Inflation and the Housing Market
Today I want to talk to you about inflation and the six degrees of separation. When the price of every day goods goes up, consumer have less to spend on housing. If you are watching market data, it will come as no surprise that the market is changing.
In our industry, we don’t celebrate market changes; we are frustrated by them. As the market changes, it increases our workload. Ignoring the change puts your sales desk in peril. In times like these the serenity prayer can have a calming effect: God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.
Inflation is the topic of the day. We see it in the price of groceries, the price of dining out, the price of gas, airline tickets, and the list goes on. Global forces such as the virus outbreak in China and subsequent supply chain disruptions, severe weather events, Russia invading Ukraine and the resulting rise in energy costs have all contributed to rising inflation and it has spooked the stock market and the real estate market.
Remember, you can’t change the market, you can only change how you react to it. Inflation is currently at 8%. Governments want to see it at 2%. That means they will continue to raise interest rates to try to slow down inflation. As rates continue to tick up, fewer buyers will qualify to buy a house. Add to that the cost of goods and it creates an environment of uncertainty. When buyers and sellers get nervous, they postpone making big decisions.
What does that mean for us in real estate?
- We will see inventory rise.
- Houses will take longer to sell.
- Buyers will have more choices.
- Both sides will need to start compromising.
If you are a listing agent:
- You will need to do a better job with your evaluations. You will no longer be able to let the market set the price.
- You will need to use different talk tracks with sellers to ensure they understand they may no longer get the price their neighbors got a few months ago, they may not get multiple offers, and it may take longer to sell.
- Let sellers know that even if they sell for less, they will likely pay less for their next house. It’s apples to apples.
- Sellers may have to consider adding incentives to make their listing stand out. This is something they haven’t had to think about for the past couple of years while they were in the driver’s seat in negotiations.
- For the past couple of years, sellers were buying houses before they sold theirs because they were afraid their house would sell too quickly and they would have no place to go. That is now a dangerous predicament because they may be carrying two properties for a while if their house doesn’t sell quickly.
If you are a buyers’ agent:
- Understand that buyers are getting very nervous with interest rates ticking up. Although house prices have stabilized and even started coming down in some markets, the conversation needs to change from purchase price to monthly payments.
- In the past two years, buyers threw caution to the wind, and they often paid way above asking price. This forced them to come up with the funds to cover the gap between the appraised value and the purchase price. With the market softening, don’t be surprised if buyers start refusing to pay above appraised value.
- When the market was rising, if an appraisal came in low, buyers could request a second appraisal and it often would come in higher than the first. As the market shifts, don’t be surprised if second appraisals come in lower than the first as more comps are sold for lower prices.
- When searching for homes, you will need to advise buyers to consider homes that are listed for less than they qualify for. This will give them some buffer room if rates continue to rise.
- Get your buyers rate locked now because the Feds have forecasted that rates will rise by 1% in the next 60 days.
USE AGGRESSIVE PRICING STRATEGIES CAUTIOUSLY:
When the market changes, agents who are sloppy with pricing are going to get caught. Aggressive pricing strategies work great in an undersupplied market as they generate multiple offers pushing the purchase price higher. But when the market softens, aggressive pricing strategies can get you in trouble.
Let’s say you are listing a home that you think is worth $1.3 million and you put it on the market for $1 million to attract multiple offers. But once you list it, it sits on the market for a few weeks with no offers. You finally get a full-price cash offer for $1 million with no conditions and a sizeable deposit, but the seller doesn’t want to accept it. The seller is not obligated to sell their house, but this could get messy, so I suggest you talk to your managing broker about how to handle this situation.
You are better to start pricing at market value as the market shifts. Pricing becomes a conversation around positioning. You should price your listings attractively so it stands out from competing listings, but do not underprice it to the point where the seller wouldn’t accept a full-price offer.
Prepare your sellers that it may take longer to sell, and they may get offers below asking price. They may need to be flexible on closing, include chattels, or include a warranty and pre-home inspection to give buyers confidence. These conversations need to be supported with facts and data (not opinions). Your best guess won’t cut it anymore as the market pendulum swings.
Prepare for lenders to become more conservative as the market slows down. Gone are the days of drive-by appraisals. You can expect to see more conditions on financing, inspections, and even sale of purchaser’s property with kick-out clauses. In this market, you need to sharpen your negotiation skills.
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