real estate agent

Last nail in the coffin for the Pandemic era market

by John Rice

All throughout real estate history, we have had value differences due to location. Similar houses in the best locations got top dollar and the less desirable locations were worth less.

Except for the COVID era market.

During the pandemic, supply was so short and demand was so strong that pretty much the same house would sell for the same price regardless of things like what part of town it was in, what school district it was in, and even what condition the house was in.

This was especially true for the more affordable houses. Back then, a small 3 bedroom, 1 bath house without a garage was going for about $200k regardless of whether it was in a Grade A, Grade B or Grade C location. That was because the market was so tight that people didn’t have a choice in location. Buyers were shopping all over town, looking at any house in their price range. There were so many buyers doing this that location didn’t seem to matter much. It was about getting a house, not getting a house where you want it to be.

We’re not wearing masks. Rates aren’t 3%. That crazy market is in the past now.

Now that we are starting to see some houses staying on the market for more than a few hours, it’s back to location being important. As this happens, I think we will see the Grade A neighborhood prices remain stable. The Grade B and Grade C locations that recently had been getting the Grade A money…..well, they aren’t any longer. That is one reason we are seeing so many price reductions now. It just shows that the market is returning to normal. It isn’t crashing.

Back during the pandemic, I would have people ask me what a house was worth. I would tell them I can easily determine what it is worth, but the value and the sale price were not related for that brief time. I would tell my Buyers to view the sale price as paying what the house was worth plus a “Convenience Fee” for winning the house in multiple offers. Now that we aren’t seeing multiple offers on every single new listing, we are back to a house’s value and its sale price being the same.

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.

Backup offers are a bad idea except for this 1 reason

by John Rice

Backup offers.

They seem appealing to buyers who missed a house they wanted.

However, they are 99% of the time, a bad thing to do.

Why?

  1. It ties you up. You have an accepted contract on a house contingent on the primary buyer’s contract falling apart. Should another house come on the market that you want to make an offer on, you have to rescind your offer IF you have verbiage in your contract that allows you to do so. If you don’t have that language in the contract, you are stuck. You are missing out on houses you could get right now in hopes that the sale of one you previously missed will fall apart. This is a recipe for never getting a house.
  2. You are really helping the seller more than yourself. Think about it from the seller’s perspective. You are putting them in a spot where they have two people wanting the house. If the primary buyer asks for repairs after a home inspection, the seller is just going to say “Look, I’ve got a backup contract. If you want this house you’ve gotta do what I want you to do. If not, walk away and I’ll just let the other buyer have it.”
  3. You are going to pay a premium. The seller has no reason to accept an offer less than the primary contract they already have. If you’re a seller with an accepted contract for $400k on your house, would you bother with an offer for $390k? This means you are most likely going to have to make an offer stronger than the offer they currently have with the primary buyer.

When is that one single time when it might make sense? If the house is 110% exactly what you want and you are not going to be happy with any other house. If that’s they case, make that backup offer. Pay too much for it. Give the seller all the power. Pray the sale with the primary buyer falls apart. Then wait and see what happens.

If the house is just a really nice one that you liked a lot, just keep looking. Another one always eventually comes on the market. Oh, and remember, the best way to not have to make a backup offer is to have been the strongest offer the seller got when it was on the market. Beat the other buyers when you have a chance. Be that primary buyer that another buyer hopes will not be able to close the deal.

When is the best time to sell?

by John Rice

I get asked this often.

If you’re really not into reading, I will go ahead and tell you. The best time to sell is when you are ready to put the house on the market.

Why wait? There are buyers out year round. Always have been. Always will be.

There are a few things to consider though.

The goal in any market is to get as many buyers as possible wanting your house. You do that by pricing it correctly and presenting it well. Usually the first few days on the market is your best shot of getting multiple offers. Once a listing grows stale, buyers are not afraid of losing it. They will pay top dollar for it if they are afraid somebody else will get it first. So, that means the first few days are the most critical to get right. Again, always has been. Always will be. That is why most realtors put their listings on the market on a Friday. Most people are off work on the weekend which means more showings. If your first weekend on the market is going to be a big UK home game, a big day for Keeneland, Mother’s Day or some other holiday when people will be traveling or have events with family/friends, it might be best to wait a week.

With so few houses for sale any more, you don’t have to worry as much about competing listings. I don’t worry about what time of the year is best and you shouldn’t either. If we ever get back to having a lot of inventory, my advice might change. Right now, any time is the best time.

The wrong way to make housing more affordable

by John Rice

I keep seeing a bit of enthusiasm in the media regarding the market softening to the point that real estate prices will drop.

With the logic of a 5 year old, sure, it makes sense that lower prices make things more affordable. There are however more variables that go into a mortgage payment. There is the price you pay, your interest rate and the length of your loan. There is another variable independent of real estate and that is wages. I read this morning that wages are going up as workers are demanding more income to combat inflation. I predicted this. Inflation came first and hurt all of us. I knew that in time, wages would have to go up as well. I used to have a lawn care business when I was younger. I remember a customer who built their house brand new in the 1960s. They told me their payment was something like $160 a month and some months it was hard to make ends meet. We laugh at that payment today, but keep in mind that it was probably still about 30% or more of their income.

Let’s say that we all wake up tomorrow and real estate prices have dropped 20%. Yay affordability!! It won’t make a bit of difference. Why? Having lived through the Great Recession, I can tell you that Buyers will not view this as an opportunity. They will be afraid to buy. The self claimed shrewd Buyers will try to time the market and wait for prices to go down more. Those Buyers usually end up waiting so long that prices have started to rebound before they feel comfortable to pull the trigger.

Let’s also take into consideration what softening real estate prices will do to those who already own a home, which ultimately affects everybody. For most middle class folk, their home is their greatest asset. If they feel good about the value of their home and their job security, they will go out and spend their money. They take vacations. They go to Lowe’s and Home Depot. They buy furniture. They spend on landscaping. It’s good for the whole economy. They stop all that when the value of their home goes down. How do I know? I saw it from 2007-2011.

What is the solution? Build more houses. We have been in a housing shortage since the Great Recession ended. Yes, people right now are not moving since they got super low rates that don’t exist anymore. That is keeping prices high in these times of higher rates. But think back. When rates were super low and everybody was eager to buy houses, we still didn’t have enough houses available.

And if you think affordability and low inventory are bad now, just wait until rates drop down to around 6% or hopefully less. That will create a bit of a frenzy. There will be even more bidding wars and prices will continue to go up, making housing less affordable.