At some point over the last 6-12 months, Zillow started revising their zestimates higher – way higher!
It has been noticed too, and now virtually every potential seller brings their zestimate to the table, and expects to list their home for that amount……or more.
But in the latest Zillow forecasts by zip code, they have SCALED BACK their big percentage increases!
Are they scaling back the zestimates too? If not, the list pricing for the rest of 2022 will be frothy.
Here are their current forecasts, with the previous forecast beside each zip code:
They do have something that none of the ivory-tower economists have – the real estate viewer data.
They have lowered their local 1-year pricing forecasts by 5% to 11% in every zip code, which must be resulting from their algorithms sizing up the customer viewing data….doesn’t it?
Are they lowering the zestimates too?
It is hard to track because once a home goes on the MLS, their zestimate is automatically adjusted to within a couple of bucks of the list price. But are consumers – sellers and buyers – aware of that? No, and not even the agents know it. Everyone will wonder if the zestimate is legit, and they want to believe in something.
If we see more active (unsold) listings stacking up, we can attribute some, or all of it to the list pricing being based on the zestimates taken from earlier this year……..and sellers believing that they mean something! And then if they check their latest zestimate, it will be the same as their current list price, which will embolden them to think that the lucky young couple with 2.2 kids is right around the corner.
Our Carmel Valley listing closed escrow yesterday!
It was the 3br/2.5 ba, 1,804sf home built in 1989 that we completed about $60,000 worth of upgrades in preparing for market (it had been a rental for years). The before-and-after photos were featured here:
The house looked great and it was vacant but this was when I did the blog post about spring break interrupting the market’s momentum. We decided to forge ahead, and I inputted the listing onto the MLS on the Thursday morning before spring break with immediate showings available that day – in hopes of catching any buyers that might be leaving for vacation the next day.
We had six showings on Thursday and Friday, and 100+ people came to open house over the weekend.
In January, I predicted that we would list for $1,750,000, and sell for $1,900,000.
On March 31st, we hit the MLS priced at $1,750,000, and closed for $1,875,000.
We received one offer.
Thankfully, the only offer included a $125,000 premium to incentivize the sellers to take the deal, instead of waiting for two in the bush. But we were already on Day 4 of open-market exposure, so I knew we were at peak market and our chances of selling for over list price would start dropping .
We contemplated whether we should counter-offer on price, or extend the two-week escrow period because we wanted the extra time for the sellers’ 1031 exchange. But given the fact that we only had one offer, the sellers signed it.
We had already completed a home inspection in advance, and thought we had fixed everything. The buyers did their own home inspection – which we always recommend to our buyers as well, and here’s why.
Their inspector noted that the water-meter gauge was running, even with all faucets being off. It’s the sign that a leak had developed, and the hot-water heater was operating the entire time too. The sellers checked their history of utilities and found their costs spiked on March 31st.
We have a ‘slab leak’, and we knew it was the hot side!
Just the thought of a slab leak causes grave concern and panic for most people. But we’ve handled them before, and know that they can be fixed with money like any other home repair.
Donna’s vendors jumped on it, and we closed in 16 days, instead of fourteen.
With rates rising, and prices significantly higher, the average borrower is paying about 38% more on the monthly payment now than they would have for the same home one year ago, according to Realtor.com.
JtR: This is crushing the move-up/move-down market, with very few existing homeowners needing to move bad enough to start over on a new 30-year mortgage at a higher rate (86% of mortgage holders have a rate under 5%).
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Mortgage applications to purchase a home fell 3% for the week and were 14% lower than the same week one year ago. That annual decline is now beginning to grow, as housing becomes even more pricey.
“In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase demand as well. Home purchase activity has been volatile in recent weeks and has yet to see the typical pickup for this time of the year,” added Kan.
March sales were 4.5% lower than the same period in 2021.
JtR: Sales are dropping due to lack of supply, yet the talking heads will blame it on the demand side. There is no shortage of demand around San Diego County – plenty of buyers waiting.
