What would it take to crash the real estate market?

A lot of people subscribe to the “What goes up must come down” theory on markets. I don’t. I tend to just use that one when describing gravity.

For real estate, we have only really ever had prices go down twice in the history of tracking such stuff. Once was the Depression which caused ALL markets to go down, and the other was the Great Recession which was largely caused by bad mortgages that were toxic to the stock market. Neither time actually had anything to do with just the real estate market.

Today’s market is probably the healthiest it’s been in a long time. Prices are high due to supply and demand. Sure, low interest rates help but not as much as you would think. People acclimate to interest rates. I remember bragging about getting 6.625% on my first home when all my homeowning friends were over 7%.

When people on Youtube or those who write for the news look at the real estate market, they tend to not look at the whole picture. I am sure you have seen headlines about how all the people in mortgage forbearance would crash the market once they got foreclosed. Didn’t happen. All those people who needed to sell had enough equity to sell and avoid foreclosure. What about all the Baby Boomers who would leave a huge void in the real estate market as they sold their homes and went into retirement homes or to reside on the other side of the Pearly Gates? No mention of the youngest generation of buyers entering the market who would keep the wheels of the whole market greased so everybody can move. Years ago I described this like a baseball game where the bases are loaded. The Player on 1st base wants to run to 2nd. The Player on 2nd base wants to run to 3rd. The Player on 3rd wants to run home. What needs to happen in order to keep all those Players moving? For the Batter to hit a home run. The first time buyers are the most crucial element of the market. Without them, no homeowner can part with their old house in order to move up to their next one.

Everybody knows how Supply and Demand works, right? Let’s apply it to real estate. Most people involved in selling or buying will be doing both. Most sellers are also buying. Most buyers are also selling. That means there is no net gain or loss in the supply/demand ratio regardless of the market. This is why the supply/demand ratio got so bad during the Great Recession-You had so many foreclosures where the previous owner did not reenter the market as a buyer. Other than in such catastrophic times, the only people who are doing one side of a sale are first time buyers or those who have passed away or are going into some form of assisted living. Historically there have been more first time buyers than there are those who are exiting the market permanently. (I am excluding those well off enough to purchase second homes since that is a smaller market and we are not in a big area for that like Florida or any other vacation destination.)

So then, what would it take to tank the real estate market if it has nothing to do with real estate? It would take something terrible to happen with the economy…..meaning something bigger and broader than just the real estate market that is like a Tsunami and wipes out everything in it’s path. Let’s hope that doesn’t happen any time soon!

Are prices going to drop?

I’m reading a lot of headlines and seeing YouTube videos about the market crashing.

Is it going to happen? Short answer is NO.

Is the market slowing down a little right now? YES. It always does this time of year. People go on vacation and those with kids like to be in their new home before school starts. I always like this time of year because I can catch my breath and enjoy a break before it picks back up a little for the rest of the year. When I go to a track and I get used to doing 120 MPH in a straight, hopping on the interstate on the way home and doing 80 feels slow. Right now we are all so used to a crazy fast market, that even a strong but not super strong seller’s market feels like a major slow down.

Are we seeing more houses come on the market right now? YES. I think this is because all the sellers who would have sold during COVID now feel it is okay to put their house on the market. We started seeing more listings hit the market after the vaccinations rolled out. This makes me think that the sudden increase in inventory hit all at once. We will see if it keeps up. Really though, I sort of hope it does. I would love to see a balanced market where there aren’t 5 offers the first day on the market for a loser house and 15 offers the first day for an HGTV worthy house. Simple economics tells us that as long as there are more buyers than sellers, that it will remain a seller’s market. As long as it is at least a balanced market, meaning supply is equal to demand, prices will remain the same.

What happens when we do see more houses for sale?

I read a lot of news about real estate. It is always a little funny to me to see what people who are not realtors have to say about the market. There are two things that I have read this week that have me rolling my eyes.

The first one is the headlines about how the number of sales have been declining. Gee, that’s just what happens when there are so few houses for sale. This does NOT mean that buyers are deciding not to buy a house. It means that they can’t get a house.

The other one is that it seems there is a projection that we should have more houses for sale later this year than we have in a long time. That would be great but let me tell you what it doesn’t mean. It doesn’t mean that prices are going to drop. They might stabilize prices a bit but when a hot new listing in Lexington can easily get 15 offers, we would need 15 times the listings for a balanced market. There is going to be more buyers than houses for a while.

A lot of the people who are fantasizing about what that market might look like are not old enough to have lived through the housing crash during The Great Recession. Back then we had more houses for sale than ever and do you know what? The best houses still sold fast and often in multiple offers. Do you know why? It is because everybody wants the best house in their price range. We could triple the number of houses for sale today and it wouldn’t change much. What would happen would be that the best houses sell fast and for top dollar while every other house languishes on the market. This flood of new inventory does not mean that every buyer will be able to get their ideal home.

How to price your house in this crazy market

Everybody knows that it is the craziest seller’s market ever.

Everybody knows houses are selling for over the list price.

What a seller does with this information is often all wrong. Sellers think they need to price their house as high as they can to get the most out of it. That is totally wrong today.

Today the list price is really just an opener, similar to an auction. Imagine if you went to an auction and the auctioneer began with the number that would be the same as the sale price at the end of the auction? How many bidders would you have? Maybe one? Maybe none? This is effectively what a seller does when they start too high.

I showed a house a few days ago that was listed for $185k, which is pretty high for what it was. There was a line of people waiting to get in to see it. This morning I got an email from the listing agent that they had “An” offer. A few days on the market and they get one offer from all those showings. Had they started at something more reasonable like $175k, they might have ended up at $185k or more. Why? Because buyers are used to going over the asking price these days. When you start at the number they would be willing to pay, they assume they would need to go over that to get the house and are not willing to do so. To a buyer, a list price of $185k means expect to pay $190-195k or more.

The best strategy today is to price the house in line with the most recent comps and create a multiple offer situation. The only way to take advantage of the buyer frenzy is to have two or more people trying to outbid each other for your house. Pricing it high and only having one buyer would be just like going to an auction where there is only one bidder in the room. This is why the success of an auction depends on having maximum exposure for a brief period and then setting a deadline for the sale.

Sold for 25% OVER list price!!

I listed a manufactured home in a tiny town in northern Scott County on 15 acres last week. I have had it in my pipeline for close to a year so I have been watching the market in the area for a while. Prices have gone up quite a bit, but lately similar properties have all been listed for about $160k.

So we got pictures and put it on for $160k. I fully expected it to sell for a little more since the market value is no longer determined by recent sales. It is determined by how desperate the buyer is.

Turns out they get more desperate every day.

We got 8 offers. 10 actually but two were for a financing type that did not do manufactured homes so we can’t really count those.

One offer was $155k. I always laugh at those buyers and scratch my head. What rock have they been hiding under that they and their realtor don’t know that practically every house in multiple offers goes for at least list price.

Five of the offers had escalation clauses. That is where the buyer pretty much says they will pay so much more than any other offer up to a certain price.

I got one offer for $200k. My mind was blown. No escalation clause. Just a flat $200k.

This gave me the chance to tell the buyer’s agents with the escalation clauses that they might want to up their amount if their buyer really wanted the house.

Fortunately one buyer whose offer had some better secondary terms raised their escalation clause to be $200k. I have seen where people throw out some high number on an escalation clause to get their offer noticed but they have no intention of every going that high. I called that buyer’s agent to confirm they were legitimately willing to go that high. They were. They got the house for $200k. Next step is to convince the appraiser it is worth that.