Fake Real Estate Trends & Rising Rents

This post first appeared on the Sacramento Appraisal Blog

Let’s talk about fake news. No, not anything political. Let’s consider a couple of examples where it’s easy to misunderstand trends and then report fake real estate news. Then let’s look at how rent increases are fueling the 2-4 unit market. Anything to add? I’d love to hear your take.

Part I: This is Part I of my big monthly market update. Part II will come next week. If you need a few graphs now for marketing, send me an email. This post is long on purpose. Scroll or read in depth.

1) FAKE NEWS: The market is starting to turn because sales volume is down.

TRUTH: Sales volume declined by 21% last month in Sacramento County. That sounds dramatic, right? Should we be concerned? Is the market shifting? Nope. It’s actually normal to see volume drop like this between December and January. I circled January in red below as proof. This January was actually the strongest we’ve seen since 2013.

2) FAKE NEWS: The market is flat and didn’t have a price lull during the fall.

TRUTH: The median price has been flat in Sacramento County for six months, and normally it softens by about 5% during the fall, but that didn’t happen this year. So it’s easy to say that the market is so “hot” that prices didn’t dip, but that’s not true. Here’s the thing. Sometimes the median price ends up being a bit more flat despite the market showing a legitimate cooling. Besides, if we step back and look at the average sales price and average price per sq ft, both declined during the fall. Moreover, the median price in the region also declined. The moral of the story? Don’t put all your eggs in the median price basket.

3) *FAKE NEWS: Bay Area residents are buying EVERYTHING in Sacramento.

Truth: Bay Area folks are getting lots of attention and they should since there are over 20,000 new Bay Area residents migrating to Sacramento each year according to the Greater Sacramento Economic Council and Mercury News. That’s jaw-dropping to hear, but let’s pause and consider a few things.

* WHAT I AM NOT SAYING (update): I am not saying Bay Area buyers are not a factor in our market. They are. Bottom line. All I am saying is they are not buying everything. Thus it can be misleading news to perpetuate the idea that our market is being utterly gutted by Bay Area residents. As we have conversation about Bay Area buyers, let’s consider some of the points below. I find these fascinating for the sake of our conversation. Moreover, when we are talking about trends, let’s look to not only how the market feels, but actual stats too where possible.

A) Bay Area cash is not gutting Sacramento. Only 15% of all sales were cash in the region last year. Cash used to be about 30% during the “Blackstone” days.

B) Nearly 20% of sales in the region last year were FHA, which tells us first-time buyers are winning in this market – not just loaded Bay Area residents.

C) There are 20,000 new residents every year from the Bay Area, but there are only about 28,000 single family detached home sales in Sacramento per year. This tells us not everyone who moves here is actually buying. Of course if Bay Area buyers are picking up the slack of locals not buying, then that’s another story. If anyone has data to suggest that is the case, do share. For now though let’s admit not everyone who moves here is getting a mortgage.

D) I might be more bullish on thinking the Bay Area is dominating the purchase market, but having more than twenty thousands residents migrate to live in Sacramento is definitely putting pressure on rents. According to Yardis Matrix, rents are up 8.5% this year, and that translates to renters paying an average of $105 more each month for rent (or $1,260 more over the course of the entire year). Yikes.

4) NOT FAKE NEWS: Rising rents are heating up the 2-4 unit market.

TRUTH: An investor told me the other day, “Sacramento’s hot rental market is now the worst kept secret in the nation”. Such a headline quote (thanks Eliot). He is 100% correct because news of rising rents has seemed to permeate the marketplace lately. For years after the housing collapse prices seemed more subdued, but lately it’s been eye-opening to see how much demand there is for the 2-4 unit market. Yet many units hitting the market actually have below-market rents because the rents have not been raised in many years. This is why most of the time it seems like I cannot fully trust rental data in MLS because it reflects older rental contracts from years ago rather than the market today.

What the? There are also some lofty sales that leave us asking, “What the? It sold for how much?” I thought this recently when seeing a triplex sell for 1.8M in Midtown and a 4-plex at $850,000 in Curtis Park. A “lone-ranger” outlier sale might reflect the “hot” market in some senses, though remember a high sale could also be a trophy property, have a subdividable lot, or maybe a buyer overpaid in light of needing to do a 1031-exchange.

I hope this was helpful or interesting.

Questions: What do you think of the “fake” real estate news above? How much of an impact are Bay Area buyers really making? What are you seeing in the rental market? Did I miss something?

Have any comments or would you like to submit content of your own? Email comments@appraisalbuzz.com.

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About Ryan Lundquist

Ryan Lundquist
Ryan has been appraising full-time since 2003 and his clients include home owners, real estate agents, governmental agencies, attorneys, and lenders. He handle appraisals for estate settlement, divorce, tax grievances, pre-listing, loans and other types of private matters.

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