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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.

The Slow Unwind

Even though real estate is local, the homebuyer psychology tends to be similar across the country – mostly because people are people, and have similar reactions to every variable.  When they see mortgage rates go from 3% to 5.5% in less than six months, it’s only natural to want to pause and see where this goes.

But the desperation among buyers – especially those who are out-of-towners and don’t own a home here yet – hasn’t changed, due to the low inventory.  It is unsettling to see so few of the quality homes coming to market, and they want/need to stay in the game so they don’t miss out.  It would take a flood of new listings to change that, which isn’t happening. At least not yet.

Let’s have the statistics help guide us on current market conditions.

1. We have considered the local real estate market to be ‘healthy’ when the active listings to pendings has been 2:1 ratio. Here are the detached-home listings between Carlsbad and La Jolla:

Monday:

Actives: 262

Pendings: 207

Thursday (today):

Actives: 262

Pendings: 202

The current ratio is very healthy, and the actives aren’t exploding.  Last year at this time there were 330 active listings, so only having 262 homes for sale in an area with a population of 300,000+ people isn’t bad. The only startling part is that there aren’t more homes for sale!

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2. Let’s talk absorption rate, another measuring stick for the health of the market.  The historic norm for a healthy market has been a 6-months’ supply of homes for sale.  In recent years, a 3-month supply has seemed to be more realistic, just because the supply has been limited.

What is it today?

There were 225 sales in April, so the 262 active listings is only a 1.2-month supply.  We would need 675 active listings to have a three-month supply, which sounds impossible in the current environment.

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3. How about the market time of the current pendings?  Is it taking longer to find a buyer these days?  Yes.  The median days-on-market for homes sold in the early months of 2022 has been nine days.  The current pendings have a median days-on market of 12 days, which isn’t alarming and still extremely low.

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4. Have the number of actives and pendings been consistent in 2022?

Yes, especially the pendings:

So while there is talk about a shift in the market, it may just be a pause. Statistically, the market looks steady – there isn’t a surge of unsold homes, and there are still plenty going into escrow every week.

If there aren’t as many buyers looking, and there aren’t crazy numbers of offers, then it’s just going back to a more-normal market. Not normal yet, but heading that way.

The list prices have been on a rampage, and it’s probably time for them to stop going up so much every month. It was going to happen sooner or later, and that day has probably arrived – finally!

Can’t Buy What’s Not For Sale

The talking heads are saying that higher rates are slowing sales, and I say it’s the lack of inventory.

If higher rates were the cause, we would see more active listings piling up.

This chart shows how the pendings have dropped off from last year – especially those in yellow:

The active-listing counts aren’t any higher – there are just fewer listings overall.

Home Buyers Not Deterred

When people are looking for the perfect ‘forever’ home that will last them for a lifetime, any additional cost isn’t going to phase them – or at least it won’t affect the affluent folks.  Most are making it up elsewhere when they sell their previous home or rental properties, inherit big money or receive a gift, and/or sell their businesses/stocks or other assets and just want a trophy property.

If they weren’t bothered by home prices rising 60% to 80% over the last two years, a measly 2% increase in the mortgage rate isn’t going to stop them.

https://eyeonhousing.org/2022/04/high-home-prices-are-leading-more-buyers-to-give-up-home-search/

Seller & Buyer Survey

https://homelightblog.wpengine.com/wp-content/uploads/2022/03/HomeLight-Buyer-Seller-Insights-2022.pdf

This looks pretty normal:

In an era where 50% or more of the homes for sale receive multiple offers, yet half or more of the sellers don’t ask the buyers to improve their offer – they just grab one instead? Money is being left on the table coast-to-coast:

We make sure you don’t end up on this list – Get Good Help!

Read the full survey here:

https://homelightblog.wpengine.com/wp-content/uploads/2022/03/HomeLight-Buyer-Seller-Insights-2022.pdf

From their last page:

Speaking of gifts from buyers, we asked our sellers if buyers used any unusual tactics to try to win a bidding war, and the results were shocking. When flattery and (possibly) bribery didn’t work, some buyers turned to more nefarious tactics.

Among the troubling experiences sellers reported, the highlights include:

  • An offer of two fully paid, all-inclusive tickets to a resort in Hawaii, presented over dinner
  • Offering a $10,000 signing bonuses if the offer was accepted by midnight
  • Buyers offering to buy toys and gifts for the seller’s children
  • Three weeks at a time share in the Bahamas
  • A buyer lying to the seller and saying they knew the seller’s grandmother
  • A buyer texting a seller each morning to ask if they had received any better offers
  • Buyers promising one price to sellers but writing their offers at a significantly lower price
  • Telling the seller a home was on ancestral lands
  • Heartfelt personal letters in hopes of tugging on a seller’s heart strings
  • An offer to purchase the home with Bitcoin
  • Attempted to give the seller exotic animals and a car to accept their offer

Just some of the tactics sellers reported buyers using to have their offer chosen include:

  • A buyer lying to the seller and saying they knew the seller’s grandmother
  • A buyer texting a seller each morning to ask if they had received any better offers
  • Buyers promising one price to sellers but writing their offers at a significantly lower price
  • Telling the seller a home was on ancestral lands

Commentary on Today’s Market

My thoughts on commentary seen in the news today:

With rates rising, and prices significantly higher, the average borrower is paying about 38% more on the monthly payment now than they would have for the same home one year ago, according to Realtor.com.

