Sellers, Don't Count Your Chickens Yet

Just in the last few days, we've started to see homes in Greater New Haven come back onto the market, after a sale fell through.  When we think about how many offers now are made without contingencies, in order to improve a buyer's chances of winning a multiple bid situation, the percentage of DFTs (deal fell through, as we call them in the trade) is actually higher than it appears.  People who made contingency-free offers did not always leave themselves wiggle room to get out of a contract, so that the sellers likewise couldn't get out.  Those contracts would therefore be sticking, meaning that the 80% or so of sales with contingencies are producing 100% of the DFTs.

Why would that be happening?  There is always some amount of buyer's remorse. That house you were bidding on the night before doesn't seem as great in the light of day.  However, it is likely that more homes are coming back onto the market because the buyers can't perform. Either they can't borrow enough money--maybe they bid too high in the last round of negotiations, or maybe they never had quite the credit they thought they did--or it's just coming at higher rates, as rates are inching up.  Sometimes it's fees, or flood insurance, or repairs that will cost more that ends the deal.  

In weaker markets, many of those contracts would be adjusted downward by both parties, especially if there are major defects that come to light, or if the home doesn't "appraise out" at the price being paid.  That can easily happen in a rising market, because appraisers can only use closed sales, so current contracts at higher amounts can't be counted.  In this time of short supply, the sellers are more likely to put the house back on the market, and try to resell it at a comparable price.  

When one house has this problem, it can also cause a domino effect, where several homes each depend upon the buyers selling their previous house.  One transaction can ripple through other sales. Even if a sale sticks, a lower price may lower the equity available for the next purchase.

What does all this mean?  It means that the market is beginning to show the downside of rising prices, where buyers face hard upper limits on what they can pay.  Sellers should remain flexible, roll with the punches, and not get greedy.  A deal that seems too good to be true may be just that.  If everyone works together, a good result may occur for all parties.

Inventory is the Key to the Housing Market

Everywhere in the country, there is talk of a red hot housing market, for many reasons.  Low interest rates, pent up spending and demand, and pandemic desire for more space.  Supply and demand, therefore, have gotten way out of  whack.  Today, we circulated an article featuring 76 full-price offers on one home.  

That's true in many regions, but what is happening in Connecticut?  Even that needs to be broken down by county.  Fairfield County is booming, and is absorbing many of the 24,000 people that have moved to Connecticut in the past year.  New Haven County is seeing some of that movement.  West Hartford, one of the most popular towns in Hartford County, is actually down 8% in the first quarter.  Of course, this can all be explained by the old adage:  Location, location, location.  The closer to NYC, the higher the price, and, now, the hotter the market. 

Many families moving here are counting on working from home for at least some of the time going forward, but they want to be close enough to commute when necessary. For now, many are avoiding public transportation, but that number will diminish as vaccinations increase.  Prices are rising rapidly in many towns near the NY border.

Despite all the reasons for the increase in prices listed at the beginning of this post, the real driver is inventory.  Many sellers were burned in earlier attempts to sell, or haven't found a place that they can go.  They are tempted by the demand by buyers, knowing that they may get more than they expected.  However, they also know that when you sell high, you usually turn around and purchase high as well.  

That shouldn't matter.  People should make decisions based on lifestyle, personal preferences, and proximity to friends and family, and let the investment side of the equation take a back seat.  Since selling and buying in the same market is a wash as far as prices go, it should come down to individual choice.  And, if you want to choose a new home, this is certainly the time to do so.  The rapidity of the selling cycle may make life intense for a while, but the uncertainty is short lived, and the benefits of moving last as long as you are in the new property.

So the market comes down to the sellers--will they provide a spring season supply?  We very much hope so.  Sales depend on it.  

Multiple Offers Multiply

Finally, the wave of inventory shortages that has swept the country for several years has made it to Connecticut.  In our case, years of not building new product, and a delayed generation of first-time homebuyers has combined to create a scarcity of homes for sale in South
Central Connecticut.  That means that those looking are jumping on whatever new listings there are, and causing immediate offers to occur on many homes. And we all know what that leads to--multiple offers!

