IT'S THE MARKET. IT'S ALWAYS ALL ABOUT THE MARKET
Ecomonics 101: As demand for corn goes up, the price of corn goes up. If pigs stopped eating corn, the price of corn should go down. Oops, I forgot Ethanol. The price of corn will stay high because there is now another demand. In 2001, with historically low interest rates, the number of home buyers when up dramatically. Economics 101: More buyer chasing homes for sale drove the prices up. Now that interest rates are higher and there are fewer buyers, shouldn't prices of homes come down? Of course, they should, but there are other forces at work and they are working against the market.
HOW DOES THAT RELATE TO REAL ESTATE SALES AND PRICING?? There are too many agents chasing too few sales which drives listing fees down. Listings are up, but sales are NOT. The market is not working. When will the market begin to look at what buyers are willing or able to pay to let the market work?? Hopefully, soon, or, at least before foreclosures escalate to a point to force the market down. When the price of homes goes up and up and up, what is the alternative use for these residences other than other residential home owners?? In reality, there are few alternatives to selling. Renting and becoming a landlord isn't often a solution because the seller still needs housing. Mortgage companies don't give 100% credit for rents received on an assets/liabilities statement.
WHAT IF THE HOME OWNER MUST SELL? 
Military buyers learned years ago that, when transferred, if their home had not appreciated sufficiently to cover the cost of sale in the 2-3 years at their duty station, they either sold at a loss or rented and moved on. The market would not pay the military home owner more than market for the property. Yet, the military home owner has little to no choice about job location. This is the predicament home owners are now facing if they purchased within the past 1-3 years. Appreciation has not been sufficient to cover their cost of sale. For home owners who purchased at the peak of the market, sometime during 2005 and utilized 100% financing, they are in for a rude awakening if they MUST sell. In our present market, if a member of the military contacts me about housing and they are only going to be here 2-3 years, I strongly advise that they rent.
WHERE DO REAL ESTATE AGENTS FIT IN THIS DYNAMIC? ANOTHER MARKET FORCE AT WORK
There are too many agents offering high valuations for properties which helps keep the list price of properties high. Why they do it is an enigma because the house isn't usually going to sell unless the agent falls into an undervalued property which they have unwittingly overpriced to market. The agent just gets to put it in the MLS and spend money for useless advertising. Buyers, in my area, simply will not or cannot pay the prices for homes at today's list prices. Home owners who MUST move on are either renting their property or taking what the market will pay for their home, if they have sufficient equity to close. Owners who MUST move on but who have little to no equity, are going to foreclosure, deed in lieu of, or short sales. When an employee MUST move on, they do what they must do for job security, although when employers move employees to higher than average cost of living areas, some employees are simply not going or changing jobs.
MARKET SATURATION OF AGENTS - IT'S A PERFECT STORM
Too many agents chasing more and more overpriced listings will bring listing fees down as agents compete with each other. When sales were easy, a record number of persons became licensed and competed with each other for listings, driving listing fees down. The market now dictates that there be fewer agents chasing listings. Otherwise, with the glut of licensees, listing fees will continue to fall as agents compete with each other. Too many agents chasing too many homes on the market for more than 6 months will bring the listing fees down, down, down. A home owner thinks nothing of overpricing their home with the strategy that lowering the listing fee is the way to increase their net proceeds. There are more than 1,300,000 REALTORS alone. Estimates are from 2,300,000 plus licensees offering services to about 70,000,000 home buying and selling consumers. Real estate is big business.
REALIZING A SMALLER GAIN ON A SALE IS BETTER THAN A HIGHER PRICE THAT DOESN'T SELL. Real estate is big money and home equity represents the largest single asset for most families and individuals. Today we are seeing the value of that asset shrinking, but, it didn't happen overnight. It took about 5 years. Question is, how long will it take to reach bottom? How long will it take for prices to reach the comfort or affordability of buyers? It took about 7 years in the late 1980s and early 1990s for home owners to begin to see the value of their properties grow. Builders led the way to lower prices in the early 1990s as they are doing today. New homes today are often the best buy in our market. You get a new home, new warranties, incentives and prices that are 5%-10% or more less than they were 6 months ago. Of course, if you purchased that new home at the peak of the market, you will not see the kind of appreciated anticipated. But, if the average home owner keeps his home for 7 years, that's time for a reasonable gain.
WHO IS HARMED BY THIS DYNAMIC?
1. Home owners who are losing the investment in their homes after buying at peak prices when interest rates were very low.
2. Buyers who buy now at high prices who must wait for years to have any appreciation.
3. Buyers who purchased at peak prices and will see their equity shrink as the market drives priced down.
4. Sellers who MUST sell at lower than expected prices or who may lose their investment completely.
5. Agents who rely on real estate sales for their sole income and do not have savings.
6. Relocating companies who have guarantee buys with sellers who can't sell inventory.
7. Employers who have contracts with relocation companies to cover the relo company's losses on sales.
8. Lenders who must try to finance buyers who have contracts on homes that will not appraise.
9. Agents who have expensive marketing contracts for their services which are returning less and less business.
10. Agents who reduce their fees to compete for overpriced listings that are going to cost high advertising costs.
11. Home buyers who will pay higher VA Funding fees to cover the shortfall following VA foreclosures.
12. FHA home buyers who will pay higher mortgage insurance premiums as more FHA loans go to foreclosure.
11. . . . . . . . . .
