RealtyBlog

 Just over 1% of the Active listings in Snohomish County are listed as “Pre-Foreclosure”, “Short Sale”, or “Bank Owned”, yet lenders have a HUGE number of REO (Real Estate Owned) properties in their inventory. The story is much the same in most markets right now- The number of listed REO properties is much less than the actual numbers of homes lenders have foreclosed on and currently own. There are good points and there are bad points and bad points to this, lets explore them:

Good

 By “reserving out” some of the inventory the banks, lenders, and servicers are holding, they prevent the real estate market from becoming even further saturated with available homes. Real estate is a retail product- Plain and simple. With any retail product, when there is a greater demand than there is supply, prices climb and the product is at a premium. Conversely, when supply is high and demand is low, prices drop until the product sells, reducing supply to meet the current demand, and prices begin to climb again. Real estate is no different- The saving grace of the low percentage of REO homes being made available is that it prevents prices from dropping any further than they already have. If ALL the homes in REO inventory were made available, the supply would grossly exceed demand, and the market could retreat to levels we haven’t seen in decades.

Bad

These same REO homes are still there- Available for purchase or not. As we enter into a period of recovery, the homes that ARE available will start to sell, and supply will diminish, driving prices up again (I can hear you already- “That’s a GOOD thing, isn’t it?” Well, hold on a sec). If the banks, lenders, and servicers don’t recognize the trend upward early enough, the relatively limited supply of homes currently available (Both REO and, because resale values are low, privately owned), demand could very easily quickly out-pace supply, causing an “Artificial” sky-rocketing of home values… As hard and as sharp of a gain as the decline when the market collapsed in September of 2007. If the REO properties being held in “reserve” were then released en mass, the market would be re-saturated and values would collapse again. Hard.

 Ok, so regular readers will recall me referring to the original boom as artificial (see RealtyBlog post “Opportunity Knocks Twice“). This reference to a new artificial price gain isn’t intended to imply that I’ve changed my mind about that- The availability of money created an artificial demand in ‘03-’07. This time it’s the lack of apparent supply that will be the culprit. The effects will be devastating- Buyers illogically feed on seller fervor, and want most to buy in a Seller’s Market- They fear that if they don’t buy now, they could be missing out on the kinds of profits the seller’s are making on the resale of their homes (again, you can refer back to “Buyers Hesitant in a Buyers Market” for more on this). Everyone is waiting for the market to “Hit Bottom” before making an investment in a home, which is speculation at it’s worst. You can’t know when the bottom is until it’s on it’s way up again (I’ve posted on this one, too, see “Ok, So What’s REALLY Going On?“), and once it starts up, everyone who has been waiting will jump up… And the rush will be on.

 The ones at the front of the boom will be in a good position (you’ll be in a better position if you buy before the boom), but the ones who buy in the latter half of this “False Boom” will pay more than the home is really worth, and will have years of negative equity after the market stabilizes. Those REO properties will cool the market again, and prices will reach an equilibrium at a price point less than the peak of the “False Boom”. This “Super Ball Effect” will result in deep, fast market fluctuations, maybe three or four market swings over just a few years- Swings that would normally take decades and never go as extreme high or extreme low.

 While the market is low, now is the time to act if you are thinking it might be in your near future. For buyers the reason is obvious- Prices are low. For sellers it’s a little less so. Yes, values are low, however despite that it is reasonably stable. In a stable market you can predict outcomes… All bets are off in an unstable one.

 Once again, it’s disclaimer time. The opinions expressed in this blog are just that, opinion. Sometimes I’m wrong, and sometimes I hope like heck I’m wrong. Whether I’m right or wrong, what I have to say here might not apply to you, your situation, your state, or your market. ALWAYS consult one on one with a REALTOR, attorney, CPA, doctor, or auto mechanic- Whatever professional is most applicable to the questions you have.

 Pricing a home to sell presents unique challenges in today’s real estate market. We’ve been conditioned by years of abnormal appreciation to be over-optimistic about what buyers will pay for a home, and most sellers do not fully understand all of the social and economic factors that will contribute to a homes sale price. Asking price is a part, to be sure, however it is no more the primary point that will attract buyers, not any more than condition is enough to consider or location the only thing that will matter to a buyer.