Maybe surprisingly, many real estate professionals find markets like that as stressful as, or even more stressful than, poorer markets,where nothing is selling and sellers are unhappy and sometimes demanding.  In the markets where inventory is scarce, people are forced to make quick decisions on offers, both making and accepting them, and that is difficult as well.  Buyers may get caught up in the thrill of the chase, or may start to bid high in order to stay in the game, often after losing other bidding wars.  This creates a feeding frenzy, maybe not quite like tulips in Holland hundreds of years ago, but the same idea on a smaller platform.  Buyers drive prices up with bidding wars, sometimes using escalator clauses, which I will discuss in another column.  Sellers may counter more than one buyer, and then have to be careful not to sell a home twice; alternatively, they may accept an early offer, then regret it, and try to accept another one later, by getting out of the first one.  Negotiations on inspections and mortgage delays are complicated by backup offers in the wings, and will change the dynamics of any discussion.  That can leave buyers in a situation that they either can't afford, or didn't really want as much as they thought they did.  Both scenarios lead to unhappiness down the road.

If you are a seller, think in advance about the number you will accept, and don't be a pig.  Take that offer if and when it comes along, and don't negotiate with more than one person at a time.  If you are a buyer, decide how high you will go up front, and don't get sucked into going up, if you can't afford it.  Don't then think that you deserve to ask for the moon during inspections, because you may have paid more than you expected.  If all of these guidelines are followed, then both parties should be happy--the sellers with a quick and successful sale, and the buyers with a happy new home.

A Different Market

All real estate markets are variable, as are all cycles.  What applies to one property may not apply to another.  Yet there are usually certain truisms that stand out at any given time.  So what are we seeing now?

First of all, inventories have tightened in almost every segment.  There just isn't as much on the market.  Good properties can get snapped up almost instantly, sometimes with multiple offers.  This is particularly true on the lower end of the price continuum.

Secondly, rates have been rising, meaning that time is of the essence.  If you are able to afford a home now, don't wait.  It will cost you more every month in the future, if rates go up further, and inflation is a real fear in this economy.  Even if you are downsizing, money is cheaper to borrow currently.

Thirdly, sellers (who tend to be older than buyers) value different things than do buyers (who tend to be younger).  There is often renegotiation that takes place after the inspections, not because the home is falling apart, but because the buyer intends to do work that the seller might not think is necessary, and which, indeed, may not be.  A seller shouldn't be surprised if a buyer is looking to change the floor pattern, bathrooms, security system, or appliances.  As a seller, you don't have to participate in those choices, unless you want to sell your home to that buyer.  There is an exception here--multiple offers reduce the cost of renegotiation, by changing the power dynamics.

Multiple offers still tend to come on properties that are very well priced, and also on those that are in move-in condition.  Prepping the house well for sale helps with that, as does making your offering price so attractive that more than one party will bid, often above asking.  Not only does that drive up the final sales price, but it cuts down on give backs, since buyers know they are competing.

If you are trading up to a larger and/or more expensive home, you may be better off than those trading down.  Not only is supply more plentiful, but carrying costs are a real concern for many people, and bigger homes can sell at discounts that smaller homes would not have to face.  This provides a real opportunity for those who are willing and able to purchase a large home, and those buyers can end up with a lot for their money.  In addition, they will start with more money, since the smaller home that they are selling is probably increasing faster than the larger one they are seeking to buy.  Every market has pockets of opportunity, and this is one--go over $1,000,000 for the best value.

Finally, don't expect this market to change rapidly.  Every other part of the country has already seen declining and tight inventory, and therefore rising prices.  If it is starting to happen here, remember that it is just starting.  And adjust your expectations--then make your move!

Why Are We Seeing These Market Conditions?

It's always dangerous to postulate about why certain market conditions exist, but I think I'll take a crack at it, since it's been going on for some months now.  To begin with, our market has been lagging behind nearly every other market in the country, and that's been happening for years.  At some point, we all knew that Connecticut would get lifted, at least to some extent, by the rising tide that's been lifting other boats, so to speak.

We also know from history that activity ramps up when interest rates rise.  Although this seems counter-intuitive, it occurs because people don't believe that rates will ever rise until they start doing so.  It's probably really more like a hope that they will continue to go down, than the real sense that buyers are ignoring the bottom of the curve.  Plus, they think, and they are correct, that 4% on the way up is the same as 4% on the way down, so it won't matter if they wait.  We in the industry put this more in the category of bottom-fishing:  Everyone is hoping to be the one who got a mortgage for the lowest interest rate possible.

