future of real estate

August 17th the Y2K for Real Estate?

by John Rice

Here we are just a few days from the date that the media thinks is going to change the entire real estate market.

Leading up to this reminds me of most of the year 1999. Back then, the media took the opportunity to let us know that most computers were never prepared for the year 2000. Doomsday was scheduled to begin January 1st 2000 since the computers would think the year was 1900 instead of 2000. This was called Y2K. People stocked up on cash, water and food in case the world froze up.

Of course, what happened on 1/1/2000 was that everybody woke up to find nothing had changed. Whenever I see a pantry stuffed full of a lifetime supply of canned goods, I wonder if that is somebody’s leftover Y2K stash.

All of us will wake up on 8/17/2024 and find that the real estate market kept going, just as it always has since the first person hired somebody to be their real estate agent whenever that was.

There are a few changes, and they are not at all like the so called journalists predict. Housing prices will not go down. No real money will be saved by anybody. Commissions in my area have dropped a little. I used to see mostly 3% offered to Buyer’s Realtors with an occasional 2.5%. I am now seeing a lot of 2.5% commissions. The change is really more of a technical inconvenience than anything mind blowing.

What will change is basically the equation to get to the same solution that has always existed.

In the “Old days” of right now, the Seller’s Realtor had a certain commission they wanted to make for selling the house. They would add an amount to that for the Buyer’s Realtor. The sum of those two numbers were what the total commission was going to be. By the way, commissions have always been negotiable.

The new model pretty much does the same thing…..at least in my market. A seller will have 3 options when signing a listing agreement with their Realtor: 1) The Seller’s Realtor is paid a larger commission and will offer to give part of it to the Buyer’s Realtor. This is the old fashion way. YES, it still will exist! 2) The Seller’s Realtor will charge their own commission PLUS the Seller will offer an amount to the Buyer’s Realtor to be paid directly by the Seller. 3) The Seller may choose at that time to not offer any commission to the Buyer’s Agent. Option 3 is the one everybody is assuming will change the industry. Well, time will tell if I am wrong, but I don’t really see Option 3 being viable in anything less than the absolute hottest real estate market ever. Why? Because history has proven that Buyer’s want their own Realtor involved. That is why most For sale By Owner listings fail to sell. Almost all Buyers prefer to have their own Realtor involved.

On the Buyer side of all this there are a few things I want to point out: The National Assoication of Realtors (NAR) is wanting it’s members to have Buyers sign an agreement which details how their Realtor will get paid. There has been no change in Kentucky’s state law at all. Why? Because commissions have always been negotiable. The NAR is a professional organization whose membership is voluntary. You can be a real estate agent without being a member of NAR, you just can’t call yourself a Realtor because they own that word. You would have to call yourself a real estate agent. This new NAR rule is really like being a member at a country club and having to wear a tie to dinner because it is a rule.

So back to how things change for Buyers. Well, for those real estate agents that use the NAR form, there will be a place to put what commission is to be paid by either the Buyer or Seller for the Buyer’s Realtor. This has always been on existing Buyer Representation Agreements, so the concept is nothing new. This is the part the media is in a frenzy over……but hold on, there is more to this. Our new offer to purchase contracts have a paragraph now for Buyer’s Realtor commission. Yep. You can write on the offer that you want the commission for your own Buyer’s Realtor to be paid for by the Seller. Aaaaaand this is something I think most all Buyers will want to do since few have the cash to pay for their representation.

There will be Sellers who try not to pay, either directly or indirectly, for a Buyer’s Realtor. They will probably find that not many Buyers look at their home. This is effectively like a For Sale By Owner situation, something most Sellers fail when attempting, largely because most Buyers want their own Realtor involved.

So in the end, what we have is a lot of hoopla with little real change. Most all Sellers will either directly or indirectly pay for the Buyer’s Agent commission one way or another. The Seller now just has a choice of how to do it. The Buyer now has to write in their offer how much, if anything, their Realtor is to be paid by the seller.

