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Although we have known a shift was coming, in reality, we have been functioning as if nothing was going to happen. It was business as usual — until the weekend of April 30 through May 1. Following a weekend of dismal traffic through our open houses, offer deadlines for the following Tuesday, May 3, came and went with no offers on any of our active listings.
Discussing among ourselves in our team meeting, we all concluded, “It’s here.”
As the week progressed, chatter from teams across the nation clarified that this was not just a local phenomenon: While some markets were still firing on all cylinders, in others, the proverbial wheels had come off the bus.
Hopping on the phone with all of our sellers, we provided as much information as we could and reset offer deadlines for the following Monday. We also outlined a potential strategy if no offers appeared over the next week.
As we went through the data with each client, they all realized that the market had indeed reached a tipping point and, to a person, were extremely frustrated with their timing but grateful that we had a strategy going forward.
As the Fed announced yet another rate hike on May 4, the highest single increase in two decades coupled with a promise that more adjustments were on the way, the stock market tanked, and buyer activity screeched to a near halt.
Remaining in touch with our sellers daily, we made some price adjustments and, on some of our listings, saw incremental increases in traffic. We also received some lowball offers as buyers, smelling blood in the water, sensed they might have an opportunity to score a bargain.
Having gone through a number of shifts over the years, we have fine-tuned strategies for each change in the market. Critical to any strategy is an understanding of the fundamentals under the surface behaviors.
Why there’s a diminishing buyer pool
In this case, it’s important to understand what is happening to prospective buyers and why we not only have a diminishing buyer pool, but the buyers who remain are more hesitant.
1. Increasing prices and mortgage rates have eliminated many buyers
As prices have soared this past year, many buyer wannabes have seen home prices soar past their limits. In addition to the increasing home values, mortgage rates have also been on the rise, pricing yet another group out into the cold. It’s estimated by some that this number is approaching 9 million since January.
2. Stock market declines have removed a second tier of buyers
In our region, flush with tech workers, a considerable number have stock options or portfolios they have planned on using as their down payments. As interest rates have skyrocketed, the stock market, sensing future losses in potential gains, has begun selling off and redistributing assets.
The resulting declines in values have reduced individual portfolios and, in some cases, erased funds earmarked for home purchases. With down payment potential reduced, these buyers, though their incomes still qualify them for the higher interest rates, are also backing out of any immediate purchases.
3. Buyers have begun anticipating price reductions
In an overheated market with limited inventory, buyers, if they want a home, must compete and pay whatever is necessary to land a property. Once buyers get a sense that the market is softening, however, tactics change and do so immediately. Instead of engaging in multiple offers, they adopt a wait-and-see attitude which, literally overnight, slows offer activity and increases the number of days homes remain on the market.
As the days-on-market increase, some buyers, anticipating long-term price reductions, back out of the market completely, assuming that they will get better opportunities if they wait. Others, sensing immediate opportunity, start firing in lowball offers.
4. Buyers are getting hyper-picky
The result of these combined issues is a drastic reduction in the number of active buyers, with homes staying on the market longer, begins increasing available inventory. With more homes to choose from and less competition from other buyers, those remaining in the market begin cherry-picking, going after homes they believe offer the most amenities for the best value.
Alternatively, some start dredging the bottom looking for desperate sellers who have had to slash prices to facilitate a quick sale.
Understanding these factors, listing agents need to begin counseling their sellers to adapt to the new reality. The faster they adapt the higher their chances of success.
Once sellers across any region begin realizing a shift is occurring, we begin seeing wholesale price reductions which result in two facts: It sends confirmation to buyers that they have increased opportunity and eliminates any opportunity a single seller may have had to get ahead of the market shift with a preemptive price reduction.
7 key strategies we outline to sellers
1. Don’t: Buy before selling
A hallmark of overheated markets is the difficulty faced by homeowners seeking to move up. Although selling existing homes has been easy, finding replacement properties has been exceedingly challenging.
A scenario some owners have been using is to buy their replacement property first and then turn around and sell their existing home. There have been numerous ways to do this, including bridge financing, HELOCs, family loans and the like. The idea is that once the new home closes, the existing property is quickly sold to pay off the financing.
Now that the market appears to be shifting, tactics need to shift as well. As long as there was certainty existing homes would sell in a few days for top dollar, move-up buyers fared very well.