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A new study conducted by OJO Labs, an online real estate site and personal finance tool, found that the vast majority of recent home seekers are unwilling to relocate extreme distances, and are instead looking to buy much closer to their current homes.
It suggests that while buying a home in another state may have become a popular move for some during the pandemic—especially for high earners—most people looking for a new home right now are not venturing too far.
The OJO Labs study, published at the very end of March, surveyed more than 500 prospective homebuyers about their experience over that month. Of these, 41% were limiting their search to within six and 50 miles from their current home, while 36% were interested in buying a new house only if it was fewer than five miles away.
Only 11% of respondents were willing to move more than 500 miles away from their current address.
The findings push back on the pandemic-era narrative of New Yorkers and Californians moving to more livable cities in states like Arizona, Texas, and Florida.
JtR: Those who are only searching within a 50-mile radius of NSDCC probably won’t find anything that makes it worth moving – the prices aren’t low enough. There needs to be a bigger windfall to compensate for the capital-gains taxes, and feel like a big win. Nobody is going to move just for the heck of it. Thus, our supply is dependent upon those willing to move a long ways.
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Daimler went on to say that Zillow does not believe that the “double dipping agent” — or in other words dual agency in which the same person represents both a buyer and a seller — is the future.
“We don’t believe in that philosophy and we don’t believe that’s where the industry is going,” she added.
JtR: She needs to spend a few days on the street to know what’s really going on – it’s never been so hard to be a buyer’s agent. I finally succeeded with a set of buyers on their 12th offer, which was 40% higher in price than where we started six months ago. It will be a natural progression that buyer-agents get phased out altogether, and CoStar’s new search portal that directs the consumers back to the listing agent will be the last straw. It will debut in New York City this summer.
The drastic drop in inventory seems devastating, but check out the closed sales:
NSDCC Number of Listings & Sales, First Quarter
Year
NSDCC Total 1Q Listings
Median List Price
1Q Closings
Median Sales Price
2018
1,230
$1,592,500
569
$1,323,000
2019
1,277
$1,575,000
536
$1,290,000
2020
1,082
$1,712,500
572
$1,420,500
2021
985
$1,899,000
663
$1,800,000
2022
704
$2,595,000
504
$2,418,000
Last year was an exceptional frenzy with 663 sales in the first quarter, but look how this year compares to previous years. The 1Q sales in 2022 are fairly close to those in 2018-2020, in spite of fewer choices!
There is some some discussion among the talking heads that a moderating frenzy could cause more sellers to come to market in hopes of getting out while they can. They may be right in areas where inventory is already exploding.
But not in San Diego, where last month the new listings dropped more than anywhere else.
As the selling season opens up, it is normal for the inventory to rise, and below you can see that sexy destinations like Austin, Denver, Nashville, etc. experienced large increases between February and March.
But not in San Diego, where in March the active inventory month-over-month went DOWN!
No surprise that San Diego is the place where people are least-likely to leave!
Like most real estate talk, half of this is horsepucky:
Don’t Let FOMO Drive You
Just because everyone is buying a house, doesn’t mean you should be too, said Donald Olhausen Jr., owner of We Buy Houses in San Diego. “I have seen many people force bad decisions because they have fear of missing out (FOMO). Forcing a bad deal will not rectify itself because there were no other options or because you felt stuck. Being patient in this market is hard, but overpaying for a faulty property will ultimately lead to more regret.”
There Are Markets Within Markets
There is not one universal housing market, but rather “many smaller micro-markets,” said Michael Shapot, Esq., licensed associate real estate broker. “Some of those submarkets are ‘hot, less hot or more hot’ and they may change week by week, or month by month.”
Elisa Uribe, a realtor with Wells and Bennett Realtors added that “real estate is hyper-local,” so consider the source. “You can withstand any market changes if you don’t have to move in a specific time frame.”
