The Slow Unwind

Price Reductions

Imagine the pricing quagmire we are in.

The homes on the market today were priced according to comps from 1-4 months ago, which were the craziest-priced sales in the history of real estate.

To make matters worse, sellers are naturally drawn to the highest-priced sales – and today that means the ones that closed for hundreds of thousands above the list price. But there was probably only one buyer crazy enough to pay that price.

Then rates go up to the mid-5s, which to buyers feel like double what they were.

But the sellers have committed to their list price, and their ego is laid out bare for all to see – friends, family, neighbors – all are watching and waiting to see if another house is going to sell for an insanely high price.

What happens if it doesn’t sell right away?

The sellers have to be motivated enough about moving that they will address the results.  Many have been on the market for weeks without selling – and have they even received an offer yet?

They didn’t get this far in life without being smart enough to know that something different is needed.  But there are only three choices:

1. Cut the price.

2. Wait it out at this price.

3. Cancel the listing.

That’s it, those are the choices.

Most will add a fourth choice – it’s my agent’s fault! If my agent would only advertise more, and do more open houses, and well, heck, do whatever agents are supposed to do to sell my house for my price, then it would sell! But you can spend a million dollars on advertising, and it still won’t sell if the price isn’t right.

This is why the market won’t adjust for a long time. The gap between those crazy comps from yesteryear and what more rational buyers will pay today has never been so wide.  It’s probably not 5% or 10% either.

The craziest buyers have already purchased, and left us with unattainable comps. The only question is whether there are any somewhat-crazy buyers left, or if it’s just the rational buyers.

Tip: Throw out all the sales prices of the comparable homes that have sold nearby, and just use their list prices. Those list prices were probably rooted in reality (hopefully), and then in all the commotion, one of the craziest buyers radically overpaid just to win the house. Their purchase price is unlikely to be achieved again, at least for the foreseeable future, but those list prices should be a good starting point.

Quality of Inventory

I mentioned that we could be seeing a pause in the market, and for prospective home buyers, there are plenty of reasons to take a rest:

Mortgage rates starting with a 5, not a three.
The S&P 500 and Dow are down 15.9% and 11.3%, year-to-date.
The list prices of homes for sale are higher than comps.
There are very few superior homes coming to market.
It’s a good time for graduation/vacation season!

When I look at the current batch of unsold homes, I don’t see any surprises. Either they are inferior homes/locations, or the list price is too optimistic (or both).  It’s natural to add a little extra mustard to a list price so the optimism isn’t a complete turnoff if the home has been upgraded nicely and is well presented.

Buyers taking their time and being more picky about what they will tolerate is a good thing for everyone.  The sellers who do everything right (spruce-up, price attractively, and are easy to show and sell) will be rewarded, and those who don’t will languish.

It is a big change from the last two years when the frenzy caused buyers to jump for the inferior or overpriced homes AND pay over list for them too.  Those days are gone.

If you see more than an occasional quality home not selling, then we have bigger problems. But for now, buyers could just be waiting for some quality inventory at a decent price!

Of the 109 houses that have closed escrow this month, only 22 of them sold for less than the list price. Eight percent sold have for list price or higher!

Happy to report that the new custom contemporary in Cardiff whose proceeds were going directly to the Rancho Coastal Humane Society did sell for $6,750,000 cash or $1,650,000 over it’s list price!

Pricing Gap

The new market conditions will bear some resemblance to the past, but to believe that real estate sales will be ‘getting back to normal’ some day would be full of false hope.  Rob Dawg said it long ago – we need to abandon all previous assumptions.

Let’s start with the two things most likely to change:

1. Buyers are going to stop paying over the list price.

2. Buyers are going to stop making offers the minute a house hits the market.

The frenzy conditions that sellers have enjoyed over the last two years will now be in question, and take some finesse to navigate. If buyers are reluctant to pay over the list price, it means that they may even want to pay less than the list price. Then for some listings, there might not be any buyers – at least none willing to pay close to list.