Experts have been talking about the lack of supply for a few years now, which is what has caused spikes in prices and decreases in days on the market in other places.  Part of that is because of the lack of new supply, and that was more acute in Connecticut, because of our poorer economy.  Now it's true here as well.  The years of a bad market have caused sellers to hesitate before selling, and buyers now face a dearth of choices in many areas and price ranges.  This is particularly true at the lowest price points, where first-time homebuyers are competing with each other for the homes that have come on the market.  Many sellers also wait for spring before listing, and this year's snow (even today's snow!) made that more likely.  Buyers in our region tend to want to buy sooner than sellers want to sell.

Employment is also tightening, which is driving up wages.  That means that more people can afford to buy a home, and that those who already own homes can afford to trade up more easily.  Rising wages also increase the consumer confidence index, which I have long found to be a very important predictor of real estate activity.  In turn, that makes buyers think that they can stretch further to purchase, because they believe that their wages will continue to rise.  They may be right about that, and there are many reasons for that to be so--one is that there are fewer undocumented aliens and immigrants filling those jobs out there.  Another is that the baby boomers are hitting retirement age.

The new tax rules are so complicated for many taxpayers that, in a funny way, they may be helping also.  Since it's hard to know what effect the new provisions will have on any given individual or family, some are choosing to buy now, especially since this year's taxes were not affected.

Other reasons may also exist, but the ones above seem to be driving the market, despite the old saws of bad weather and wrong season, which have not held true this winter in our area.  Let's hope that the standard spring market kicks in anyway, and that our good fortune will continue throughout 2018!

Sometimes It's Good to Lag the Market

In many parts of the country, real estate has fully recovered from the Great Recession, has increased in price, and is levelling off.  Inventory is a problem, because demand in many areas has been greater than supply.

 Not so for Connecticut.  Our poor business climate and high taxes has caused us to underperform everywhere else.  That means that we have yet to see any price increases, and our inventory remains higher than in other places.  And what does that mean?  It means that buying here makes more sense than it does in almost anyplace else in the country, because we share the same low interest rates, without the appreciation that would make housing prices higher than they were a few years ago.  We are still recovering from the downturn, and our jobs did not return in the same categories nor at the same rate as in other states.  That puts us in a different phase of the housing cycle, and makes us expect that this year will be strong. 

Certainly the weather is helping!  It's over 60 degrees today, and it already feels like spring.  So what does spring mean to us?  It's time to buy!

Lack of Inventory

Wouldn't it be ironic if the real estate recovery ended up being hampered more by lack of listings, as opposed to too many listings?  When we think of down markets, we think of lots of unsold houses, because people aren't buying.  If you talk to real estate professionals around the country now, they will likely tell you that people aren't buying because they can't find anything they want to buy.


How can this be true?  Shouldn't there be plenty of homes, especially here in Connecticut, where the recovery has been much less robust, and, indeed, where prices are still declining?  Actually, it makes sense, if you think about supply and demand.  The supply here is not keeping up with demand, because owners don't want to list if they can't recover their costs, or get the profit they thought they would.  They know that prices are declining still, and that the average home is worth 20% below what it was worth in 2006.  That, in many cases, deters them from trying to sell.  What is on the market has, in many cases, been there for some time, and isn't being shown.  Sometimes those properties are overpriced, and sometimes they have location, condition, or other issues.  Buyers aren't going to "overpay", especially if they need a mortgage, so those homes just sit.


What we have seen here, however, is that buyers will pay at or above asking, if they see something good, because so many people are bidding on what is available.  Therefore, new listings often have multiple offers on them, because good properties are rare, so paying more is not overpaying, it's an increase in the market rate.  And there's the law of supply and demand, played out for you in real estate.

Sellers Take Note

Many people read the national news when it comes to real estate and forget that, like politics, all real estate is local.  In the past couple of years, most news has been about prices rising once again, and inventories running low across the country, especially (of course) in California.

We don't like to dwell on bad news, but our region was one of only six out of the top hundred metro markets around the nation whose average price fell from May 2013 to May 2014.  Three of the past few months have also seen declines.  I hate to bring it up, but sellers considering offers, or even listing price, should take those statistics into account.

There are multiple reasons for the fall in prices here, and some will certainly go away over time, but, for now, we are in stasis at a lower price point for most real estate, and we should accept that during the fall market that lasts until Thanksgiving.  Buyers will have choices, and it's fine to stick to your guns about price, unless you want to sell in the short run.  The spring market may be different, so buyers, who may expect that low selling prices and low mortgage rates will last forever, should act now.  Everybody will be better off if everyone is realistic.

