda. Thanks for the commentary. I appreciate it. I’m a big fan of being comfortable with the mortgage payment instead of banking on lower rates in the future. To each his/her own though. I get the real estate community saying “date the rate, marry the mortgage,” but there are certainly limitations with that. Are you comfortable with the mortgage payment right now? That’s the key. But let’s be real. Very few people stay in a home for 30 years, so if the rate works for a season, so be it.
Lots of people have incentive to sell regardless of what the market is doing. People are moving out of state, down-sizing, up-sizing, moving money in a 1031 Exchange, needing to buy something in a different school district, etc… Lifestyle, death, divorce, disease, etc…. Lots of reasons. The numbers certainly won’t work for everyone. Lots of people are sitting on such a low rate that there is incentive to stay put. 100%. And there is so much equity there too. This is what intrigues me as I wonder what we will see with sellers in coming years. Sometimes people online will say things like, “Sellers are flooding the market,” but it’s fake news locally and nationally. We are seeing a subdued amount of new listings hitting the market.
Hi Ryan,
Thanks again for the excellent information as always. I really appreciate you putting in the hard work to keep us all informed. Question, when would think we have a enough time and data to know if we truly are in a downward trend or if it’s just seasonal? Start of Q1? Or maybe come late November? Thanks again,
Neil
Hi Neil. That’s a good question. I don’t know that I really have a cutoff date to be honest. I don’t want to box myself in because we will continue to get more clues as time unfolds (presumably). With that said, I think it will be very telling to see what happens with the remainder of this year. Words like, “market shift” and “correction” are okay to use right now though because that’s what we’re experiencing as the market is clearly having a strong reaction to doubling rates. I think seeing what the market is like during the first quarter would be an even stronger indicator. Keep in mind seasonality tends to happen in most markets – not just rising markets. What I’m saying is having increased attention on the market in January is to be expected unless we are super dull. Erasing all seasonality is hard to do. I’ll speak more to that as time unfolds because I think people are going to want a deeper analysis of declining markets and such. One factor here is what happens with rates. We’re experiencing a dramatic shift due to mortgage rates increasing. If rates go down again to 4.5% like some are predicting, that could change the feel of the market. So that’s an x-factor and worth considering that we are not locked into a trend.
Great writeup as always, Ryan!
Wow, what really jumped out to me (in a somber way) were the affordability charts. Essentially, around 75% of residents of Sac and surrounding counties can’t afford to buy a median-priced home.
That alone should exert some downward pressure on home prices, because it lowers the demand side of the price equation.
It’s also a sobering look as to the effects of inflation on the “average person”, that it has effectively boxed them out altogether from buying a home.
Thank you ChrisBern. It really is sobering. Affordability has been heading in the wrong direction for years, but it’s been on hyper-drive over the past couple of years especially. The best solution for increasing affordability quickly is to see rates drop dramatically. Though that feels like a very temporary solution to me because it puts a bandaid on a huge issue – prices are high. The other strong solution here is to see prices drop. Wage growth, economic growth, new lender programs, etc… can all help alter affordability, but the bigger two issues are what I mentioned.
We are all looking forward to seeing inflation get under control. There was less-than-positive news put out yesterday unfortunately. We are still in the thick of this. Fingers crossed.
Ryan,
Thank you as always for your analysis. In looking at the affordability chart for Yolo County it looks like the drop in affordability must be due primarily to the rapidly rising prices. The rise in interest rates wasn’t a factor yet, right? If that’s the case I would think that to even maintain the affordability level we have the prices would need to go down to compensate for the increased interest cost.
Thanks Carol. The drop in affordability during the past years is definitely tied to rising prices. You are correct about that. We are starting to see mortgage rates showing up in the data though as these images go through Q2 2022. By June 2022 rates were already at 6%. Here’s a chart to help show the history of rates since 2009. https://www.mortgagenewsdaily.com/mortgage-rates/mnd And yes, prices going down is one mechanism to help people afford the market. Right now we’ve seen buyers step off because they cannot afford. Some might feel uncertain about buying right now too. But I suspect if rates dropped to 4% tomorrow, we’d see lots of fresh buyers jump into the game. All that said, we are missing one quarter of the market, and we have to find a way to get buyers back into the game.
Hello Ryan, well back on my ranch after the Fairview Fire down here decided to head my way. Mandatory evacuation order was received. Good news all is good, and we are back on the ranch, breathing a sigh of relief, so are the big animals.