JtR: This is crushing the move-up/move-down market, with very few existing homeowners needing to move bad enough to start over on a new 30-year mortgage at a higher rate (86% of mortgage holders have a rate under 5%).

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Mortgage applications to purchase a home fell 3% for the week and were 14% lower than the same week one year ago. That annual decline is now beginning to grow, as housing becomes even more pricey.

“In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase demand as well. Home purchase activity has been volatile in recent weeks and has yet to see the typical pickup for this time of the year,” added Kan.

March sales were 4.5% lower than the same period in 2021.

JtR: Sales are dropping due to lack of supply, yet the talking heads will blame it on the demand side.  There is no shortage of demand around San Diego County – plenty of buyers waiting.

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A new study conducted by OJO Labs, an online real estate site and personal finance tool, found that the vast majority of recent home seekers are unwilling to relocate extreme distances, and are instead looking to buy much closer to their current homes.

It suggests that while buying a home in another state may have become a popular move for some during the pandemic—especially for high earners—most people looking for a new home right now are not venturing too far.

The OJO Labs study, published at the very end of March, surveyed more than 500 prospective homebuyers about their experience over that month. Of these, 41% were limiting their search to within six and 50 miles from their current home, while 36% were interested in buying a new house only if it was fewer than five miles away.

Only 11% of respondents were willing to move more than 500 miles away from their current address.

The findings push back on the pandemic-era narrative of New Yorkers and Californians moving to more livable cities in states like Arizona, Texas, and Florida.

JtR: Those who are only searching within a 50-mile radius of NSDCC probably won’t find anything that makes it worth moving – the prices aren’t low enough. There needs to be a bigger windfall to compensate for the capital-gains taxes, and feel like a big win. Nobody is going to move just for the heck of it. Thus, our supply is dependent upon those willing to move a long ways.

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Daimler went on to say that Zillow does not believe that the “double dipping agent” — or in other words dual agency in which the same person represents both a buyer and a seller — is the future.

“We don’t believe in that philosophy and we don’t believe that’s where the industry is going,” she added.

JtR: She needs to spend a few days on the street to know what’s really going on – it’s never been so hard to be a buyer’s agent.  I finally succeeded with a set of buyers on their 12th offer, which was 40% higher in price than where we started six months ago. It will be a natural progression that buyer-agents get phased out altogether, and CoStar’s new search portal that directs the consumers back to the listing agent will be the last straw. It will debut in New York City this summer.

Bay Area Crazy

Sally’s former home in Los Altos closed yesterday for what seems to be the obligatory $500,000 over the list price (LP was $3,195,000):

https://www.zillow.com/homedetails/1200-Brucito-Ave-Los-Altos-CA-94024/19620416_zpid/

The bump over the list price is so customary in the local area that the zestimate was raised by $763,480 about the time it was marked pending – the algorithms already had the expected increase baked in!

 

They are enjoying The 2022 Lucky Windfall of the First Quarter, and we’ll see how well it holds up. But as long as home sales in the Bay Area keep selling for much-higher pricing than in San Diego, one of our main feeder areas will keep sending happy buyers our way!

The list prices mentioned here all say that they sold for 100% of the LP, but it’s a typo – they all sold for well over. For example, Patrick Way sold for $1.1 million over, and William Henry sold for $800,000 over list:

Paying ~$2,000/sf for modest homes in Los Altos has been fairly routine lately!

Hopefully, those sellers keep coming our way. Even if their market were to dip 10% to 20% from these dizzy heights, they will still love what they can buy here for the money.

No Major Panic

You can’t spend too much time reading/watching the news recently without being well aware of the relatively unprecedented surge in mortgage rates seen so far in 2022.  In particular, the month of March was one the worst on record with one individual week in March tying a week in June 2013 as the worst in more than 25 years.  All that to say, rates are much higher!

The higher borrowing costs have had the same impact they always have when it comes to refinance applications.  In this week’s Mortgage Application Survey from the Mortgage Bankers Association (MBA), refis dropped another 10 percent, and are now 62 percent lower than the same week last year.

The purchase market remains a different story.

While purchase applications also declined last week, they are only 9 percent below the same week last year and still higher than most of the past decade before the Covid.  Keep in mind that the survey only tracks applications, so by the time all-cash demand is factored into the purchase market, housing demand has yet to show any major panic over the rising rate environment.

https://www.mortgagenewsdaily.com/news/04062022-mba-applications-purchase-refi-refinance

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