No BS Real Estate – 2016 May

May 2016

Bubbles …

Don’t exist if they never burst. If real estate values continued to increase forever, with no correction, then we can’t call it a bubble. The continued appreciation may increase the fear of a correction and that fear, in turn, may help produce the “bursting”. But if the bursting “doesn’t”, then the bubble “isn’t”.
Are sometimes created by other bubbles. For all of the talk of the real estate bubble, we have to admit that it didn’t happen by itself. Supply and demand of housing both play a major role in our attempt to reach equilibrium (where supply meets demand and where sellers and buyers agree on a sales price). But many other market forces have impacts on supply and/or demand. And many forces are artificial and end up corrupting any ability to reach equilibrium. Yet other forces may be other bubbles bursting (or increasing forces that have not burst yet). For example, I think a salary bubble is currently bursting in our country. That is impacting supply, demand, confidence, employment, and financing rules. Each of these forces can affect the size, duration, and momentum of a related market and, therefore, whether it bursts now, later, or never.
Bursting is part of a healing market. If we admit that a bubble must burst to be a bubble and they represent an unsupportable increase, then the bursting of that bubble must be the beginning of the healing process. Markets are like living organisms. If they are not allowed to heal themselves (or by reversing the relevant market forces), then the organism gets too big to survive. That kind of market appreciation will create the fear which pops bubbles. But when one market is healing (real estate), another market may be protected (salary) because someone is reaping a reward from its protection. Or, rather, some forces are protected for political reasons.
Are obvious in graphical form. The graph shows the Sacramento Median Price, the Inventory (For Sale), the Sales (Sold), and the Pended (almost Sold). The drastic increase in inventory was partly due to new construction activity (trying to ride the appreciation wave) and, then, as a result of lending forces, partly due to distressed sales (REO, Short Sales). If we examine the history of lending rates, loan types, rate of home ownership, and regulations over the same time period, it is obvious that Inventory is not the cause of the real estate bubble (values) but, rather, is a result of the bursting — demand decreased while supply increased.

Momentum Swings
The last 3 years are shown in this Swing chart. The market corrections (healing) are depicted by the momenta of all zip codes in our region.  After a season of momentum “Down Ticks”, the market starts to appreciate and fill the vacuums left by the decreases.  But for the last 18 months, there has been no vacuum to fill.  The aggregate number of “Up Ticks” is not true enough to stage a healthy recovery.  This is strictly a combination of local zip codes which means that local and national forces may be affecting us differently than other areas of the nation.  California is still a preferred place to own a home although regulation, taxes, employment, and cost-of-living may be keeping the appreciation in check. And, in my opinion, this State is much closer to Socialist than Capitalist.  And our elected leaders are motivated to protect their “phony-baloney jobs”.


– The median price for a County or zip code is based on MLS reporting each month; half of sales are higher and half are lower than the median.
– The Indicators and charts with momentum and my watermark are my creation and can be seen on my website.
– Momentum can be used to “guess” at future direction of a commodity in a free market (capitalism).

Fair Oaks — Although adhering to the downward direction of momentum since late 2013, Fair Oaks median price is over 16% above last year’s median. Sales volume is fairly normal. There has been new construction over the last 2 years which helps supply recover to give buyers a better choice. And if there is truly a buyer for every house, supply need only meet demand, not exceed it. The remainder of listings that are not as alluring take longer to sell or require price improvements. (See web page for Fair Oaks details)
Folsom — This zip code is usually in the top 5 of area median prices. Many areas of new construction are high in quality and value. Empire Ranch and Los Cerros are the areas of highest values in Folsom. The inventory is almost not enough to satisfy the demand. This keeps prices higher. And we can’t know if a larger supply (of quality houses) would beget more sales. Folsom’s relative popularity is a constant. (See web page for Folsom details)
Orangevale — The median price and average Days on Market of this zip code have been recovering more consistently than most others since 2011. High-value pockets, new construction, and a change in the allure of rural living have all, I think, transformed the general outlook for Orangevale. And this zip code is tangent to Granite Bay, Roseville, Folsom, and Fair Oaks which helps sustain a higher value due to proximity to higher values. (See web page for Orangevale details)
Granite Bay — Usually the highest median price in the 3 counties, Granite Bay consists of many high-priced houses and momentum is therefore not as smooth or helpful in prediction. Momentum crossed the zero axis in 2014 but only shortly. Now it resembles the flat behavior but again approaching zero. There are many neighborhoods and communities in Granite Bay which exceed $1M in estimated (and actual) value. Average Days on Market is half of what it was between ‘06-’12. (See web page for Granite Bay details)
Roseville (95661) — The highest Roseville median prices are typically in this zip code. The momentum bounced off the zero axis last summer then generally headed upward until this month. Castle Creek, Roseville Parkway, Secret Ravine, Stoneridge, and Morgan Creek have the highest values. These are popular areas and Placer will be seeing the most growth, I think. And the seller’s market is helping to keep prices high. (See web page for Roseville details)
El Dorado Hills — This zip code has a little more inventory and therefore closer to a buyer’s market than a lot of other zip codes. EDH has had some positive momentum movement since Q4 ‘15 and only this month has it shown a change in that momentum. The north end of EDH, near the lake (Marina, Lakehills, Summit) maintain a lot of the value in the zip code. And the custom side of Serrano does quite well. (See web page for El Dorado Hills details)