Great Affordability Chart(s). Here is a funny HaHa and also sad comment. I am saying somewhat tongue n cheek. About 3 months ago I wrote up a lending report. I included a comment on affordability and in this world of shall I say hypersensitivity I received a call from an underwriter asking me to remove the comments about affordability. They claim my comments form a racially bias profile. Most of you Don’t know me, but Ryan does, so don’t send him hate mail just because he knows me. My comment back to the underwriter was please tell me what factual data I presented was incorrect. Her comment back was that “facts don’t matter”. Yes, after she said it, she realized what came out of her mouth. I thought of jumping on the comment and for some reason I let it pass by. So, I asked her again what was factually incorrect? She had no response, except that it can’t be in my report. The world of the Twilight Zone was just entered. I made no change to the report and told her to send it to her boss’s boss and to her congressman or congresswoman or Rep Ms. Maxine Waters and have them call me to discuss. So far, no call backs, hmmmmmm.
I say this because affordability is one part of the puzzle not the whole puzzle, but it does matter and can explain some of what is going on with changes in sales volume and how interest rate changes do matter. My guess is that if more than 70% of the population, no matter their what religion or skin color, can’t afford to buy a home in a market that it might be an issue for the market, but what do I know.
Ryan, enjoy your great work and effort to get all this good stuff out among the cyberspace folks.
Great data as always.
Tip my Stetson to those agents that follow you as this market is nutty with nutty sellers who seem to have access to 2021 and First Qtr 2022 market data, but they stopped collecting after April 2022. Hope they start listening to the professional RE agent.
Wow, Brad. I’m really glad you’re okay. Yikes. What a relief. I imagine that’s beyond scary to have to evacuate and get your animals to safety. I can’t imagine. Right now we have the Mosquito Fire locally, and it’s sad to see some friends on my Facebook feed evacuated. I think it’s only 20% contained too.
That’s quite a situation and I imagine you worded things very well and objectively. That’s who you are and I know your heart.
Now, just for the sake of discussion, let me play devil’s advocate… For any onlookers, I suppose it depends on how something like this is worded. If someone said, “And residents cannot afford properties in this neighborhood,” that sounds off because it sounds like a subjective judgment. But if someone said, “Affordability is declining as only 27% of households in the county can afford the median price per CAR stats,” that is factual and objective. Or something like is also factual… “The monthly mortgage payment is up 37% this year per Redfin, and we’ve seen a 25% drop in volume as buyers are struggling to afford today’s prices.”
When we think about the climate of today’s housing market, I completely agree with you that we have to be able to talk about affordability. This is a massive issue. It is the elephant in the room. What is the market doing? And why is it moving the way it is? If we’re to parse what is happening, it’s meaningful to discuss the trends and stats (while obviously avoiding any hint of bias).
The reality is we’ve seen lots of areas with contracting volume. In fact, CAR reported last month that every price point contracted in the state. And locally, some of the highest-priced areas have 20-30% lower volume this year, so it’s not just one type of neighborhood or buyer profile. Affordability has been growing in the wrong direction for years, and it’s on steroids right now in light of rate hikes. That 100% matters for the market and I will talk about this in my market analysis in an objective manner.
For any onlookers, see slides 15-17 in the CAR July report to show volume trends in the state. Hopefully they will publish August stats soon, and it wouldn’t be surprising if August stats rebounded a bit because lots of markets saw a bit of a rebounding dynamic (including Sacramento). https://www.car.org/marketdata/data/countysalesactivity
Thanks Brad. I appreciate your commentary. And I’m so glad you brought this up because it helps us intelligently parse through what it looks like to talk about trends. I hope it was okay for me to expand on the example here.
Take care. And yippee ki yay (not sure if real Cowboys say that, but Bruce Willis does…).
Bruce does say it and it works for me. Although sometimes he is a little more graphic with his chose of words………..
You are absolutely right on with your comment. It is about the community. It is what the statistical mean and median show and what the average household income has to be in order to make a monthly payment. It is part of the reason why things are changing in a market. When you see spikes in monthly payments from $900 a month to $3000 a month (in less than 1 year) for the same property (depending upon interest rates and the crazy rise in prices), then you have a whole big mess that is part of the issue at hand.
Well said as always Ryan. Thank you, my friend, and last week was a very busy week. Funny how it only takes a few minutes to two hours to evacuate but it takes four days to move everything back in. Have no idea how that works.
Haha. Good to know. Thanks as always. Now hang in there and get some rest to recover from this past week.
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