 Market conditions are the central indicator of what a homes value will be in any given market, and in upward trending markets sellers have more room to over-price a home. Given enough time a home mistakenly priced too high will have the market catch up to it, with market value achieving the seller’s price. This same mistake can be fatal in a downward trending market, as a home priced too high will only sit as the gap between the ever lower values and its asking price grows. The seller must then spend valuable days on the market (DOM) playing “Catch up”, and the greater the discrepancy between asking price and market value combined with how long the seller chooses to wait to make the needed price adjustments, the larger that adjustment will need to be. To get a home sold for the most amount of money it COULD sell for in a declining market, a seller must make their initial offering at as near to market value as possible- The goal being to sell the home in the shortest time possible as every day in a declining market the market value becomes less, reducing the maximum sales price a seller can get for the property.

 So what must be considered in the pricing of a home in a declining market? Market values based on recently “Sold” properties (within the last three months or less) that are as similar to the property to be sold as possible is first and foremost. This establishes a “Base Line,” a starting point, however it is no where near the end. Market value as established this way is only the first step.

 A seller must be very honest with themselves about the condition and amenity of the property- The second step in pricing to sell starts with asking a lot of questions about the home. Is the house in rough condition? Is the house dated or out of fashion? What is the age and condition of the roof, the siding, furnaces, or other big ticket systems in the home? In a declining market features that are worse than the others reduce the value of a home a lot more than those same features add value if they were in better condition than that of the comparable properties. Likewise, in an appreciating market, condition issues don’t devalue a home as much as better condition improves the value of those same homes.

 Market trend is the third consideration, and makes the biggest difference in where a seller should make their initial offering. In an appreciating market a seller can price above the comparable properties and expect to get it within a reasonably short time (to an extent- A $300,000 home will not sell for $500,000 in any market). In a stable market the margin of error is much smaller, and in a declining market a seller needs to anticipate what market values will be when they get an offer on the property. This ties in with average DOM, which is sort of the fourth step… Really more like step 3.1. If market trends indicate a declining market of ½% per month and the average market time for homes in the area is 60-90 days, a seller will need to price the home an additional 1-1.5% below the comparable properties.

 It can be tempting to want to “Test the market” by pricing the home higher than indicators show the value to be, unfortunately that puts a seller in to that “Chasing the market” routine, where their price may have to actually drop below market value in order to attract a buyer. Buyers are more savvy today than they ever have been in the history of modern real estate sales- The availability of information on the internet and self education on the topic have created a new breed of buyer, one who knows an over priced listing when they see it. They also understand one general truth about homes with long market times- There must be something wrong with it or someone else would have already purchased it after all this time. That something wrong could just be the price, but the buyers don’t know that it isn’t a condition issue by looking at the DOM on the internet, only that everything else is selling in 60-90 days and this house has been on the market for 180 days or more. At this point the only buyers who will bother to even come out and look are the ones who want a deal. Investors, rehabbers, bargain-basement buyers, and buyers who might not even be able to qualify for a loan to buy the house in the first place.

 Step 5 is much more personal. A seller must weigh the why’s of the decision to sell the home. If there is no rush to sell, a slightly higher price might mean a longer market time, as there are fewer buyers looking in the higher price range for homes of a given style, location, or amenity, however if a seller is willing to wait a little longer, they might get it. If needs dictate a fast sale, then the price needs to reflect that, and being a bit further below market value is key. This is where “Active”, or currently available comparable homes comes in to play. These homes are a seller’s competition, and buyers want the opposite of what a seller wants- Buyers want the lowest price they can get. They will look at any competing homes that are priced less than the seller’s property before they come out to see the sellers home. Should one of those meet their needs and expectations (or if that seller was more determined to sell and priced the home low considering it’s condition to attract a fast buyer) they will make an offer on it without ever getting to the higher priced home. To attract the most buyers a home must be the best price for what it is. There are too few buyers and too many sellers vying for the sale.

 In a declining market the above steps MUST be considered before condition, location, or features. That does not mean that these are no longer considerations, just that while they are the primary points of interest in an appreciating market, they make much less difference in the viewing decisions made by buyers. The decision to buy will still be impacted by how nice the home is, where it’s at, and what it has to offer to an owner, but without that critical decision to go and look at the home in the first place, no buyer will ever get the chance to make the decision to buy. Value adjustments can be made for being better than the others (and should be made for conditions that are worse); however instead of making tens of thousands of dollars in difference it might only mean a few thousand dollars. Buyers have a lot to choose from in a declining market, and a homes condition may not be as much better as a seller might want to think it is.

 Pricing a home in a declining market is a challenge no seller wants to face, and when the circumstances force them to, most are unprepared for it. A whole series of mistakes might be “Forgiven” in an appreciating market, in a declining market even one can mean the difference between “Sold” and not. If you’re ready to sell, need to sell, or have no choice but to sell, do yourself a favor- Contact your REALTOR and schedule an appointment. Your REALTOR has the tools and experience to help you determine the selling price for your home, from market statistics to marketing tools. You can’t afford a mistake regardless of why you are selling- Every day is costing you another couple of dollars in value.