As we have seen in recent days, however, in a market shift it takes longer for homes to sell, which in turn increases financial pressure on those who have purchased new homes and are now trying to offload their previous property.
Bottom line: In the emerging market, it may make more sense to sell first and then go looking for a replacement.
2. Don’t: Set an anticipated price you must receive
Once a market begins to shift, all bets are off for matching the prices of previous comparable sales. In a recent talk with a homeowner looking to sell, he stated, “We have to sell above a certain price in order for our plans to work.” He clarified, “We’ve looked at recent neighborhood sales and, based on those numbers, have concluded we can get X-amount for our home.”
This tactic fails to recognize that it is the buyer who sets the price, not the seller.
A shifting market is evidenced by two key factors:
- First, homes start staying on the market for a longer period of time.
- Second, because buyers now have more opportunity and leverage, offers come in at lower prices, effectively lowering overall market values.
Regardless of how much any given seller insists they must make in a sale, it’s not within their control. Sellers need to carefully consider any offer that arrives — if they dismiss it out of hand, it might be a while before the next one arrives, and no guarantee it will be any higher.
3. Don’t: Underprice listings
A common strategy employed in this area is to list homes artificially low and then let the market drive prices up to reasonable levels. I have always been in complete disagreement with this practice, and it has caused significant heartburn for those listing agents who recommend that their sellers list at fair market values.
We have always told our sellers to list at a price they would accept if only one offer came in at that price. Ironically, due to other agent pricing strategies, some buyers look at listings that are priced realistically and then assume they will have to add a substantial amount on top of that price to have a chance to purchase the home. In many cases, this assumption has prevented potential buyers from submitting offers.
In a slowing market, homes listed at ridiculously low prices may get offers, but at a potentially lower level than the seller’s expectations. The practice has been a bit like an auction with a hidden reserve: If offers come in lower than the seller’s “minimum,” then the offer is refused. Personally, this smacks of false advertising, and I am aware of at least one agent who incurred penalties for this practice.
4. Don’t: Price higher than existing comps
When pricing a home, sellers must always follow the market. In an escalating market, it’s OK to price at or higher than previously closed comparable sales. In a market that is tipping or headed down, sellers want to price ahead of the market by setting the price under previous sales.
5. Do: React quickly
When the market shifts, it typically does so in a single day. Although agents who have been through previous shifts can usually spot the early indicators, a significant percentage of currently active agents have never been through a shift and may not recognize the signs until it is too late. Listen carefully to pundits to maintain an active read on the market du jour and, when it appears a shift is happening, respond as quickly as possible.
One of life’s ironies is that the segment of the market most affected by a shift is also the slowest to grasp the implications and respond effectively. When the market spikes upward, disadvantaged buyers will frequently refuse to write offers at prices that will win the day, stating, “The home is not worth that much.”
The sad thing is that once another buyer pays the going rate and escrow closes, the house is indeed now worth that much, and the buyer who missed out will need to offer even higher to get the next home that appears.
When a market shifts downward, buyers recognize the fact immediately and respond with lower offers.
Sellers, on the other hand, refuse to accept the new market reality and will ignore offers coming in at the new lower price points. Skilled agents will recognize this and get the sellers onboard with effective responses before the majority of other sellers wake up and smell the roses.
6. Do: Maximize property potential
Once buyers see an increase in available inventory coupled with a decline in activity, they become decidedly picky. Since they finally have a chance to get a home on terms that are more agreeable, they will start to focus on those listings that outshine the rest.
In an overheated market, the goal for buyers is to simply get a house — any house — so they can begin to reap the benefits of being owners. In a softening market, however, they actually have an opportunity to look for and buy a home that more aligns with their stated tastes and needs.
The message to sellers in a shifting market is simple: Make sure homes are well-prepped, staged, priced and marketed better than competing homes down the street.
7. Do: Be patient
Sales in a few short days will disappear in most cases, so counsel your clients to hunker down for a bit longer haul. Encourage them not to panic if their property does not sell in a couple of weeks — in softer market conditions, sales just take longer.
We have no idea how long this shift may last or how far down the rabbit hole we may go. Stay in touch with market conditions, pay attention to the news, network with other agents, and do whatever is necessary to stay ahead of the market.
This is not a case of Chicken Little crying, “The sky is falling … ” We are headed into a real shift and those who embrace the new reality, effectively coach their clients and respond the quickest will come out ahead.