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.

Current Absorption Rates (Single-Family Residential Homes)

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 New Haven you can say “If market conditions do not change and if no new listings come on the market it will take 2.8 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”.

Exposing Your LIsting to the Market Before Selling

 One of the country's large real estate boards recently did a study of the prices obtained for so-called "pocket" listings.  Those are properties that are really sold before they are listed, but that often go onto the MLS and immediately flip to pending status.  In all likelihood, they were sold to a client of the listing agent or agency before anyone else saw them, and were then put onto the MLS for the purposes of market share for that agency.  Buyers are seeking these types of opportunities, since there is such a short supply of new homes for sale.  It has some appeal for sellers as well, since it shortens the amount of time that their home has to be ready for showing. It also gives them an early indication of value, if an offer is made, that won't be able to be inferred by number of days on the market.

But what are the downsides?  One of the basic principles of behavioral economics is called the wisdom of crowds. That refers to the fact that large groups of people weighing in on almost any forecast produces a better result than one or two people can produce alone.  Therefore, a house that is bid on, or even seen, by the general public will result in a sales price closer to the true value, than a bid by one buyer.  In fact, this study of pricing mentioned above, for homes sold with pocket listings, resulted in prices which were 6 to 20% below what those homes were estimated to have gotten if broadly exposed to the market.  One could certainly assume that the same thing would happen, perhaps even to a greater extent, if owners simply sold the home themselves. Real estate agents should be, and generally are, much more familiar with current pricing in the area, and have an incentive to sell a property for more, since commissions are usually a percentage of the sales price.

There is one countervailing argument, however. If someone feels that they are getting an early look, with a chance to buy before others can bid, shouldn't they want to make sure that they are paying a fair price?  Maybe, and perhaps for that reason, they may come in high. Odds are, however, that they will want to pay as little as they can, and that time will work for them.  That is particularly true without a broker involved, since buyers will expect to save the amount that the seller won't have to pay in commission, and will aim to pay his or her net price. (This doesn't usually go well, because the seller also expects to save the amount of the commission, but that's a topic for another day).

So, in an ideally fair world, all buyers would have the chance to put in an offer equal to what the house is worth to them, and sellers would be able to tell what it's worth, by looking at the average of the offers, maybe throwing out the highest and lowest.  The only way to do that is to make sure all potential bidders know that the property is available, which is how the MLS came to be in the first place.  It still works pretty well, after all these years, and all these real estate cycles.

Current Absorption Rates

 

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 Branford you can say “If market conditions do not change and if no new listings come on the market it will take 2.0 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”.

Current Absorption Rates

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 Guilford you can say “If market conditions do not change and if no new listings come on the market it will take 2.8 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”.

 

Home is Where the Gratitude Is

At Thanksgiving time, it's traditional to count our blessings.  Especially this year, people who live in places they love are grateful for that, since they are spending more time there than ever.  As the weather gets colder, and more time is spent indoors, it becomes even more important.

Thousands of years ago, and lasting almost to the present, a house was something you built yourself.  Most didn't move far away from where they were born, and families were close by.  These days, a family can be far flung, and only gather sometimes.  That makes it even more important for a home to be a gathering place that attracts friends and relatives.  

Second houses can fulfill that need as well.  Particularly when they are in vacation locations, they can become the center of seasonal activities,  year after year.  Connecticut, especially with its long coastline, is well suited as a locale for family gathering places.  Woods and water make for great recreational possibilities for all ages.

Greater New Haven is even more attractive for both primary and second homes, with commuting options and easy access from major cities along the Northeast corridor.  Prices here have not risen the way some other places have seen, making it more affordable for buying now.  While supply is tighter than it has been for a long time, there are still houses for sale at various price points.

The holidays are a wonderful time to make memories, and think about making future ones.  If you love where you live, you are lucky!  If there are features you wish you had, room you need for sheltering your pod, or outdoor space you crave, now is the time to plan for next year.