3+3=6

3.5+2.5=6

6-3+3=6

6+0=6

Yay, you get to pick your own equation now. Any numbers you want which will total somewhere between 5-6% commission when selling your house, just as it always has. Keep in mind too that a Seller’s Realtor is not going to do 100% of the work for both a Buyer and Seller for the same price. Also, just like any market, there is a point where it just isn’t profitable to do the work. Commissions can only go so low before Realtors just say no.

Do you really need a Buyer’s Agent?

by John Rice

YES!! YES!! YES!!

I’m seeing a lot in the news that the future of real estate might do without the role of a Buyer’s Agent.

That sort of scares me. Not because half of my work is with buyers. It scares me because buyers need an agent, almost more than sellers need a listing agent.

Having cut my teeth in the worst market in all of real estate history, I can tell you first hand that a buyer doesn’t know if they have made a mistake in picking a house, or overpaid, until they sell their home. It has been a good market for so long that I think most people think all there is to buying a house is picking the one they like…….as if it is as simple as choosing which product to buy on Amazon. One day, every buyer will become a seller. Your home may be a noose around your neck and you don’t even know it yet.

This was a common scenario for me when I was called to list a house between 2008 and 2011:

Seller calls me to list. They say they paid full price in multiple offers to get their house in 2003-2005. They assumed it would always be that way when they needed to sell. Then I have to tell them their house is worth less than they paid and they really should have called me before they bought the place. I could have saved them not only money, but a lot of time, frustration and headache.

I frequently saw where a spouse was transferred here. Their home back wherever they were from was on the market. The spouse was living in a studio apartment here until their house back home sold. The family was separated. Nobody was happy. Trust me, you don’t want to be this buyer.

This is how a Seller’s Market works: EVERYTHING sells for top dollar and fast since there aren’t many options. This is how a Buyer’s Market works: ONLY the choice, Grade A homes in Grade A neighborhoods sell fast and for top dollar. Everything else goes for less. Have a house in a less desirable school district? Have a house with an awkward floor plan? Have a house with a terrible lot (Think steep driveway, no privacy, backing to a busy road, etc)? Good luck selling in a Buyer’s Market because every buyer can get that Grade A house. You need to have a big price difference between those Grade A homes and your home to entice a buyer.

Aaaaaaaand you need a Buyer’s Agent who can tell you these things BEFORE you buy a house.

What’s 2024 Going to be Like?

by John Rice

I do these type of posts every year. Not to brag, but I am usually spot on. Why is that? I think it is because I don’t concern myself with short term knee jerk reactions to market fluxuation like the media does. I don’t view “Demand” like most people. I think there is always demand because everybody loves real estate and everybody ultimately wants to own their home. How many people are out there buying at this exact moment can vary, but there is always demand.

I think 2024 will be a better year for buyers and a still great year for sellers. We have all been on a roller coaster the past few years:

2020-We thought we were all going to catch COVID and die, or didn’t think it existed at all. We were too busy fighting over everything early on to bother with buying or selling houses….until later in the year when rates got so low.

2021-We partied like it was 1999. We chatted daily about how much our crypto went up. We got a better house, an airbnb or refinanced what we already had like crazy.

2022-We continued to party like it was 1999 but we knew the ball was about to drop. Just like inflation was eroding our purchasing power, we could no longer afford the cost to maintain our enthusiasm.

2023-Was like “Will there be a recession?”, “Are we IN a recession?” and “These rates are crazy high right now!” It felt like when somebody thinks they saw a shark and everybody jumps out of the water. Was there a shark? Who knows, but nobody wants to be the first one to get back in the water.

2024 is looking like the economy has stabilized, rates are going to drop to a level that is historically average, and all those people who are on the fence will come out….just like the opening scene of Bambi. Affordability will remain an issue. Prices will at least stay stable. We will read later in the year that rent prices are dropping but that data is skewed. All the new giant apartment complexes will be competing for the same tenants. Prices for apartments will go down for sure. The single family rental market will remain strong since there are not enough single family houses for anybody in any market.

