Yesterday at the sales meeting a new agent brought up a really, really important topic that I feel compelled to write about. It is an age old problem anytime someone is selling just about anything. It has been compounded in the housing industry, however, with the volatility and the tremendous swings we have had in the last 10-15 years. The problem is, of course, pricing what you have for sale and, conversely, figuring out what to pay for what you are buying.
Real estate, at its core, is actually very simple. People have a need for housing. Other people build houses. The first people find one that fits their personal tastes, needs, etc. They agree on a price and the home transfers ownership.
Of course it is not that simple. There are legal requirements for registering ownership, lender requirements, laws to follow when marketing, etc, etc, etc. The main complication I want to focus on today is in pricing. How does the seller offer at a price a buyer is willing to pay? I specifically want to look at the current climate we are in.
Let's rewind about 15 years. In the late 90s, we saw growth, lots of it. Government started telling people to buy homes. Lenders starting making that more possible. Lots and lots of people wanted to buy and lenders said "yes". This flooded the market with buyers. That means that sellers could get basically what they asked for. Life was good if you were a seller. Agreeing on price was a fairly simple process. Seller asked for $----- and buyer, if he liked the home, said ok. They did this because there was a shortage of homes available. Now move forward a few years. The feeding frenzy escalates beyond anyone's imagination. Literally anyone who wanted a loan could find SOMEONE to give them one. This means we basically have an infinite supply of buyers and sellers are making tons of money. If the seller did not want to sell, they could still make money by taking out the equity in their home. This volatility (and yes, it was volatile--just volatile upwards) made it somewhat more difficult to agree on a price because sellers started trying to sell at what the house
could be worth at some unknown time in the future. Buyers still were buying because they thought it was their
right to own a home. Lenders were still lending because it was their paycheck (and lots of big ones at that!). Plus, if they didn't lend, someone else would. Then it got really complicated.
Depending on where you lived, the crash started in 2007, 2008 or even 2009. Basically, a few lenders realized people were not paying their bills. Then a whole bunch of people weren't paying their bills, then a WHOLE bunch of people weren't paying their bills. Lenders were in hot water and so they retracted--big time. It became harder and harder and harder to borrow. This meant the infinite supply of buyers that were driving prices up and up and up dried up--AND FAST. The momentum swung way more quickly than we could stomach and thus prices dropped big time. This meant that you could have literally had your house appraised at $200k one day and $175k the next--or sometimes worse. The media compounded the problem by using fear tactics and a sort of "self fulfilling prophecy". In other words, they started talking about how awful the housing market was, buyers pulled out and the market became worse.
Normally there are a handful of people that can't pay their bills. The market absorbs those issues with no problem. When the market becomes flooded with those issues, prices drop further. This compounds the problem that we started talking about--agreeing on a price. Lets look at a hypothetical that I deal with on a regular basis.
Homeowner wants to sell his home. First step is to figure out how much it is worth. They had the home appraised in 2008 when they refinanced and took out $20,000 to buy a new car and pay off some other debts. They now owe $175,000 on the house. They paid $185,000 in 2005. They have $10,000 in equity still, right? When they invite the Realtor over to evaluate the home and price it for them, they find out that their neighborhood has had 10 homes sold in the last year. 3 of those were foreclosures, 4 were short sales and 3 were "normal" sales. Based on comparables, the home should sell for around $170,000. This causes an array of emotions--anger--at the market, at the Realtor that sold them the house, at the Realtor that is in front of them, at themselves, Sadness and hoplessness--like they are stuck, and of course, defiance. They are determined to sell the house and, further, to sell the house at their price--$190,000 because it is silly to think they could actually LOSE money on their home. So they interview a few Realtors. Most of them tell them the same story. Then they find one that is willing to list it at $190,000. That Realtor works hard with good pictures, a well crafted marketing plan, open houses, etc. Surprisingly, they get no activity. So the homeowners fire the Realtor and get another. This time they agree to $185,000. This time they also get a buyer. The buyer wants the home for... $170,000. They disagree because of what they paid and what they owe. Negotiations ensue. Finally, they settle on $180,000. Then the home appraises for $170,000. This seller did not have an accurate perception of the market.
On the flip side--there is a buyer that watches all the "experts" on TV talk about how bad the market is. They watch the late night infomercials about buying homes for pennies on the dollar. They know everything there is to know about real estate except how to get into the homes. They call a Realtor to open doors for them. They only want to see homes that are "great deals." They look at 30-40 homes. Some of those homes are great deals based on condition, price compared to the market, location, potential, etc. They aren't good enough because they aren't "pennies on the dollar." What they don't realize is that the media shows a national picture and we live in an ultra local market for housing. What happens in Smyrna is not the case in LaVergne or Antioch or Nolensville. They get discouraged and angry that the Realtor is not showing them the best deals. Then, as humans are prone to do, they fall in love with a home. They want to offer 30% less than asking price. The Realtor tells them that the home is priced pretty close to right and it should only be about a 5% reduction. They make the offer anyway and the seller doesn't even acknowledge them. 2 weeks later it sells for 3% above asking price with closing costs.
The point is this, both sides have misconceptions about the market right now. Both are selective in the information they retain. Both are wrong. Obviously it is not always this way. Deals are still going on. I am as busy now as I have been so far in my career. Bottom line, if you are on one side or the other, find a Realtor you can trust, one who knows their local market. One who will explain the position to you. Also, take in all types of media but do so with a critical mind. Verify facts and pay attention to the scope of the report. If they talk about "national housing trends," pay very little attention to them because, just like "averages" they include all the extremes. In our area, in particular, we are a solid upper middle. We took some hits but nowhere near as bad as many other places. Even then, some areas were hit harder than others. There are some parts of Nashville, at some price points, that NEVER really lost value. Find an expert and trust him or her.
