Saturday, June 17, 2017

Death By a Thousand Cuts

The real estate market in the Greater New Haven area is bifurcated these days.   Some things sell, often with multiple offers, in a few days, while other properties don't even get shown, or don't get offers at all.  The difference is mainly in the urgency that the listing conveys to buyers--they will bid on something that they think won't be there the next time they look, but will wait and ponder on everything else.  There is enough supply so that buyers feel that more will come on every week.  It's a little like Tinder--there have been articles saying that dating apps actually reduce serious relationships, because people can't choose and settle down, when each visit to the site brings new and sometimes exciting options.  Buyers can visit real estate sites whenever they please, or set themselves up for automatic notification of new listings.  This means that they are constantly being presented with new options, hence reducing their sense of urgency about an exisitng one.

In our region, some towns and neighborhoods are hotter than others, and may lack sufficient supply.  There, buyers will put in offers more quickly, although they may then back out on a contingency clause if they find something else they like better.  So, if you don't live in a hot area, like East Rock or Spring Glen, what do you do to get buyers to make offers?

Well, the key thing is not to overprice at the start.  Listen to your agent, and look at other comparable homes.  If you feel that you must try a higher price, make an agreement with your agent to lower the price at a certain point, and go ahead and sign the price reduction at the same time as the listing, so that you don't forget what the advised price was.  And finally, if you do start too high, don't chase the market down.  I titled this article "Death by a Thousand Cuts", because I see a lot of homes, especially in the Shoreline towns, being reduced over and over again by small amounts (and I really mean small--I've seen reductions as low as $1).  While you may think that a reduction will get your home looked at again, what many reductions will do is make people think that there is something wrong with your home, especially if they come from another part of the country where the market may be stronger (and that includes, unfortunately, almost everywhere). 

So, when you do reduce the price, make it dramatic!  Make a statement that you are ready to do business, and choose a price that is compelling, and one that will inspire urgency in a buyer.  Don't feel that you need to save your pride; save the sale instead.  Give buyers a reason to stop looking, and to settle on your home before someone snaps it up at a price those buyers know is going to make it sell quickly. 

Friday, June 2, 2017

Explanation of absorption rate: The rate at which available homes are sold in a specific real estate market during a given time period. If you look at the number for Madison you can say “If market conditions do not change and if no new listings come on the market it will take 6.4 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5 - 7 months.”

Wednesday, May 31, 2017

Pricing is an Art

I've been writing a lot about pricing--signs of a changing market, appraisal issues, the importance of the first two weeks, and other aspects--but I still feel that there is more to say about this critical piece of the real estate market.  It would be nice if there were a formula to apply, that would spit out the correct number every time.  However, the pricing of property is more an art than a science, for a plethora of reasons.

First of all, nothing about real estate is static.  Things are constantly changing, from stock prices and political fortunes (which do affect real estate) to tastes and preferences among buyers.  In the same way that a video can go viral, a trend can suddenly take off (or end), leaving in its wake all kinds of now outdated homes. Even towns and neighborhoods become trendy or not, and make pricing differences apparent from place to place. In the realm of changes, an election can cast a big shadow, be it local or national, with people waiting for resolution before making decisions.

Interest rates deserve their own paragraph, since they play such a big role in what buyers can afford.  They have ranged from low single digits to almost 20% during the course of the last thirty years or so.  Many buyers, probably most buyers, look at the monthly payments more than the actual price of the home, since that's the true measure of what they can afford.  Strangely, though, more buyers pull the trigger on a purchase as interest rates are rising, than when they are falling, because the rise creates a sense of urgency. 

Demographics also factor into the equation.  Millennials have lagged behind their parents and grandparents in the buying of homes, but they are out in full force now.  They waited longer to get married, longer to have kids, and they owe more in student debt, so it has taken them more time to get around to buying property.  For a long time, we believed that they never would, but that seems to have changed. That increases demand, which affects prices.

Values in other markets come into play when we consider relocating transferees.  Those coming into our market may be coming from places with hotter markets, or higher prices, which inevitably influences what they will pay.  This is especially true if they sold a house in a booming economy somewhere else, and for tax reasons or otherwise, they want to reinvest that same amount here.  It's a good example of the old saying:  "The property is worth what you are willing to pay for it". 

Conversely, people relocating within our region may be faced with a decline in the value of their current properties, and may not be able to spend on a new home what they thought they could.  That puts pricing pressure on in the opposite direction.  In addition, the average person spends double the time between purchases (eight years) than he/she used to do, so that dampens demand as well.

Finally, when is the spring market?  As the world changes, and more households are not tied to a school year move, and more families spend time apart before rejoining forces in a new location after a job change, the traditional spring selling season is less certain.  Weather definitely plays a role, whether it be snow lasting into the spring, or even a rainy month (think this month!).  Often the "spring market" lasts longer, and in 2016, we saw that occurring, with the market staying strong into early August. 

All of this together gives you an idea of what goes into a pricing recommendation.  In the past few weeks, we've seen prices lowered at the last minute before listing, and we've seen others raised.  We've seen many more price reductions within the first month on the market than we used to see, and we've seen some homes fly off the market and others not even get shown. We may bring in a high offer, only to have the home not appraise, which in many price ranges effectively means that it can't sell at that price.  Sometimes we are sure we are correct, and sometimes we have our fingers crossed.  Connecticut is harder to predict than other places, since we are in our own "bad economy" bubble, but other markets can face these uncertainties as well.  Much as a doctor may not know which procedure will be best for an individual patient, or a financial advisor can find his or her stock picks having unexpected outcomes, professionals of all stripes have to offer advice with imperfect knowledge.  So we go forward, together with our clients, combining hope and trepidation, into an evolving market in 2017. 



Monday, May 22, 2017

Appraisals

We are starting to see properties "not appraising out" lately.  That's an early indicator that prices may be increasing, at least in submarkets or areas where supply is limited.  What we mean by that term is that the appraisal number is lower than the amount on the sales contract.  If the buyer needs a mortgage, it's an issue, because he/she may not be able to borrow the full amount that they expected.  In other cases, where the buyer is paying cash, it is not uncommon for the buyer to put in a clause that the sales price cannot exceed the appraised value. 

There are two ways to look at this issue, as with so many things.  One is that the buyer should be willing to pay what a property is worth to him/her, regardless of the appraisal.  The other side of the coin is that the practical value of a property--what it would resell for, and what you could borrow against it--is dependent upon the appraisals.

Appraisals tend to lag the market, because an appraiser can only use comps from within a narrow range of closing dates, and within a very small area around the subject property.  It can be very hard sometimes to find good comps, and adjustments must be made from properties that might not be exactly the same in quality or type.  Since the comps come from recent sales, those prices could be lower, in an increasing market, than the sales prices on contracts that haven't yet closed. 

What advice do I have after all of this discussion?  Appraisal is as much an art as it is a science, and both buyers and sellers should be reasonably skeptical about exactitude.  Given the restrictions on bank lending these days, it is harder for a bank to take the same attitude, so just be prepared to make an independent decision in any given instance.