If where you live now sparks joy, as Marie Kundo puts it, then you are lucky.  Enjoy your home, and practice gratitude, for you are in a place that will do more than serve as shelter.  If you just moved, settle in.  If you have lived in one house for many years, revel in the many memories of good times you've had there.

If living somewhere different is on your wish list, now is the time to do something about that. Planning will help us all to get through this isolated season, and give us something to look forward to in the future.  Why not use this time to dream, and dream big?  Whether you are increasing your down payment by staying inside this winter, or fixing up your current house for sale, focusing on the next step will improve your present state of mind.

Whichhever situation you find yourself in, we hope that your holidays are healthy and safe.  And we'll be here to help, when you are ready to act. 

Real Estate Closings in Greater New Haven vs. Last Year

We are in uncharted territory, as commentators remind us every day on every subject.  None of us knew what would happen to the real estate market during the pandemic.  At the beginning in Connecticut, the visits and offers really slowed down, but closings sped up--there was a big effort on the part of all parties to get things closed before the State shut down.  March was very busy on that metric, compared to other years.

When closings are charted week by week, results are only so useful, because one week versus another can be very random.  However, we can tell over the past four months that people adapted to the new normal.  After the initial bump, there was a big dip, which was followed by ups and downs throughout the period.  In general, the higher the price range, the better the closings held up. At most of the higher price levels, this year's closings exceeded those of last year during the past four months.That would be consistent with the observations and speculations that suggest that great numbers of NewYorkers are buying residential property in Connecticut, as our real estate seems very inexpensive to them.

While overall that is true, New Haven County supposedly did not get a bump from New York, nor did New London.  Anecdotally, we do believe that people are looking in our area.  If that's combined with the very short supply of listings, it makes for a vibrant market, and one far better than we expected for this spring.  And we expect that to continue, at least until (and unless) there is a second wave in the fall.  Anything that creates a sense of time pressure, be it weather, interest rates, or the possibility of further lockdown, will improve the market in the short run.  One of the biggest problems of the past decade was the sense on the part of buyers that they could take all the time that they wanted to decide, and that, as on Tinder, new choices would continue to appear, while previous ones would remain available.

Now that we know that's not true anymore, buyers are more serious.  When you add the fact that looking today is not without risk to health, there are many fewer idle lookers.  That has turned out to be a big boon for our industry; since we don't get paid for our time, we love any reason for buyers to be driven to contract faster.  Some want to sell and move while they can, while others are motivated to be in someplace where they can nest and telecommute in any future virus waves.  Those buyers also seek lower density, and value outside space, which helps us here as well.

So, in the main, we have adjusted to a new way of doing business quite well.  Market conditions were favorable for keeping sales up, and our region, with its concentration in higher ed and medicine, is fairly protected from the broader economic issues facing the whole country. Those relocating here from other parts of the world had already accepted offers, which were honored, so they needed to move. Our low prices attracted investors, too.  All in all, a good report for real estate prices and activity in Greater New Haven.



Disruption in the Supply Chain

When we give advice to people about buying property, we are often guided by standard metrics, whereby the average mortgage is outstanding for about five years, meaning that it gets paid off as people move, or refinanced, at about that point.  That used to be a proxy for estimating how long someone would stay in a home.  Based on that, we would also point out that it took, when the median home price was rising year by year at a steady amount, a few years to break even when selling and buying a new home, considering the costs of moving.

We have known for many years now that people refinance more frequently, or did so when rates were first low on an historic basis.  That's been less true recently, as refinancing is not as common as the rates would predict.

What was news to me this week was a Wall Street Journal article saying that the typical homeowner now stays in a property for 13 years in most places.  Some of that is tax based.  California has long been known for giving an incentive not to move--your taxes get frozen, and, like rent stabilization, that makes people rethink what they would do absent outside considerations.  However, it appears that the supply of homes in most parts of the country limits options for moving.