 Here’s the fine print: Every situation, every home, and every reason for selling is different. Sure, I’m biased to using a real estate professional for your sale, and it’s because I know you have much better odds selling a home in a declining market when you use one. Your neighborhood is unique, consult with someone who can help you make sense of it all.

 Thanks for reading!

 I’ve posted a lot of negative stuff lately- Foreclosure news, real estate market information that paints a poor picture of things to come, doom and gloom- You may be wondering if you should ever buy real estate again. So I thought I would take some time to explain a few things that might help clear up some of your concerns about buying real estate right now.

 When is it the right time to buy? Well, that depends on a number of factors, first and foremost being what your goals are. If you plan on living in a home a very short time renting is most likely your best option. If you intend to live in and enjoy the home for a number of years, then the current market has very little impact on you right now. Real estate markets are cyclical- They go up with demand until prices reach a point where the demand fades, then the prices drop until they reach a point where they create new demand, and back up they go again. We are near the bottom of an ebb cycle on real estate values, and they could wax and wane several times between now and the time a buyer might be ready to sell… Whether it’s an up cycle or a down cycle when that time comes is anybody’s guess.

 Many buyers lack the funds to make a sizable down payment. As such, they’ll be looking for the few $0 down payment and Low down payment programs out there, such as USDA home loans or FHA/VA loans. What most first time buyers are unaware of is that it costs money to sell a home. Even the For Sale By Owner (FSBO) seller has expenses he can’t avoid, from marketing and advertising to excise taxes and title insurance costs, escrow fees, document recording fees and more. On a regular, professionally assisted sale you can expect about 9% of your sales price to go out in the way of Cost of Sale (COS). Oddly enough, after factoring marketing costs and legal fees for document preparation or pre-printed legal documents, a FSBO seller spends as much going solo as a seller does hiring an agent.

 These Costs of Sale mean that you have to have at least a 9% equity position to sell a property without any cash out of pocket. Between a normal rate of appreciation and typical rates of buy-down on an amortized loan, an owner who purchased with very little out of pocket will need to own the home for 3-5 years before they’ve achieved that on a 3.5% or less down payment loan at 6% interest. The current market is no more relevant to the market that will be in 5 years. It would be comparing apples to… Apple sauce. Sure, they taste about the same, but it’s an entirely different experience.

 A large down payment makes a difference in how long it’ll be before you can sell without any COS coming out of pocket. That isn’t quite the same as “Breaking Even” or making a profit, but for some that doesn’t matter when the time to sell comes- Just that they don’t have to come up with more money than what the buyer is giving them. To “Break Even” or to profit, the amount of your down payment has to be considered too, and your equity will need to “Repay” that initial investment as well as cover the COS.

 Really, it’s easier to decide when it ISN’T a good time to buy. When sellers are making a ton of money selling homes, that’s not a good time to buy- You will pay the most during an up market as a buyer. When all of the industries are moving out of the community and the jobs that support those homes are leaving… Yeah, that’s a bad time to buy, too. Generally speaking, almost any time when the market is down for sellers is a good time to buy- There’s a reason they call those times a “Buyers Market”. It’s the time in the market cycle that is most advantageous to a buyer- There are more homes to choose from, prices are at their most affordable, and sellers are more willing to negotiate for repairs, upgrades, and sometimes price. Where we are currently in the cycle puts buyers in a position where in the next up cycle they will gain value, even if the value of the home they buy drops a little more before it starts to go up again. If right now is NOT one of those “Bad” times to buy, then it must be a “Good” time to buy.

 Regardless of market conditions, your situation is going to be unique, and in fact, the market conditions are going to be unique to the area you are looking to buy in. When we talk about “Market Conditions” nation wide or even state wide, it’s in very general terms- It’s like having a meteorologist saying it’ll be an average of 56 degrees in North America today… Not very helpful to you when it comes time to decide between shorts and a t-shirt or slacks and a sweater. County, city, and even neighborhood conditions can also vary drastically. Your best bet is and always will be to consult with a REALTOR concerning your goals. Your REALTOR can help you decide if now is the time for you, and if it isn’t, they’ll help you build a plan to get where you need and want to be.

Disclaimer time! This was written today. Tomorrow something might change and render it irrelevant, and just because that happens doesn’t mean I’ll pull it off the site, so if you read it the day after it might be meaningless. That’s the inherent problem with writing things down- The writing stays static while the world changes around it. Always consult directly with a professional and never rely solely on the advice of a blog. Thanks for reading!