The Housing Market is Heating Up!

February 19th, 2023

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The housing market went from an ice bath to a hot shower

The housing market is getting hot again for the spring. It went from an ice bath in the fall to a hot shower so far in January. It’s not scalding like 2021, but it’s been a striking change. Let’s talk about this.

burning fire flame on white background. The caption reads, "The housing market is heating up."

 

THE HOUSING MARKET SO FAR IN 2023

It’s heating up & we need time: Each week we get a slightly better view of the 2023 market, so it’s important to keep watching different metrics to understand what is normal and what is not. In late January we’re finally getting a better view of what’s happening with pendings, actives, and prices.

Temperature shock: We had the worst monthly volume ever in the Sacramento region over the past 90 days. It’s like fall was a housing market ice bath, but now the market is a hot shower. Look, the trend feels so different right now, but part of me wonders if some of the heat perception is the result of such a stark contrast from cold to hot. Time will tell.

Quarterback Peyton Manning sitting in an ice bath with the slogan, "Fall 2022: Housing Market Ice Bath."

Normal spring seasonal stuff: So far, we’re seeing typical signs of a spring season with more pendings, properties getting into contract quickly, more multiple offers, more mortgage applications, and new listings. The number of mortgage applications and pending contracts are still down though, so it seems premature to say the market is normal.

Buyers are targeting older listings too: Buyers are targeting new listings, but stuff that’s been sitting on the market is also getting into contract. 31% of pendings in January are units that listed since January, but 69% of pending contracts listed before the new year. Nearly 18% of pendings listed before October 2022 too. Friends, demand woke up, and buyers aren’t overlooking older listings (they still aren’t overpaying though).

The spring feels hot, but not 2021 hot: The housing market was moving about twice as fast as usual for most of 2021, but that’s not the case so far in 2023. I’m not downplaying the temperature change lately, but I want to be careful about saying it’s 2021 all over again because so far the stats don’t support that. To give the market an awkward word picture, it’s Brad Pitt at 59 years old hot, not Legends of the Fall hot (sorry).

A picture of rapper Nelly with the slogan "It's getting hot in here. Spring market 2023."

Sellers wearing golden handcuffs: Sometimes the narrative is sellers are rushing the market, but we’re not seeing that sort of dynamic. It’s as if rates at 3% over the past few years are golden handcuffs keeping prospective sellers from listing. Or maybe the replacement home is just so expensive today for most people regardless of the rate they have, so it’s hard for anyone to move. Anyway, new listings have been anemic in January as we’ve only seen about 1,100 units in the region compared to 2,000 last year for the full month. I’ll talk about final monthly numbers next week or so.

Higher-priced listings in 2023 so far: Larger homes are listing (normal spring trend), which means buyers are finally starting to have a higher-quality selection instead of smaller leftovers from the fall. The active units are being priced higher, which could in part stem from the size difference. Pendings in January are listed about 1% higher than the median price of January’s closed sales and 3% higher than December (normal trend). We’ll see where they close though because a pending price isn’t always the final price. In short, preliminary stats suggest we could see a spring price uptick. It’s still early to say this, but larger homes and higher prices in January suggest this could happen. And as I mention below, a spring uptick even happened in 2007.

The right price moves quickly: It’s that time of year where it’s going to take less time to sell. 28% of pendings in January so far got into contract within ten days, and about 46% of units got into contract within thirty days of listing. This underscores the importance of pricing it right. Technically the average for pendings this month has been a whopping 60 days, and a number that big speaks to lots of properties that got into contract that were listed prior to January. But here’s a stunning stat. Active listings have been on the market 86 days, and that shows how many stale overpriced units there are right now.

A line graph to show days on market for current pendings since January 1, 2023 in the Sacramento region. The area below the line is filled in with red, and there were 1001 pendings represented here on this visual. Lots of properties got into contract quickly, but there are also units above 250 days.

Lower prices are hotter: The hottest price point in town is under $500,000. In fact, 40.7% of all pending contracts in the region since January have been under $500,000. A whopping 49.7% of these pendings had multiple offers too compared to 37.9% of units above $500,000. Honestly, these numbers aren’t unexpected for what we should see since the bottom half of activity tends to be more competitive.

Not a buyer buffet: Buyers, you do have more power in today’s market, but there is still competition – especially for lower-priced units and homes that check all the boxes. In short, it’s not a buffet where you can take whatever you want at any price. As Realtor Jenica Williams said on my Facebook this week, “It’s a price war and a beauty contest out there.” As I keep saying, for anyone buying right now, be confident in your decision, be patient, and get the most the market will give you.