What’s worse is that buyers and their agents won’t be comfortable making low offers, so they just won’t offer at all. Sellers who get no offers will only know that their price is wrong – they won’t know how wrong. Plus, they might not even get any showings, let alone offers.

What variables will make the difference between selling, and not selling?

Comps aren’t going to matter much. Just because there are high sales nearby doesn’t mean that tomorrow’s sellers are going to automatically get the same money or more – especially if the new listing has a defect or unusual feature.

The differences between schools is getting fuzzy.  We have become a little too reliant on the online school reviews, and there are going to be parents who spread negative stuff around – and unfortunately, there might be some truth to it.  No school is perfect, and the best education is a good upbringing at home.  If that’s the case, then why pay larger-than-ever premiums to be in the ‘best’ school district?  Some buyers will be attracted to the better home values further out in the suburbs.

Work-From-Home is here to stay. If you WFH and already considering private schools or taking a chance on the lesser-known public schools, then the need to pay a big premium to be closer to downtown won’t be as urgent and the outskirts will benefit. Plus, there is a new car-pool lane on the I-5! The homes that have multiple spaces to accommodate the work-from-home buyers will benefit.

The easy cure for higher prices & rates is buying a smaller house. Before buyers think about sacrificing on location, they will consider buying a smaller home – and most people can find a way to live with 3,000sf to 4,000sf. As a result, the big bombers aren’t going to get the same $/sf for square footage over 4,000sf unless they have larger yards with a pool. It means we should see 4,500sf and 5,500sf homes selling for about the same price – which is different than it’s been.

Smaller yards should get penalized. While a smaller house might work, those with tiny yards won’t be as appealing post-frenzy.  At these prices, buyers will be reluctant to compromise on the most-important stuff, and having a decent yard is high on the list.

The homes that have everything going for them should continue to be popular and sell for a premium.

The rest? The price gap between the dogs and the creampuffs should widen, and market times extend dramatically as sellers and agents will be slow to react.

Sellers will be smart to spruce up their home more than they had planned, make sure their price is attractive, and hire a great realtor!

Get Good Help!

Fewer Sales

There is rampant speculation that home prices must come down to compensate for higher rates.  But there is another solution.

Fewer sales.

We learned a couple of lessons during the peak covid days:

1. Sellers don’t have to sell – they can wait it out.
2. When they do, the market can survive with fewer sales.

Look at the NSDCC sales in the past months of May:

2018: 273

2019: 297

2020: 143

2021: 300

2022: 126 so far

We might not hit 200 sales this month, and while the doomers and mainstream media will be talking about how the demand has been crushed and there is no hope, will the sellers panic?  Even if they aren’t receiving offers? Or not having any showings at all?

Have you seen anyone dump on price yet? Not really.

Are today’s sellers willing to keep reducing their price until they find what the market will bear?  Doubt it – and after two price reductions (three tops) they will give up, rather than keep lowering the price. They can blame on ‘the market’, or on their realtor, and decide to try again next year.

Anybody who needs the money can borrow against their hefty equity positions or get a reverse mortgage.  If they can’t make their payments, they can float for 6-12 months while their lender decides if they want to get back into the foreclosure business, which is California means you have to offer the borrower a loan modification before you can foreclose.  It will be months, and probably years, before we see any real foreclosure activity – if any.  If they have to, the non-payers can drag it out at least until next year, live for free, and just sell for less then.

Sellers might get a little antsy, but it will take more than that to give up hope of cashing in that big ticket.  They have been dreaming for months about what they are going to do with all that money, and they aren’t going to give up on those dreams easily.

Price-wise, we will hang out in Plateau City.

There will be an occasional big sale that keeps everyone optimistic – this will be the next one in South Carlsbad which was on our private site at $3,100,000 but hit the open market at $2,880,000, which should really rev the engines this weekend:

2864 Camino Serbal, Carlsbad 92009

But most listings will languish, which is ok. It’s how we used to do it, and we survived!