In celebration of the upcoming River Cats season, this article is about my favorite sport; baseball. Baseball has been baked into my DNA since birth so it’s the best way I can explain buying and selling residential real estate. I can understand how some find it less exciting than other sports but there are many uses of strategy and tactics which make it very exciting when playing the game and very useful when a metaphor is needed to guide my clients. (Fast-pitch softball is even more exciting.)
One of the best ways to learn the sport is to learn each player’s appropriate response to an event on the field. We did that by playing “situation”. The team and each player must know “what to do if…”. This “what if” exercise is called “situation”. For example, if there is a runner on 2nd base, 1 out, and the ball is hit to shortstop, each player has a role to play. If one player fails in their performance of their role, it gives the other team a tactical advantage (i.e., runners advance). Most understand that an appropriate response can be done within a wide (infinite?) spectrum of skill levels.
In the guidance of my clients who are selling, buying, or both, they need to know “what if”. For example, what if my seller gets an offer from a buyer who is cash poor? My seller, in the absence of a better offer, must understand the buyers’ limitations and what the seller should expect at the end of the buyers’ contingency period. As another example, what if my buyer succeeds in getting into contract with a seller and, before they must commit, another house they REALLY want comes on the market.
Life, like baseball, comes in many forms with many different situations. When selling or buying real estate in California, an incorrect response to a situation could increase my clients’ risk. An appropriate response could increase my clients’ leverage. And leverage is the key.
One of the most frequent questions from sellers is “should I make updates or improvements without getting any permits”? The answer is “no”. But without a permit for certain changes to a residential dwelling, a house can still be sold but the new owner acquires that situation. Many changes cannot practically be permitted or grandfathered without exposing all work that was done.
This makes the improvement “undocumented” (illegal) but is only an issue if the buyer cancels or an appraiser/lender denies a loan due to a condition related to the improvement or lack of permit. Roof lines, foundations, plumbing, or electrical changes are obvious issues if not done in a professional manner.
An owner may make any improvements themselves. But it should be done well and with a permit (by a bonded professional). A house should have regular maintenance to keep it from aging like us. But it’s the buyer who must be aware of the risks and consequences of acquiring the issue.
Especially if the change increases the value of the property, an owner should get the necessary permits. The last thing our housing population needs is an undocumented improvement. If a large number of houses have undocumented improvements, it will affect the allure of those houses and, hence, the value. And the decreasing value of your neighbor’s house affects the value of yours.
Swing Six Times
Over the last 20 years, when applying my Swing Indicator to historical data, there has NEVER been a period in which the Up Swings and Down Swings crossed each other more than three times in a short time period. We’ve just swung our sixth.
This view below shows only the last 3 years of my Swing Indicator. This view shows the relatively narrow range (equilibrium?) yet multiple crossings (chaos?) of the Up Ticks and Down Ticks. (I count 6 crossings since June ’15.)
In my opinion, this behavior indicates either chaos or equilibrium. With all of the external forces that affect supply and demand (employment, rates, etc.), it is easier to believe this is a sign of chaos in the market. Although, in the early days of my collected data, there were no/few FHA loans and no loan quotas pushed onto lenders. Builders and unqualified buyers used the tax payers to take their handfuls.
Fair Oaks Trends
The momentum (blue line) for Fair Oaks median price is decreasing and nearing its zero axis. Momentum peaked in Q3 of 2013. I’m not a fan of unbridled appreciation. But I’m not impressed when comparing momenta in surrounding areas. Fair Oaks is a mixed community with regard to price, location, and condition.
The higher values in Fair Oaks are in subdivisions like Hammersmith, Clover Meadow, Curragh Downs, Winding Woods, and other pockets.
Orangevale is transforming. Historically priced lower than Fair Oaks, known for horse properties, and a rural look and feel, Orangevale is becoming more popular. Newer pockets of homes and proximity to Folsom has increased the number of higher priced properties.
This latest jump, however, may be an anomaly and may come down in March. And Fair Oaks may increase in March. Serial moves in any direction don’t continue ad infinitum.
Fair Oaks momentum is down. Orangevale momentum is up. The remaining movement is “flat” and Folsom is indecisive about its direction so is teetering at its current level. Unlike Fair Oaks, the momentum doesn’t appear to be heading toward its zero axis.
