October 29, 2007

What to do about all of the unsold homes?

The bottom line, we’re beginning to realize, is that builders and individual home sellers will have to cut prices dramatically in order to clear the excess inventory of unsold homes on the market right now.

The light at the end of the tunnel?  A stable real estate market in which housing prices once again rise.  But getting there might hurt.

According to a recent Business Week article, “When builders cut their prices in one fell swoop, rather than letting them drift slowly downward, they in essence force sellers of existing homes to do the same. At the very least, that can be a severe psychological blow that in earlier slumps was absorbed over a period of time rather than all at once. For some homeowners, it's a catastrophic financial blow as well. With new, clearly established market prices, troubled homeowners who paid peak prices will have a harder time refinancing. Others, who need to sell fast, will most likely do so at a steep loss. If they sell for less than their mortgage, they'll be left owing money to the bank. And speculators who banked on being able to flip properties fast in a rising market or strapped homeowners struggling with adjustable-rate mortgages that are now resetting with higher payments face their own particular hell. As painful as such situations are, however, the excesses must be wrung out of the market before the sector or the broader economy can recover.”

So the announcement that building permits in Metro Phoenix dropped significantly last month may not be so bad.

Writing in the Arizona Republic, Catherine Reagor said that it’s a good sign. “[A drop in building permits] is a good sign, as long as new-home sales are holding steady. And they are. There were 1,391 single-family permits issued from Casa Grande to north Peoria in September, while new-home sales or closings were more than double permits for the month at 2,991.”

According to the article, RL Brown, publisher of the Phoenix Housing Market Letter, estimates there are 6,000 to 8,000 unsold spec homes in the Valley now – compared to 15,000-20,000 earlier this year.

What’s made the difference?  One reason may be builders’ willingness to cut prices.

But even as supplies of new homes begin to balance with demand, there are still a large number of unsold resale homes sitting on the market.  Sellers will have to follow builders’ leads and cut prices to get those homes moving.

A while back I wrote an article called “7 Keys to Selling Your Home in a Slow Market” (visit MyPhoenixMLS for a copy).  Keys Number 1 and Number 2 are: Price your home competitively; and drop the price if your home doesn’t sell at first.  In today’s buyer’s market, homes shouldn’t be priced higher than the middle of the range for comparable homes in the same neighborhood.  And home sellers should cut the price if they don’t get any action – the longer a home sits on the market, the less likely it is to sell.

Of course, no homeowner wants to feel like he’s giving his home away.  But in today’s market, you have to strike a balance between giving your home away and not selling it at all.  If you need to sell right now, the only way to do it is to be realistic about a competitive sales price – even if that means you sell your home for less than you paid for it last year.

If you don’t absolutely have to sell your home right now, though, hold on to it.  Once the excess inventory is gone the market will be back to normal and housing values will once again rise.

For more information, visit www.myphoenixmls.com.