The Elephant in the Room

Trying to predict the market is a little like trying to predict the weather. It is kind of like when your weather app shows it’s raining, but you look out the window and it’s sunny. That’s what it’s like trying to predict the economy right now. While some leading CEOs are sounding the alarm on a recession, the economic data isn’t saying the same thing. When buying or selling, timing is everything. What do experts say is in store for the rest of this year?

• Inventory will increase: Buyers will have more options, but supply is still low, so they need to be ready to act fast and put their best offer up front. Sellers will face more competition, but we are still firmly in a sellers’ market.
• Mortgage rates will continue to increase: As rates rise, buyers lose purchasing power, so they are better to act now and buy before it costs more to do so. Sellers need to be mindful of price – as rates rise, prices will need to adjust to keep payments in line.
• Prices will stabilize: The crazy price increases we’ve seen for the past two years are finally subsiding. In some markets, prices have started to retreat, but in markets where inventory is still very low, prices are holding strong, but they’ve stabilized.

For the last ten years the market has been on a bull run. It wasn’t so long ago that we were asking how high house prices would go. Well, I suppose now we’ve found out. Anyone who started in the business in the last few years has only known a rising market. Our talk tracks with both buyers and sellers focused on FOMO and the urgency close.

We all know that the pandemic, government stimulus, supply chain issues, the war in Ukraine, and the shortage of workers have all caused inflation to skyrocket. We see it every day at the gas pumps and grocery stores. The single strategy governments use to curb inflation is raising interest rates. Now we are feeling the result of those rate hikes.

What does this mean for our industry? The Feds may be slowing inflation, but with every rate hike they are also cooling the housing market. Fewer buyers qualify as interest rates tick up. Fewer buyers mean fewer sales, longer days on the market, and ultimately a decline in house prices.

I had a call with an agent in SoCal this week. She has a condo for sale and she’s worried because it is not selling. Her sellers are showing signs of dissatisfaction. They believe it should have sold by now. The agent feels uncomfortable as she can sense the sellers’ frustration with her. To give her advice I needed to dig a little deeper.

• I asked how long the house has been on the market. 17 days.
• I asked why the seller was selling. It is their second home. They rented out their principal residence a while ago and now they’ve decided they want to move back to that house.
• When did they buy the condo? 2020
• How much did they pay for it in 2020? $310,000
• What are they asking now? $475,000 They came up with this price based on a unit that sold in November. It was a smaller unit, but they took the price per square foot and adjusted it for size.
• I asked about recent sales. A similar model (but without a bonus room) was listed at $450,000, it was reduced to $435,000 after a week and sold for $432,000. Her listing is priced at $475,000. Even if we allocated an extra $5,000 for the bonus room it would put market value around $440,000.

The long and short of it is that the condo should be listed for $435,000 – 440,000. Basing the list price on what a similar unit sold for in November is no longer accurate … the market has changed since then.

The last time I saw a similar situation was in 2009-2011 in Miami. There were townhouses selling for around $500,000 when we went into the great recession. I watched sellers and their agents chase the market down. Owners tried to sell for $500,000 when the market had gone down to $450,000. They eventually reduced their price to $450,000 but by that time the market had dropped to $350,000. They lost more money than they would have if they got ahead of the market rather than chased it down.

I was teaching pricing strategies in my LA class this week and we were talking about how to do a proper CMA. One of the agents admitted they don’t do long-hand CMAs anymore. They rely on market reports to tell them what the house is worth. The problem with relying solely on technology is that it uses lag data. In some cases, the comparable sales go back to last November when rates were different, and the economy was different.

The Fed in the US predicts that the inflation rate will be at 6.3% by the end of 2022 (that is a 2% drop from where we are now). They predict that in three years the inflation rate will be around 3.9% which is still 2% higher than their target inflation rate. Inflation is not going away any time soon. As governments continue to intervene by raising rates, they are cooling the housing market.

In times of fluctuation like we are seeing now, you need to do more than rely on a computer-generated CMA. You need to be able to adjust for time, location, condition, and size. Where agents could get away with sloppy CMAs for the past couple of years, you now need to do more research and be more thorough. You will need to clearly understand the sellers’ motivation, and their financial situation.

Back to the example I brought up earlier about the agent who has the condo that is not selling. She must have a frank conversation with the sellers. They bought the house two years ago for $310,000 and they now want $475,000. That is a 53% increase (or about $7,000/month profit). Even if they reduce the price $435,000 to be more in line with the most recent sale, that is still a $125,000 increase in two years. My advice is to reduce the price and move on.

If the Feds continue to raise rates, the market will continue to cool off. Sellers need to get ahead of the market rather than chasing it down.

I recommend you review your current listings and do new CMAs based on current market data. If you determine a listing is overpriced due to the changing market conditions in your local market, book an appointment with sellers. Let them know about the changing market and how it would be wise to reposition their listing to make it the most attractive in their category. If you need help with how to conduct a price repositioning meeting, review the Pricing Strategies session in the Leader’s Edge Virtual Training system.

Chris Leader
President
Leader’s Edge Training