33 offers is NOT the new norm: There is a listing in Sacramento with 33 offers right now, which sounds wild, but it’s also an outlier. 8.7% of pendings in the region over the past two weeks have five or more offers. Look, the market is undeniably heating up for the spring, but let’s not give too much weight to sensational examples. A property sold at the end of November with 43 offers during one of the iciest months on record (closed at $315K). If a property is getting that many offers, there is probably a story and/or pricing strategy. If I went to the mall and saw one teenager sporting a mohawk, it would be a mistake to say, “Dude, every teen has a mohawk.” One example isn’t a trend.

A meme of Borat giving thumbs up with the slogan, "I'm going to get 33 offers."

Seasonal markets happen even during declining years: One of the things I’ve been emphasizing in recent months is a seasonal spring uptick tends to happen even during declining years. What I mean is decades of stats show there is an uptick in the number of sales and more attention on the housing market even in years like 2007 and 2008. Thus, today we want to be careful about interpreting a seasonal uptick as a full-on rebound. We need more time to make that determination in my opinion.

The market isn’t just one thing to everyone: I ran a poll yesterday on Instagram, and while it’s not scientific research, the results remind us the market isn’t the same for every escrow. We’re hearing some stories of offers above the list price, some properties getting multiple offers and still going below the list price, and listings without any movement at all.

A screenshot of an Instagram poll I did yesterday. The question is, "What are you seeing with offers?" 12% said over list price, 35% said at list price, 41% said below list price, and 13% said what offers?

Affordability is still a glaring issue: It’s possible some buyers have gotten used to the idea of 6% rates, and some are finding a bit of affordability relief in light of a 15% dip in the median price last year. But let’s be real. We’re still missing a ton of buyers in the marketplace, and we need to see more affordability to get these buyers back. Just this week a tenant told me it was cheaper for him to rent than buy (he was right).

Might not go above the list price: A house in Sacramento has six offers, and the accepted offer is at the list price. This reminds us getting multiple offers today isn’t always the same thing as 2021 where so many listings were bid up with contingencies removed.

Is this 2021 all over again? Nope. And let’s hope the answer stays NO because that was total chaos. These days the mention of multiple offers can evoke housing market PTSD from 2021, but let’s remember getting multiple offers is a normal part of the real estate experience for a portion of the market. I keep hearing the sentiment that “multiple offers equals 2021,” and that’s false. Here’s a wide view to show what I mean. 46% of pendings over the past two weeks had multiple offers, which is a pretty normal level for the time of year, and we SHOULD be seeing more multiple offers in the spring season. Granted, if this percentage really starts to increase, then we’ll need to change our narrative. Keep in mind we started 2021 with about 70% of pendings with multiple offers, so it’s not the same vibe today (thankfully).

A line graph to show the percentage of sales with multiple offers in the Sacramento region since 2017. In the spring we see this % increase and in the fall it subsides. 2020 and 2021 in particular were quite elevated from the normal trend, and right now the % for 2023 looks fairly normal for the time being.

Has the housing market bottomed out? There is lots of talk about the housing market bottoming out. Bill McBride of Calculated Risk points out there can be an activity bottom and a price bottom. I think this is a genius distinction, and it’s what happened in Sacramento during the last housing crash where we had really subdued sales numbers for two years before volume rebounded. But prices still declined for multiple years after volume came back. Time will tell what happens ahead and how long this downward cycle will last, but with lots of focus on the market bottoming out, it would be wise to be looking for multiple bottoms (I know, that sounds a little pervy).

Pending volume is still subdued: The number of pending contracts is starting to see an uptick for the spring, but it’s still lower than a normal level. It’s possible we could see easily see 400 to 500 fewer pendings than last January, but I’ll report on that next week. What we want to watch ahead is whether the volume number starts to shrink. We’ve been missing about 40% of all buyers, and we can gauge when this number gets to 35%, 30%, 25%, etc… In my opinion, it’s really early to make a definitive call that volume or prices have bottomed out, so the next few months in particular will be helpful for volume at least (it’s really early to make a declaration on prices). Like I said in my 2023 outlook, I expect volume to be subdued this year, but with prices dipping, we will see some buyers come back. If rates end up dropping too, that will help even more.

I hope this was helpful.

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