2022 Is a Slightly Better Time To Buy
Real estate experts like Marina Vaamonde, the founder of PropertyCashin, said that 2022 would be a better time to buy because, “The demand for residential real estate is still vastly overshadowing the inventory.”
Indeed, now that 2022 has arrived, experts still agree that is the case, even with decreasing inventory. According to Time, home prices will not increase as rapidly and home values will also likely increase at a less vigorous rate than the peak of 2021, which bodes well for buyers.
However, the Fed Just Raised Interest Rates
What made 2021 unique was extremely low interest rates, according to David Friedman, CEO of investment property platform Knox Financial. “There have been very few times in history when we’ve seen 30-year fixed mortgage rates hovering around 3.3% and 15-year mortgage rates slightly above 2.6%,” he said.
However, on March 16, 2022, The Federal Reserve raised rates for the first time in years by 0.25%. What this likely means, according to NerdWallet, is that mortgage rates will follow suit by increasing, meaning homebuyers will pay more in interest.
No One Can Predict the Next Drop
Despite these slight increases in interest rates, and decreases in inventory, this doesn’t necessarily mean the market is going down.
Khari Washington, a broker and owner of 1st United Realty & Mortgage, added, “No one knows if the housing market will drop and when it will drop. Most reports talk about the market slowing in 2023 but not falling. Builders have not built enough housing and interest rates remain low.”
“The right time to buy is when a person is ready,” adds Washington.
Don’t Wait for a Better Price
Waiting can be a gamble, said Jeff Shipwash, CEO of Shipwash Properties LLC. “You could be waiting to purchase with the thought of prices coming down, but…even if home prices do pull back some, if rates increase it will all be for nothing. You may be able to afford a $300,000 house at current rates. But if those rates increase by 1% while you wait, that same payment may be on a $250,000 house.”
Rents Are Sky High
If not buying means renting, consider that “the current rental market is on fire with rents skyrocketing and landlord incentives eliminated,” said Shapot. Renting will not be a cheaper option in the long run.
This Market Is Stable
Unlike the unstable market leading up to the economic crash of 2008, this market is stable, said Jennifer Shannon, a broker associate with Keller Williams Realty. “This market run-up hasn’t been driven by investors, flippers and bad mortgages. It’s been driven by legitimate buyers who are more free to determine where they live than ever.” While demand will start to slow eventually, she says there are no indicators of prices going down anytime soon.
You’re Ready When You’re Ready
“You’re ready to buy a home when you’re ready, not when there’s a frenzy,” said Tabitha Mazzara, director of operations at mortgage lender MBANC. “The frenzy is a seller’s market, so missing out on a frenzy is a good thing for buyers.”
Chase Michels, owner of Compass, The Michels Group, added, “If a client is fully committed to buying and is in the appropriate financial position to do so, then they should be looking. You may buy at a little lower or higher price at different times of year but that is typically unpredictable in a smaller market.”
The bump over the list price is so customary in the local area that the zestimate was raised by $763,480 about the time it was marked pending – the algorithms already had the expected increase baked in!
They are enjoying The 2022 Lucky Windfall of the First Quarter, and we’ll see how well it holds up. But as long as home sales in the Bay Area keep selling for much-higher pricing than in San Diego, one of our main feeder areas will keep sending happy buyers our way!
The list prices mentioned here all say that they sold for 100% of the LP, but it’s a typo – they all sold for well over. For example, Patrick Way sold for $1.1 million over, and William Henry sold for $800,000 over list:
Paying ~$2,000/sf for modest homes in Los Altos has been fairly routine lately!
Hopefully, those sellers keep coming our way. Even if their market were to dip 10% to 20% from these dizzy heights, they will still love what they can buy here for the money.
Now that we are grappling with 5% mortgage rates, people are wondering how it will affect the market.
The common perception is that there will be pullback.