THE FED'S "FIX"
When interest rates were the lowest in 25 years (they no longer are), demand for properties was very high, thereby driving the price of the properties higher (demand) as more and more buyers offered higher prices to get the properties financed with low interest rate loans. Remember the famous Greenspan declaration that there was "froth" in the housing market?? The FED fixed all of the above and turned the market on it's ear when they raised interest rates 17 times in about 2 years on the flimsy excuse of preventing inflation, which didn't exist. However, home buyers did NOT get a matching increase in income to meet the rise in the monthly cost of housing caused by the higher interest rates. So, home owners who would normally sell their homes now find that buyers are not willing or able to pay the monthly payments that it takes to buy the homes that the sellers wish to sell.
THE SOLUTION TO THE "FIX"
There is a surfeit of homes on the market. Folks do move up, around, away or down so homes will always be placed on the market for sale. However, there are too few buyers interested in buying these homes at the present list prices. The market dictates one and only one solution. Prices must come down, way down, in average price to meet what the average buyer will or can qualify to pay.
WHAT CAN WE DO TO HELP?
Agents need to stop bidding prices up to get listings. An overpriced listing will eat you alive and it represents our industry poorly when agents mislead sellers about the value of the property just to get a listing. Lowering the listing fee is a mere drop in the bucket. Lower listing fees are not going to sell overpriced homes.
TELL THE SELLERS THE FACTS
Sellers need to stop trying to sell their home for what it would have sold for 2-3 years ago. Buyers do NOT have the buying power to pay those prices with today's interest rates. Mortgage interest rates haven't increased as much as consumer rates for goods and services, but they have increased and ARMs are adjusting at rates that may send a mortgage payment up as much as 20%. How many home owners can take that kind of hit to their budget? Back in 2003-2005, it was not unusual for our buyers to finance their homes with a 4.75% 3-5 year ARM. Today, we're looking at 6.20 for the 5 year ARM or 30 year fixed mortgage.
I looked at a few files today of buyers who settled in February 2004, 2005, 2006 and 2007 and found that interest rates averaged from 5.74% to 6.29% from 2004 to 2007. That's not a huge increase but when you consider that the average price of the homes in my county alone went from $517,654 to $683,817, it represents a mortgage payment increase of about $1,027 per month. Our buyers are paying about $166,000 more today for the same home than in 2004.
HOMES THAT SIT ON THE MARKET FOR 6 MONTHS DON'T REFLECT WELL ON CONSUMERS OR AGENTS
Prices in the MD/Northern VA market increased by 70% to 100% between 2002 and 2005. Lowering a list price by $5,000 isn't going to make it attractive to buyers. The home will simply sit. Homes in my area are averaging 131-139 days to sell. That's more than 4 months. 4 months of seller and agent angst. But, that 4 months is what is showing for ALL homes. Detached single family homes have an average days-on-the-market of almost 5 months. Not only that, 38% of homes that have settled in 2007 were on the market for over 180 days. Of the 1462 active listings of resale homes, 449 of them have been on the market for 180 days or more. That's a lot of angst.
THE GENTLEMAN WHO CALLED LAST WEEK is a perfect example of why homes are not selling in some areas. I was contacted by a seller about a week ago whose listing was expiring. He wanted to make the home known to agents that worked with buyers thinking we would have a buyer in our pocket just waiting for his home to come to their attention. Since he had decided that he might lower his price by about $5,000, he figured he'd save that much by eliminating the listing agent and sell by owner. Since he was a very nice gentleman and I usually welcome the opportunity to research a property, I did an analysis of his home for sale and found that, by very conservative numbers, his property was overpriced by almost 25%. Identical homes in his area, same square feet, similarly situated, same amenities and sometimes more, i.e., garage, addition, etc. had sold for $275,000 to $320,000 within the past 6 months. Yet, this gentleman's home was listed for $389,900 recently reduced from $399,900. Even giving him credit for superior condition and a small additional room in the basement, the most his home should have been listed for was $320,000. This gentleman took the advice of his agent to price his home and added $10,000 for negotiating room. You gotta love it. In the past 6 months, the price has been reduced by .03%. They have had 2 showings, no offers. His co-op is the average for the property area. The listing has a virtual tour. The only problem was the price. He didn't want to hear that news. However, he understood everything I told him.
The market in Maryland and Northern Virginia is still overpriced by a good 20-30% for the buying power of the average buyer. Even then, they will be lowering their standards and expectations for what they will get for their monthly mortgage payment. In addition to the above, home owners insurance and property taxes have been increased dramatically in some of our areas. Prices MUST come down.
The question is, how long will it take??
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It's going to be a long haul!