Market Update

Time to resume your 2020 plans?

by John Rice

COVID sure changed the real estate market. Everybody knows that. For a while everybody was stuck at home and wanting home offices and separate rooms for things like exercising. Rates got so low that everybody decided to move up the property ladder. A lot of people realized life is short and went in a new direction.

I knew things would eventually stabilize and get back to normal.

The one thing I didn’t realize was that there were a lot of people who had plans for 2020 that were put on hold during COVID. Job searches, marriages, starting families…..and moving. These people are now feeling comfortable enough to resume the plans they had early in 2020. I’ve had several people reach out to me lately who are going to make some major changes in their lives this year.

I am sort of amazed that I didn’t see this coming. I guess like everybody I was so focused on all the changes due directly to COVID that I didn’t even think about those whose plans were interrupted.

Many other realtors I have talked to have said their pipelines are filling up for the year.

I think the 2023 real estate market may surprise us with how well it turns out.

How the market works when there is inventory

by John Rice

Now that we are back to having some inventory in our real estate market, I thought it would be a great time for a refresher on how the market works when there are actually houses for sale.

The recent past has shown that any house will sell fast when there are more buyers than sellers. When your choice is between whatever house in your price range hits the market or hoping the next one is better, people usually make an offer on the one for sale that day.

We are back to a normal market where Buyers have choices and this is how they make their decisions.

Simply put, they pick the best house on the market. Usually this is a house that is priced realistically, that is move in ready and is in the most desirable neighborhood within the Buyer’s price range. Then there is their second, third, fourth and so on choice.

Once that #1 pick house sells, then the #2 pick house becomes the top choice. Once the #2 house sells, then the 3rd pick becomes their 2nd choice. Once the…..well, you get how this works I am sure.

Sometimes what happens though is that a brand new listing hits the market and changes the ranking. If you have the #2 house and are excited to be the next house to sell, a house hitting the market that is better than your house means you will stay at #2 on any Buyer’s list. Sometimes winter is a good time to sell a house that has been the #2 or #3 house because we tend to see fewer new listings. Eventually your house rises to become the best choice in its price range.

The goal of you and your realtor is to make your house as competitive as possible so it ranks high on the list of Buyers. Sometimes it is as simple as rearranging furniture, doing a little updating, doing a few repairs that have been noticed during showings, or even a price reduction.

While we are discussing inventory here, I want you to know that in the coming months you will see headlines about the “Average days on Market” rising. Any time you have inventory, this will happen. It doesn’t mean that every house is harder to sell. There are still plenty of houses selling fast and even getting multiple offers. Those are all the #1 choice houses, the ones everybody wants. All the houses that are further down the list will stay on the market longer, waiting for price reductions or some other change to be made which will eventually lead to a sale. In the meanwhile, those houses will dilute the average days on the market statistics.

What happens when first time buyers can’t afford to buy?

by John Rice

I had lunch with a good friend who is also a realtor earlier this week. He started a discussion about statistics for our local area. That got me doing some digging on my own.

I saw something interesting. Sort of scary really.

Now, I am comparing October of 2021 to October of 2022 here. October of 2021 was a crazy time when about every house was selling immediately and often for well over the list price.

Want to guess which price range is seeing the biggest decline in both closed and pending sales since rates rapidly went up? The sub $200k price point. Want to know which price range saw the least decline? Over $500k.

Pretty much all the stats show the first time homebuyer price range hit the hardest. You would think during a period of high interest rates, the more expensive houses would struggle to sell, wouldn’t you? From what I have read about the last time we dealt with inflation in the early 1980s, it was very hard to sell an expensive house back then. That’s why you don’t see many big, nice houses that were built during that time but you see tons of smaller starter homes.

We need these first time buyers. They are the ones that push the rest of the market since they have nothing to sell before they can buy. Think of it like a baseball game where the bases are loaded. The person on 1st base can’t move to 2nd base until the batter swings and hits the ball. The person on 3rd and 4th base are also stuck there until that batter hits the ball. The first time homebuyer is who we rely on to hit a home run since every other buyer is also a seller who has to breakup with their old house in order to move to their next one.

Historically, it has always been easier to sell a more affordable home than to sell a more expensive one. Statistically, it is easier to sell a more expensive house today than a more affordable one.

Why 6-7% interest rates won’t crash our market

by John Rice

If you’re like me, all you are reading in the news is how the skyrocketing interest rates are affecting the real estate market. Headlines say stuff like how the rate has nearly doubled, how sales have decreased, some even are saying the market is going to crash.

Wrong. Wrong. Wrong.

Youtubers and journalists need something exciting to get your attention. If you saw a headline or video that pretty much said everything is going to be okay, would you be interested?

I think part of this drama is also that you have people whose data is correct but how they use it is wrong, or their data doesn’t give much of a historic comparison.