What that means isn’t defined – it’s just a vague concept that the logical mind wants to believe. But logic flew out the window long ago, so I’m not sure how useful it is today. Prices went up 30% in 2021 and it didn’t stop, or even slow the market in the first quarter of 2022.
Does it matter what the opinion is today?
Not really, and you can refer to the chart above to see how much opinions matter.
All that matters is that we track the trends over the next few months to see what actually happens!
Yesterday I said all we have to do is monitor the days-on-market, and the actives vs pendings to get advance notice on how the market is behaving. Let’s add a third metric, the SP:LP ratio.
Who are the home buyers that will determine our fate? When out-of-towners from more affluent areas come here to see our prices, they think we are giving them away. There have been estimates that as many as 70% of the coastal sales here have been bought by people from the Bay Area.
We should keep an eye on their market!
I’m watching one sale in progress there. My uncle has been a lifelong resident, and my mom, brother and sister all live there so I have opportunity to check in on their real estate market from time to time.
In December, we went to pay our respects to Sally, my uncle’s long-time girlfriend. They met later in life and had separate houses, and unfortunately Sally passed away from cancer just before Christmas.
We had a brief conversation with her sisters who were from outside California, and they expected that they would sell her home in early 2022. The zestimate was in the mid-$2,000,000s, and they said they would be happy with a price in that range.
After painting and staging the relatively modest 1,763sf house built in 1953, they listed it for $3,195,000. It went pending within ten days – and since then the zestimate has zoomed to $3,800,000!
The house is five doors away from the Foothill Expressway, which isn’t a freeway but there is some road noise. The 9,975sf lot size is attractive, and the house is one-story. But low-to-mid $3,000,000s?
Even more interesting was the house at 1051 Peninsular Ct. When we were there, I saw the sign and drove by to confirm that it was literally right next to the Foothill Expressway. It closed for $3,100,000!
The pricing in the Bay Area is subject to change, just like it is here – but it should be somewhat relative, and we will likely ride the same elevator. The 1Q22 pricing spiked in Los Altos, and the sisters – who only expected a sales price in the mid-$2,000,000s – will pick up a lucky windfall.
The 2022 Lucky Windfall of the First Quarter doesn’t have to continue throughout the year for our market to thrive. If pricing “crashes” downward 10% to 20% from today’s lofty heights, it means we’re only back to November pricing, which you would think wouldn’t bother sellers much.
But it will.
Do not underestimate the home seller’s ego.
It doesn’t mean you should, or shouldn’t, go buy a house today. If you are a home buyer in the hunt, just be picky (or pickier) about what you will tolerate. The list prices will feel like TodayComps+5%, the sellers are doing less to condition them for sale, and the listing agents act like you owe them money.
There is one guarantee. The inventory later in the year will be worse than it is today. It could feel like pricing is loosening up (it’s not yet), especially in the 4th quarter of 2022, but it won’t matter if there aren’t any homes for sale that you would buy. Be in the hunt for the right house!
I will keep track of the winners and losers. Help me if you can!
Here is today’s winner, who had 11 showings and three offers. Tanya raised the list price to a range, which makes it look like it probably went over $3,000,000:
It may seem crazy to you, but those coming from Los Altos will think it looks like a steal!
Alternative headline: “Four areas so affluent that home prices and incomes are completely disconnected.”
Comparing the median sale price to house-buying power in all top 50 markets reveals that 4 markets are considered “overvalued”. “Overvalued” is defined by a market where the median sale price > house-buying power. Most markets still “undervalued.”
House-buying power is calculated by using a city’s annual median household income, assuming that a household spends one-third of their income on a mortgage, assuming a 5% down payment, and considering the current (Jan. 2022) 30-year, fixed-rate mortgage rate.
The Household Mystery: Part II https://calculatedrisk.substack.com/p/the-household-mystery-part-ii
Recently there have been two papers that shed some light on this mystery.
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Putting these two papers together - it is very possible that work-from-home drove some of the likely sources of household formation ...
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