We don't have the new construction here that exists in places with lots of open space to build outside cities, but we do have a generation of young homebuyers, who don't have enough to choose from, when they go to buy.  That's because, in part, from another group looking at those smaller houses--downsizing older adults.  When new homes do get built, they tend to be large, for the usual economic reasons about lot price vs. home cost.  So there is a disconnect between available produce--often priced in our area between $400,000 and a million--and what buyers want, which is smaller and less expensive.  Homes between $1 and $2 million tend to be in places where older buyers are choosing location, and they are chugging along as well, on the Shoreline in particular.

How can we lower the 13-year figure, and free up homes to start the cycle?  Sellers should list the homes they are thinking about selling.  Buyers are once again out there to purchase!

Current Absorption Rates

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 Branford you can say “If market conditions do not change and if no new listings come on the market it will take 4.3 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.”



Finally a Market in Balance?

There have been some very positive reports about sales in our region recently. I have written about some of the reasons for the Shoreline’s improvement, like the time that’s passed since Hurricanes Irene and Sandy, but the broader market appears to be healthier also. When discussing the Shoreline, I made the point that prices had come down to where the value proposition for many people was just too compelling to wait longer, and that it stacked up well against other places where second homes are also popular. That also seems true in the non-waterfront sector. There are two factors that stand out: one is that inventory has moved, leaving less supply for the same, or increasing, demand; and two, that prices are often more realistic than they were a few years ago.

SMART MLS, our local MLS service, recently published a shocking statistic. Its records show that only 16% of listings entered into the system sell! That number may soon be going up, though, if demand continues to improve; however, it illustrates what happens when sellers price their properties too high. Buyers don’t feel compelled to act, and other sellers follow that lead and also overprice, leading to even more sluggishness in sales, while buyers hang around until prices fall. That dynamic has been playing out in our area, unfortunately, for many years. While it has always been true that a portion of the inventory is overpriced, that rate has accelerated as demand, units, and median sales prices all fell. It becomes a vicious cycle, and owners who need to sell begin to do what we call “chasing the market down”. That means that they start high and keep lowering the offering price, until they ultimately end up closing at a lower number than if they had priced correctly to start. The recent news that sales are more robust and inventory thinned out makes me think that prices are realistic, or more realistic than they were when people could still fixate on what they paid for the house ten or fifteen years ago (a period during which values have overall declined).

Like any other cycle, a good boost can start the opposite effect, where competitive prices lead to more sales, which leads to lower inventories, which leads to higher prices, which leads to more listings, and finally again to more sales. No one could be happier than we will be, if that’s where our market is headed this fall!

Current Absorption Rates

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 Branford you can say “If market conditions do not change and if no new listings come on the market it will take 5.3 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.”



Signs of a Changing Market

Finally, finally, Connecticut is beginning to see the indicators of at least a balanced real estate market! This comes so long after other places in the country that some of them have already passed their peaks, and have stalled or declined (e.g., San Francisco).  We are most likely entering a mixed market, as we have some positive signs and some negative signs.

The "seller's market" side of the equation is showing, for the first time, absorption rates just under 6 months for the region as a whole.  Healthy markets have between 3 and 6 months' supply.  Our region varies, with some towns higher, and some around the 3-month mark, but the overall picture shows that demand and supply are in reasonable synchronicity.  If the time gets too long (Denver at 48 hours!), buyers can't find homes and prices start to spike.  If the supply increases to over a year (where we still are in the highest price ranges), sellers can't find buyers for their homes.

Lower supply leads to higher prices, and then to multiple offers, which we are seeing in some neighborhoods and price ranges.  While it's not uncommon to have some variation, we do have a very bifurcated market, since we have slow price ranges and overheated ones.  In other words, either your home is going to sell right away, or maybe not at all, at least at its current price. 

Multiple offers also lead to the problem of sales not "appraising out", meaning that lenders cannot support in some cases the prices buyers are agreeing to pay.  This issue, stemming from the fact that appraisers can't talk to the brokers, and must use recent sales within a very tight radius of the given property, so that their valuations tend to lag market forces, usually only occurs as prices start to rise.  What's odd about our current situation is that we still, on a statewide basis, have declining prices overall, for the most recent periods reported.  That indicates a very quickly changing scenario.