Affordability seems to be the main topic today. These people are talking about how much more a mortgage payment would be today compared to the all time low we saw last year……DUH! Short term thinking I say.

Here is why I don’t think a 6 or even 7% interest rate is going to do much more than curb unsustainable appreciation and slow down people moving just because they feel like moving. To begin with, people will always have changing needs for housing. Families will grow, there will be divorces, marriages, job transfers, job losses and all the other lifestlye/life cycle changes.

But here are the main reasons I am not worried: The Debt-to-Income ratio and longer term history.

Let me take you back to the early 2000s. The real estate market was crazy. Houses were selling fast in multiple offers. Prices were going up like crazy. Know what the interest rate was back then? Barely under 6%. And back in the late 90s when the market was also booming, it was about 7.5%.

A house in the Bluegrass that was worth about $250k back in 2004ish would be worth about $425k today. The principal and interest portion of your loan at 6% on a conventional loan with 5% down would have been $1423 back then and $2420 today. Yeah, that sounds like a lot more. It is, but let’s keep going here.

So the real difference between then and now with property taxes and insurance included would be about $1200 a month. To qualify for the mortgage on that $250k house back then would require an annual income of about $73k. Today that house would be worth about $425k and would need about $126k in income. The median household income has gone up 80% over that time according to the census. The value of that same house has not gone up quite as much.

So there you have it. I think if the market has historically been very good in the past during times when rates were higher than they are today, and since household income has pretty much grown congruent to home values in the Bluegrass, we will weather this period very well.

Then why is the market so slow right now? Simple. People are in shock and upset that rates went up so fast. Once they realize they can’t go back in time, they will move forward with their plans. I predict that (short of a major economic crisis that pulls down EVERYTHING) buyers will be out in force next spring. Prices will remain stable. It will be a good market. It won’t be a market that you’ll read headlines about because remember, you only see real estate in the headlines when things are exceptionally good or exceptionally bad.

Negotiating 101

by John Rice

“You can lead a horse to water, but you can’t make him drink.”

I think this is good quote for explaining how negotiating works. Some people think negotiating is about getting the other party to do exactly what you want. It isn’t. It would be nice if it worked that way but it doesn’t. The goal of negotiating is to get the other party to bend as much towards your ideal situation as they are willing to go.

In real estate sales, the biggest single item to negotiate is the sale price.

Often a buyer will base their offer amount on the seller’s list price. MISTAKE!

Before you make an offer, you need to first know what the house is worth. That’s where your realtor comes in. Once you know what the house is worth, you make an offer based on its value rather than the seller’s list price. Why? Because if the house was overpriced, you might make an acceptable offer that is still more than what the house is worth.

Here’s a few observations based on my 17 years of experience in every market type ranging from the worst in history to the best in history and everything else in between:

  1. Sellers in our area usually don’t come down a considerable amount from their list price. You are not going to get your offer for 80% of the list price accepted. Even in the worst market ever, this was very rare. Usually if a seller is that motivated, they reflect their motivation in their list price.
  2. If you make a very low offer, most sellers either reject the offer or barely budge from their list price because you have given them a sign that you are going to be difficult to deal with so they leave plenty of room for more negotiating. This basically put you back in the same place you started so it is counter productive.
  3. The most common method of negotiating is the old “Meet you in the middle” routine. I often see a buyer make an offer for say $10k less than list price hoping to get the house for $5k less than the list price. Common also is when you come down to the last round of negotiating and somebody says “Let’s split the difference.” While this is common, it is very uncreative.
  4. You can lose a house while waiting for a seller to respond. I have seen this numerous times where a buyer will make a low offer, drag out negotiating over multiple days, then all the sudden another buyer makes a much better offer and your next communication from the seller’s realtor is that the house is no longer available. You typically want to make an offer that will either be accepted immediately or maybe where the seller counters once and you accept it. If the house is nice enough for you to have picked it among all the competing listings, then odds are another buyer has come to the same conclusion that it is currently the best house on the market in that price range.

So, here is my advise on getting your house and getting it at a favorable price:

  1. Realize that the person who wins the last battle usually thinks they won the whole war. I usually try to reverse engineer a counter offer so the other party can come back with exactly the number I was hoping they would. When they do, they feel like they won the war of negotiating, but I really just let them win the last battle.
  2. Know what it is worth and make an offer either for that amount or slightly less. Remember the goal is get the seller to tell you the least they will take for the house. Before the market got so crazy the past few years, the average list to sale price was about 97-98%. I might make an offer 1-3% less that the house is worth. If they counter for anything less than the full price, guess what, you’re getting the house for less than it is worth. Sometimes the seller just accepts it. If that happens, great, you STILL got the house for less than it is worth.
  3. And speaking of winning, don’t get too caught up in the game. Save that for a trip to Vegas at at blackjack table. Your goal here is to get the one house that you felt was superior to any other house you have seen. If you get it and get it at a fair price, quit trying to make that horse drink more water.