Expectations key to market behavior
Originally appeared in ANG Newspapers, Jan 20, 2008
Our actions are heavily influenced by what we anticipate will happen in the future. We often act on what we perceive to be true, rather than what is true. A recent national survey regarding expectations and current conditions revealed that consumer confidence was the lowest since October 2005, the end of our last seller’s market, and the second lowest since our last buyer’s market in the early 1990s.
Pessimism has now replaced positive expectation, a classic characteristic of a buyer’s market. This is where we find ourselves today. Rather than jumping in quickly, most buyers hold back and feel there is no rush to purchase because current homes will probably still be available later and, if so, may sell for less.
As a buyer or seller, understanding your personal expectations as well as actual market conditions can be the difference of thousands of dollars to you.
Media hype
Regardless of whether home sales are burning hot or nearly dead, newspapers, TV stories and Internet articles tend to sensationalize and exaggerate market direction. Even in a “normal,” balanced market, media tend to focus on the next stage. Often, these reports are as much embellishment as fact. Commonly, however, the public believes the hype and acts on inaccurate information.
The effect of daily stories about the joy or sorrow of the market is to create and perpetuate expectations. Even in a specific area such as the El Cerrito to Oakland corridor, there are significant differences in neighborhoods, schools, shops, public transportation, etc. Media generalizations may not apply to you.
How buyers react
Buyers have increasingly greater leverage the longer a buyer’s market exists. Negotiations and concessions that were unheard of not so long ago are becoming increasingly familiar. Price reductions or seller credits for foundation, drainage, roof, pest control and other problems fall into this category. Sellers pressed to sell may also pay some or all buyer closing costs.
In a flagging market, buyers fall into two main categories. Some “value” buyers are interested only if they can make a “killing” and buy for an incredibly low price. These buyers tend to make numerous, unsuccessful offers, look for years and are most numerous at the market’s lowest point. By and large, the newest, least seasoned agents spend time with this type of client.
Purchasers who comprehend the long-term nature of real estate, search for good properties in top locations and are more realistic than the ones described above. People who operate in this fashion tend to do well.
As a buyer, the assistance and support of a Realtor® with expert knowledge to navigate the myriad variables and considerations involved in making an informed purchase is invaluable. Establish a relationship with a good agent early in your search. If you wait to find the house first, you could end up working with someone who may not provide the type of representation you deserve.
How sellers react
It takes sellers much longer than buyers to accept a “bad” market. This is understandable.
Some sellers recognize and accept current reality and price their property accordingly. These houses usually sell relatively quickly. Others insist on looking backward in time and comparing their home to others, usually deemed inferior, which sold when the market was stronger. These are the residences that evoke little interest, few showings and sit unsold.
Well over half the agents working today were not in the business during the last market downturn. Lacking personal experience, many do not realize and are unable to clearly explain how quickly prices can soften once a buyer’s market gains momentum in its steady, downward descent.
A house that closed escrow less than six months ago may no longer be a useful comparable. This is why appraisers generally rely on only the most recent sales, preferably within the past three months. As the market deteriorates, even three-month-old sales may no longer be acceptable.
Nonetheless, it is important to bear in mind that, even in this worsening real estate environment, the Bay Area remains one of the strongest markets in California. With only limited exceptions, declining unit sales have not had the same devastating effect on prices as in much of the state.
In a weakening market such as our own, I counsel my clients to sell only if they have a strong reason or need to do so. Realtors® call this a “motivated” seller. The reason for my advice is simple: real estate goes through cycles and the best time for selling is during a seller’s market. If you can hold on to your home, even if it means renting it out, eventually it will sell for more than today’s value.
When making a decision, it may be helpful to know that past local cycles have taken six to eight years to go from the beginning of a buyer’s market to the start of a seller’s market. Note that it takes professionals six to twelve months to substantiate a swing from one market to the next.
Also take into account that prices at the start of a seller’s market are not as high as at the peak. In other words, as in the stock market, timing when to get in or out is tricky.
In addition, it is vital to recognize that cities like Oakland, Berkeley, Albany and others have few developments with numerous houses of similar construction. The majority of properties are different in style, size, construction quality, upgrading and lot desirability from the one next to them or across the street.
The point is that your home needs to be carefully evaluated by a local Realtor® who is totally familiar with your neighborhood. Once you receive a market plan and suggested pricing you will be in a position to decide if selling now makes sense for you.
Final Thoughts
Real estate goes through cycles. Those of us who are longtime professionals view these changes as normal, inevitable and healthy. Given the performance of the economy, including the falling value of the U.S. dollar, rising gasoline prices and the stock market malaise, a continuation of our buyer’s market is highly likely.
Regardless of headlines, homes are bought and sold every day and people get on with their lives. Choose a top quality Realtor® who will relate how what is happening impacts your situation and rely on him or her to help you make an educated decision.
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