On the other hand, we are still seeing sales falling apart over inspection issues, prices being renegotiated after the initial contract, and buyers looking at many, many homes over a long period of time, all signs of a typical "buyer's market".  So what's the consensus?  We'll know more when the spring market wraps up, but that may not be at the traditional Fourth of July time. It looks as though we'll see surging sales through the summer, pointing to an improving forecast for the year.  We certainly hope so!

Report from NYC

Once again, I've met with colleagues from around the country, this time in New York City.  That market is much softer than in the past few years, especially at the upper end (although their upper end is so high that we can't even imagine sales at those prices!).  In fact, the upper end everywhere, whatever that means in a particular market, has slowed down considerably.  Supply exceeds demand, and is often over a year or more in quantity; here, that supply is much higher.  In Middlesex and New Haven counties, 5 homes over $2 million had sold by July, and there were 87 active listings in that price range on the market.  Just do the math.

On the lower end of price ranges, almost every company reported that sales were being affected by lack of inventory.  In some places, that meant that the supply of homes could be measured in days.  Again, we have more supply in our market, but even we feel that there are not enough homes in very good condition and under $300,000 in some places.

When you go to a meeting that has national representation, you can really see how far behind Connecticut lags, in almost every category--job growth, population, birth rate, home prices, and home sales.  We need to get our act together, and sooner rather than later.  Having said that, NYC is not the boom town of the past few years, and agents there complained that sellers wanted last year's prices, while buyers wanted next year's prices.  That's food for thought for sellers here, as well.

Rental Rates Reach the Sky in New Haven

A recent article announced that the penthouse apartment in the old Union Trust building has just rented for $6200 per month, a new record as far as we know.  There have also been very high reported numbers for smaller apartments in other buildings.  New Haven is becoming full of luxury apartments, and the parade doesn't look as though it's ending any time soon.  Several more projects have just come on the market, or are on the drawing board.

Despite the increase in supply, New Haven shows up on lists of places where buying is cheaper than renting, because rental rates have gone up at least 50% over the past ten years, while house purchase prices have declined over the same period.  If you include the effect of the current low interest rates, it's really a bargain to buy here.  We are at the top of rental market boom towns, and at the bottom of recent home price appreciation areas.

Of course, buying makes more sense if housing prices stop declining, and there are signs that that is happening.  The signs that Realtors see include lower listing inventories and multiple offers on newly-listed properties.  Over time, we are also beginnnig to see year over year appreciation in certain towns and categories, and problems with purchases "appraising out".  This is an industry term that means that accepted offers are coming in higher than appraisers think fair market value is (always an indicator that prices are rising, since appraisals, which compare recent sales to pending contracts, obviously lag the market when it is rising--if prices were declining, recent sales would be higher, and everything would appraise for more than the contracted price).

If you take these two factors together--rising rents and an improving market for sales--and you throw in mortgage rates as they are today, it seems that any rational person would choose to buy right now, unless they were only going to be here for a short time, unless they didn't have a down payment or a good credit score.  But the bargains will only last for so long, so act quickly!

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!

Buyers, Your Time of Year Has Arrived!

After years of studying the market, I came to the conclusion years ago that the best time to buy a home is between Halloween and Thanksgiving.  Although this doesn't square with the traditional school-year market cycle, maybe that is exactly the point.  More listings come on in the spring, and many more buyers are out there looking.  They often wait, hoping to have the broadest possible choice.

In the past few years, choice has not been as much of a problem.  We in Connecticut have a higher absorption rate, meaning that our current supply of houses would last for longer at the current rate that properties are selling.  That results in more homes for people to look at during all times of the year.  And, since we have the lowest birth rate, fewer of our buyers have young children than in other states.