Ultimately, I think this will be the most normal market we have seen since Covid.

And I welcome it. Bring on 2024!

What to expect for the rest of 2023

by John Rice

In 2-3 months, you will be reading that sales have dropped significantly. The news media will have you believing the sky has fallen. They will compare the stats to the booming pandemic years and/or the best of times……as if that was normal. Headlines will read:

“Sales down 20% (compared to last month.)”

“Mortgage applications fell to lowest level (since 2022.)”

The reality will be that the market has just returned to normal, seasonal cycles.

I think sometimes we forget to look back far enough to see the bigger patterns. It probably doesn’t help that the media people are only following real estate long enough to write their article. It also doesn’t help that so many real estate agents haven’t been in the business long enough to see a balanced or even a bad market.

This is what a balanced market looks like: Some houses sell the first day on the market in multiple offers. Some houses don’t sell quickly and need one or more price reductions. March through August are peak sales months. After August the sales gradually slow down and start picking back up after the New Year.

So, for the rest of 2023, I think we will see fewer and fewer sales. Yes, the interest rates are high and that is what is returning us to a more balanced market. However, that is not the only reason we will see fewer sales. Part of it will be that we have returned to a more normal cycle of sales slowing down due to the time of year. I think prices will remain stable. We will see a whole lot of price reductions on listings that didn’t sell the first day on the market. This doesn’t mean that values are dropping. It just means the seller and/or their realtor were just too ambitious on the list price. We are returning to a market where buyers have some choices. When there are not 10 buyers fighting for ever single house, it means the loser houses that nobody wants will have to reduce the price to even attract one buyer.

Things to remember in a slowing market

by John Rice

Yea, the market is slowing down. Everybody knows that. No big deal. That crazy roller coaster market couldn’t last forever and I’m sort of glad really. It will still be a good market for years to come, but it will seem like a let down compared to the last couple of years.

Here are some things to remember as you process the Doom and Gloom news cycle real estate is in at the moment.

  1. The “Average Days on Market” will be going up. Don’t be alarmed. Usually the way that works is that the worst houses that nobody wants stay on the market longer and bring down that average. Also, keep in mind that average is usually for all residential property types in all price ranges. If you have a $350k house, do you really care about what the market is like for a million dollar home? Or a townhouse at any price?
  2. The “Average Sale Price” is another one that can confuse people. An average is just that-it’s an average of all sales. If house sales over $500k slow down a lot, it will drag down the average sale price. This does NOT mean your house is worth less when you read silly headlines that say stuff like “The average sale price dropped by 2% last month.” When rates got super low, I saw more houses selling for $1,000,000 or more than I have ever seen. Now that rates are much higher, I totally expect to see sales at that price point slow way down, bringing down the average sale price.
  3. Values may stay flat after going crazy for the past two years, but prices will still go up. I know this sounds crazy, but hear me out. Let’s say you bought a house a year ago for $400k and we have had 8% inflation since then. Your house needs to sell for $432k today for you to have effectively broken even. That’s because it takes 432,000 of today’s deflated dollars to equal 400,000 of dollars a year ago. In other words, the price of your house has to be higher even if it got zero percent appreciation just because the value of the dollar has eroded. (This is a whole other post, but one reason prices have risen so much over the past year is because we saw massive appreciation and massive inflation. If prices went up 15% and inflation was 8% of that, then that means the real appreciation was 7%.)

I started my career just as the Great Recession began. I saw most houses in our area drop in value by 15-20%. I know to a lot of people, this market seems scary. Trust me, it isn’t. All that’s going to happen is that we have a more balanced market. It will be a good, but not the greatest time in history, to be a seller. It will also be good to be a buyer because you will be able to get a house that should be a stable investment for your future.