Sales Around the Country This Spring

It's always interesting for me to visit with my friends from other large independent companies around the country, especially when the market is changing rapidly.  I just got back last night from Charlotte, and the mood from other places is almost giddy.  The feeling nationally is that market activity will be back within 10% of normal levels by the end of this year.  That's a big improvement from the projections we heard only last fall, when most experts thought that historical norms of housing turnover would not return before 2015.

Now the commonly heard complaint is lack of inventory.  There simply aren't enough properties for sale to meet the demand. The average number of months of inventory seems to be about three.  Well-priced, well-maintained homes in many areas get multiple offers--sometimes dozens--within a few days or weeks of being listed.  Once they go under contract, the problem that arises is that appraisals have been lagging, as they always do, so there are issues with mortgages.  In some cases, sellers and their agents are going back to the highest bidder and telling them that they need to release all the contingencies, including mortgage, or they will proceed to the next offer. New construction is hot everywhere.

Here in Connecticut, we're recovering slowly.  (Maybe that's why they call us the Land of Steady Habits?)  We have just over eight months of inventory overall in our county, with some towns much higher than that.  Guilford, for example, has 17 months' supply.  Our supply of million dollar homes will last several years.  So, for us, the report from other places tells us what the future will be like.  And it will be great.  However, if you are a buyer, my advice is to buy right now!

Judging the Market

One of the time-honored ways to judge the strength of the real estate market is by the months of supply available at any given time. In order to derive this number, we take the houses currently listed, and divide by the average number of sales per month, to get the number of months it would take to "use up" the current supply. During the recession, most parts of the country had a huge backlog of homes listed, including many places with more than a year's worth of homes for sale.

Last week, I was on a call with owners of real estate firms across the country, and recovery was in full swing.  The way they expressed this was in the decline of supply, making their areas more sellers' markets than buyers' markets, meaning that buyers no longer had the advantage of dozens (or hundreds) of homes to choose from, since supply had dropped in most places to a few months' worth at most.

In our market, we appear to be lagging, as I have said in recent posts.  Although our market has improved a great deal, we still have a greater supply than other places.  According to MLS figures, we have 7 months of homes under $300,000 available, 15 months of homes between $300,000 and 1 million available, and 31 months of homes over a million available.  This last number means that, if no new homes over a million went on the market from today forward, it would take over 2 and 1/2 years at the current rate of sales for the current inventory to dry up.

It's not quite as black and white as it may sound.  Many houses listed now may be overpriced, have something wrong with them, or may never sell.  Therefore, a seller putting on a home now should not think that his/her own home won't move for over 2 years.  He or she should, however, realize that aggressive pricing, especially in our area, is still important.

News from Tulsa

I just got back yesterday from meeting with The Leadership Council, a group of large independent brokers from around the country.  This time we met at Chenowth & Cohen in Tulsa, where growth is high and unemployment is low.  Tulsa turns out to be almost in the exact center of the country geographically, both north to south and east to west, so it is home to a lot of company distribution and service centers, as well as energy companies and others.  It is just approaching the million mark in population. People are moving from all different parts of the US, and many that I met had come from Texas. Boy, does it seem different from New Haven in those regards!

Tulsa has about two and a half months of housing inventory.  Prices are rising, and units are growing.  Like us, they have problems with mortgages and closing times, and sales are not easy.  However, it's really about jobs.  If people have jobs, and employees are moving into the region to work, then it's obviously easier to sell your home and buy another one, because there is a steady supply of buyers being created.  In addtion, the West has ranches and open land all around, making it much simpler and cheaper for builders to add new product. 

The real estate business has some characteristics in common all over, but there are some differences.  They have centralized showing, so agents make one call to arrange all the properties for a buyer to see.  They also have lots of listings where contact is through the owner, which seems odd to us.  States with title companies owned by real estate companies are more real estate agent driven than lawyer driven.  Towns and cities are farther apart, and many agents I met worked an hour or more from home.  There seemed to be more concentration--one agent I met with had 159 listings!  Advertising has left newspapers in many places, and you don't see the big Sunday ad sections.  Everything is done on line, or directly by real estate companies. 

Other practices were similar to ours, including the work ethic of agents, the changes brought by technology, and the complications of lending and governmental regulations.  It's always refreshing to see both the old and the new, and to step out of the regular daily grind and view it from a distance.