So why does that make this the best time of year?  For tax reasons, you can still get your purchase done before the end of the year, but that's not the biggest factor.  The biggest factor is that sellers do not want to take care of properties through the winter.  They have just started heating them, and, if the Farmer's Almanac is correct, they are going to be plowing much more snow than usual this season.  They also know that buyers are scarcer, and that it's harder in winter to get your home ready to sell, plus the landscaping that can sell a home is often less appealing in cold weather. 

All of that combines to make sellers more amenable to offers at the end of the fall.  They, too, would like to conclude the sale before the end of the year in many cases.  They, too, would like to start the new year with a different address.  Use those facts to prod yourselves into action, if you are buyers, and add them to the fact that interest rates, while low already, are usually at their lowest right around Election Day.  That's next week, so you'd better get moving! 

Have You Checked Your Real Estate Portfolio?

Given the current volatility of the stock market, many people I know having been talking to financial advisors, and checking regularly on the value of their stock portfolios. Although I subscribe to a different philosophy--don't check what you can't do anything about, so only look if you are planning to make changes---there are certainly many reasons for knowing the approximate value of your holdings.

Of course, your net worth also takes into consideration the value of the real estate you own.  So, when making financial decisions, it is sensible to know what is happening to the value of your real estate, even if you are not planning to sell in the immediate future. This makes me think that there are lots of people who are going to wonder what their properties are worth, and what percentage that would be now of their total holdings. 

This is a service we provide, and I encourage you to call your agent to see what property values are doing in your neighborhood, or check our website for information. Who knows?  Since real estate is tangible and limited in supply, you might even decide to buy more!

Mixed Signals

If you ask more than one real estate professional whether the Connecticut real estate market is good or bad, don't be surprised if you get more than one answer.  The most accurate answer is "It depends". 

What that means is that some of the indicators are positive, like increasing numbers of sales (for the past five months), and some of the indicators are negative (still mostly falling prices, which remain 20% below 2006).  Even supply and demand signals vary.  The absorption rates are dropping, down to the levels considered normal for any market, but they lag behind many other places in the country--Denver, for example, counts time on the market in HOURS, while our latest figure was 102 days on average.  There are some signs of pent-up demand, such as multiple offers, or homes that sell right away, but they are mixed in with other examples of lowball offers and mortgage problems. 

Demographically, the trends also run hot and cold.  Millennials are reaching the age where even they are having children and settling down, but they have postponed homebuying longer than earlier generations, and there are signs that suggest that they don't aspire to home ownership the way that their parents did.  (Parenthetically, this is odd, because they clearly look for work/life balance and healthy, gracious eating and living, so one might think that they would not be so tied to expensive, busy, urban areas). 

So, we aren't sure about what the rest of the year will bring, but there's nothing new about that, is there?

Current Absorption Rates

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 New Haven you can say “If market conditions do not change and if no new listings come on the market it will take 5.1 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.”

 



Prices Finally Heading Up?

It's been depressing to read the national news, and to see how the real estate market around the country has finally begun to rebound healthily in most areas, while we sat in the state with 3 of the nation's 6 worst markets.  The latest report, however, shows a tiny (0.4%) gain in year over year prices in our area.  That still puts us significantly below 2006 levels, but we are headed in the right direction at last! 


I think I've written about most of the reasons for our lagging performance, and the states around us, with the exception of the Boston area, also pull down the national figures.  Eventually, though, demand will absorb the houses that exist on the market, and encourage owners to sell.  It still takes longer here--Denver measures its absorption rate in hours, while we are at 102 days--but it's coming.
And not a moment too soon for those of us in the real estate business!


I would be remiss if I did not once again remind buyers that the greatest appreciation tends to occur within a fairly short time after prices begin to rise.  Supply tightens, and people get nervous, so they start to bid seriously, and prices go up, and the cycle repeats until something happens to halt the spiral upward.  Those who watch historical trends know to act quickly, and the rest of you have now been warned:  Buy now for best results.