4 things to remember about increasing values and low inventory
- Front Loaded Market: In a normal market, prices tend to heat up in the spring and soften in the fall. While this isn’t true everywhere in the United States (or for every year or type of property), this general reality reminds us that value increases are often loaded into the front part of the year rather than throughout the entire year. For instance, if values increased by 6% last year, it doesn’t mean value went up by 0.5% each month. Instead, any increase in value might actually have occurred from February to June.
- Rapid Appreciation: I’ve been hearing lots of chatter about rapid appreciation lately. The idea is the market has increased substantially in value over the past couple months and appraisals are lagging behind the trend. I know low appraisals are a reality, and if appraisers aren’t giving upward adjustments for value increases (when warranted of course), it can lead to conservative appraisals that probably reflect the market two months ago rather than right now. Whatever the case, the Sacramento market has felt extremely competitive lately because of freakishly low inventory, though actual value increases seem more nominal for the spring rather than exponential. Yes, there are some properties that have been bid up 10% or so, but those properties were probably priced far too low since increases that large have not typified this market. Moreover, sometimes markets feel more aggressive than they actually are, so a market’s mantra might be: “Aggressive demand, modest appreciation.”
- Not Every Neighborhood: Some neighborhoods and price ranges are trending differently than others. I know that sounds obvious, but it’s worth mentioning because it’s easy to lump all areas and price ranges together. For instance, the median price in the regional market last month increased by 2.5%, but that doesn’t mean values increased by 2.5% in every single neighborhood or price range. When valuing a property, we can keep an eye on trends from the wider area, but at the end of the day we need to look at competitive sales and listings in the subject property’s particular neighborhood. What is the competitive market doing in the neighborhood? If we impose the notion that “values increased by 2.5% last month” on every neighborhood, we’re probably going to make some valuation mistakes.
- Less New Construction is Starting to Matter: When the economy collapsed, new home construction sloughed off and has not yet recovered anywhere close to where it was during the glory years from say 2003 to 2005. This might not seem like a big deal, but now imagine the population has grown over the past 10 years, which essentially means there are now less available housing units for a larger population. On top of this, institutional investors bought homes in recent years and are holding on to them instead of selling. Moreover, some owners purchased several years ago are sitting on a sweet 3.5% interest rate and a low mortgage payment. Why would they sell in today’s market unless they really had to? Not all areas in the country are struggling with low inventory, but a lack of new home construction in recent years is actually a big deal, and it’s certainly contributing to a lower housing supply in many markets including Sacramento. Lastly, when there are less housing units for the population, it tends to create an environment where rents increase. This is an important trend to watch.
Quick Sacramento Market Summary: The market in February was fairly normal in Sacramento. Values saw a modest seasonal uptick, sales volume increased, and inventory declined. This was all expected because it’s what we normally see at this time of year. But while market stats are more on the tame side, the market has felt anything but that in the trenches of house hunting. Multiple offers are commonplace and buyers are seeming to exude a 2004-ish frenzy to get into contract before values rise too quickly (does that concern anyone?). Despite housing inventory being extremely tight, properties that are priced too high are sitting instead of selling, and that reminds us how price sensitive buyers have become. The market is definitely a sellers’ market, though that doesn’t mean sellers can command any price they want. It’s interesting to note it took 12 less days to sell a house this February compared to last February, and only 3.4% of all sales in the region last month were short sales. One last thing. There is a big difference in the mood among buyers when mortgage interest rates are closer to 3.5% compared to even 4.0%, so watch rates and the market closely.
- It took an average of 46 days to sell in both February and January.
- It took 12 less days to sell this February compared to last February.
- Sales volume was nearly identical in February 2016 compared to last February.
- FHA sales were 24% of all sales last month.
- Housing inventory is 25% lower than it was last year at the same time.
- The median price increased by 6.7% last month (take that w/ a grain of salt).
- The median price is 6.7% higher than the same time last year.
- The avg price per sq ft increased by about 1% last month.
- The avg price per sq ft is 6% higher than the same time last year.
- Sales volume in 2016 is roughly the same as the same time last year.