Category Archives: Winters

Composition Effects for Appraisers

Economist Timothy Taylor posted a discussion about hourly wages recently that had a section that sounded very familiar. Here’s the quote that caught my eye:

“You will sometimes hear statistics people talk about a ‘composition effect,’ which just means that if you are comparing a group over time, you need to beware of the possibility that¬† the composition of the group is changing.” Why would a residential real estate appraiser care about composition effects?

Much of my time as a residential appraiser is spent determining trends in real estate markets. Every day I create charts like the one below to describe the markets in my reports.

Simple linear regression trendline showing an increasing submarket

These trendlines assume that the group of homes sold do not differ significantly over time. In most cases, this assumption is reasonable. Sometimes this assumption is false.

For example, the global pandemic has affected buyer tastes. My friend Ryan Lundquist wrote about this recently. After six months of being cooped up from the Covid-19 pandemic, buyers want a larger home. Here’s his chart showing the trends in the Sacramento region:

Change in Home Size during the Covid-19 Pandemic in the Sacramento Region from Ryan Lundquist

The average size of a home sold in the Sacramento region has increased 100 sf over the past six months. House size is the primary driver for value, so if all other factors are the same, the average price for that market will increase.

BUT IT’S AN ARTIFICIAL GAIN BECAUSE ANY GIVEN HOME OF THE SAME SIZE WOULD SELL FOR THE SAME PRICE!

Similarly, if homes decrease in size over time with no other changes, that would cause the average price to decline with no impact on individual house prices.

Here’s what I do to have a better understanding of market trends:

  1. I trend sale price of homes sold over time,
  2. I trend price per square foot of homes sold over time, and
  3. I trend home gross living area over time.

Why trend price per square foot? This trick takes into account some variation in size and in conforming areas, can increase the reliability of the trend analysis. However, significant changes in size will influence the PSF trendline.

I see this frequently in Winters, California. Winters is a relatively small city of about 10,000 people located on the western edge of the Sacramento Valley not far from Davis. Below are the three graphs for Winters sales from 1/1/18 to 10/1/19 (all data from Metrolist MLS).

Sale Price trendline showing an increasing market

Prices are clearly increasing in the top graph.

PSF Trendline is stable

Prices are essentially stable when trending price per square foot for the same sales. Why?

Here’s the third chart showing size of homes over time:

GLA trended over time

The size of a home sold in Winters during this time period increased almost 1 sf per day.

Because of the math,

an increase in the average size of homes sold will push down the price per square foot trendline but will push up the sale price trendline, and

a decrease in the average size of homes sold will push up the price per square foot trendline but will push down the sale price trendline.

Here are some other examples that may cause a market to appear to change over time without a real change in market conditions:

  • Average lot size changes, especially for small acreage residential properties
  • Average age of homes changes, especially when new construction ramps up or ramps down
  • Better quality homes come to market
  • An outlier, such as a tear down or the biggest home in the county, pulls the trendline out of true
  • A small, heterogeneous market susceptible to change from the latest sale

A good habit is to take a look at your data. Do you see changes in your data or is it relatively similar over time?

When I do run into composition effects, such as sale price going up and price per square foot going down, I graph both together on the same graph and explain why there is a difference. I then reconcile.

“The sale price trendline is increasing while the sale price per square foot trendline is decreasing. The average size of homes have increased during this time period, skewing the sale price trendline up and the price per square foot trendline down.¬† I conclude that this market has been relatively stable during this time.”

Hope this adds to your understanding of residential real estate markets.

p.s. This website has instructions on how to show two time series on the same graph like the example above.

Davis, Woodland, and Winters Market Update September 2020

Six months after the Covid-19 stay-at-home order hit Yolo County, what’s happened to residential real estate in local markets?

Sales activity in Davis was low at the start of 2020 before the pandemic hit and continued into the spring with a massive drop in May. As shown below, Davis is way behind in sales compared to last year but we may make up ground in the fall.

2020 vs. 2019 single family residential sales in Davis per Metrolist
12 Month change in Davis single family residential sales per Metrolist

In contrast, Woodland started 2020 with strong year-over-year sales activity, putting on the brakes in April and May. Some of the missing activity shifted into the summer but Woodland is still behind last year’s numbers.

Woodland closed sales 2020 vs. 2019 per Metrolist
12 Month change in Woodland single family residential sales per Metrolist

While demand (sales) fell over the past six months, supply fell even further in both Davis and Woodland. We have seen an increase this summer in homes listed in Davis, hopefully a sign of the traditional summer market spilling into the fall.

Davis single family residential new listings per Metrolist.

Woodland saw a sharp drop in new listings in April and May and is continuing to track lower.

Woodland new single family residential listings per Metrolist

Net effect on both Davis and Woodland is a supply imbalance leading to rising prices. Davis is showing year-over-year increases in five of the past six months.

Prices have increased on a year-over-year basis in five of the past six months in Davis per Metrolist

Woodland prices are rising too as shown on the scatter graph of all sales below.

The Woodland SFR market has increased over the past 12 months per Metrolist

Below is a quick summary of both markets:

The standout statistic above is the incredibly low inventory in Woodland.

Winters is a much smaller market than Davis or Woodland. As the graph below shows, sales are increasing at present. Also note the lack of sales in April and May in Winters, similar to other Yolo County markets.

Prices have increased in Winters over the past 12 months too

Takeaways for Davis and Woodland

  • Sales volume is down
  • Inventory has declined more leading to a supply imbalance
  • Prices are increasing

Pay Attention To

  • Interest rates. The historically low rates are jet fuel for the residential market. When rates go up, pay attention
  • The local economy. We’re still in a recession with massive job losses and a large percentage of mortgage forbearances. So far, impacts to local housing have been minimal but that may change in a hurry

Are you seeing the same things in your markets?