Defy The Effects of Time
Houses age and deteriorate over time. The best way to maintain and increase the value of your home and property is to maintain and increase its functional utility. Kitchens and bathrooms usually get the most attention when remodeling. But there are some mistakes that owners make. Don’t make these:
Being Trendy: People try to treat architecture like fashion but architecture takes a long time to build, uses a lot of resources, and needs to last a while. Trends can quickly fade. It’s important to stay true to the character of the house and be careful when updating the home’s structure. You can change out a countertop or tile, but it’s a lot harder to re-do windows and doors. Make these the highest quality that you can and it will be money well spent.
Ignoring proportions: Too often, home owners just focus on the results but fail to consider the process enough. People will just want to add on and say, ‘I want a family room that’s 12 by 18 feet,’ rather than seeing if that fit is right for the character of the house and how it flows. Keep a close eye on proportions, such as the size of windows and doors as well as ceiling height, to make sure the renovation fits the home.
Rushing the renovation: Renovations take time and shouldn’t be rushed. It takes longer than you think and that’s because it usually takes home owners a while to process the changes. Talk to experts early on to understand the deadlines involved. Add 10 percent more time to a project than originally anticipated.
DIY: Unless you are a skilled, licensed contractor, you should hire professionals who will warranty their work, get all relevant permits, and produce high-quality results. Remember, you get what you pay for.

Call me for a free analysis or for connections to professionals.

Rent or Buy
Residential real estate is either Owner or Non-owner occupied. While it’s logical that NOT everyone should or can own a residence, what we fail to recognize are the forces behind the rental market, how it is also a force affecting the sales market, and how the external forces are unique to each. We frequently hear about the rising rents but quickly assume it’s natural and well-balanced. It’s not.
With low inventory (especially duplexes and multi-family) and no new construction of these types of residences, there is a mismatch. And the new construction is usually priced high because costs are high or the builder doesn’t want to target the investor who buys these assets.
The relevant question is whether you can and desire to purchase a home. The numbers are obviously in favor of buying. But the numbers don’t change your financial situation.

The big deal about rising rents in real estate
By Ryan Lundquist on May 3, 2016

Low Inventory: Rents are rising in large part due to low inventory. There has been population growth over the past decade, but very few new housing units have been built since the housing “bubble” burst. This essentially means we have a shortage of housing units. Keep in mind this isn’t an easy issue to solve since building a large number of units won’t happen overnight.
Squeezed Savings for Tenants: Wage growth has been more or less stagnant in the Sacramento area at least, which means rent increases are coming directly out of a tenant’s savings account. Remember, if a tenant is saving up to buy a house, it’s going to now take longer to make that happen.
Investors Holding: There are real estate investors enjoying higher rents, and many will hold on to their properties for now instead of selling. Unless an investor is looking to diversify outside of real estate, an investor’s money is probably parked well right where it is. After all, why would an investor trade in great rentals only to buy something else at a much higher price today (and get the same rent)?
Investors Selling: Not everyone is going to hold on to their properties though. There are many investors who purchased at lower prices from 2009 to 2012 especially, and it’s now time for them to cash out. Quite a few investors are actually selling directly to their tenants off MLS (agents, be there to write up the contract and help guide the process).
Old Numbers: When rents rise quickly, sometimes the rents we see published online from a few quarters ago are simply old. Just like with rising values in the resale market, we have to ask whether the rental market has changed since the most recent data was published. Ultimately it’s important to look to a number of sources to get fresh numbers. Here are some suggestions: Craigslist, Hot Pads, Zilpy, Rent-O-Meter, & Zillow.
Not Every Neighborhood: Like any trend, it’s easy to hear “rents are rising” and think that applies everywhere. Let’s remember some rental markets are hotter than others though. Apartment rents are said to have increased 10% last year in Sacramento and are projected to increase by another 10% this year. A similar dynamic is happening with single family units too, though NOT in every neighborhood.
Vacancy at all-time lows. The residential vacancy rate in Sacramento has dropped to a staggering 2.6 percent, which is down from the market’s 2002–12 historical average of 6.2 percent. Apartment building owners and managers tell me that they get 12, 15, 20 applications on a vacant 1 or 2 bedroom apartment, if it’s in good shape with modern upgrades. Apartments with original finishes tend to have more modest rents and take longer to fill.
Exchange Buyers. There are a significant number of investors selling their real estate assets and deferring the capital gains taxes through a 1031 Exchange into another property. Flush with cash and on a very short time frame, some exchange buyers are willing to pay top dollar, just to park their money somewhere. Others are “value add” investors looking for dilapidated properties to fix up and maximize on the healthy rent growth. And now there are other “like-kind” assets that can attract money out of the rental market.

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