Preparing for the Market Shift

Source: Inman Article https://www.inman.com/2022/05/10/working-with-sellers-in-a-shift-7-dos-and-donts/ 

Market Impacts 

Increasing prices and mortgage rates have eliminated many buyers

As prices have soared this past year, many 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.

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.

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.

Buyers are getting very 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, sellers will need 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.

Market Shift Strategy & Preparedness

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.

Don’t: Underprice 

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.

I have always told my 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.

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.

Do: React quickly

When the market shifts, it typically does so in a single day. Listen carefully to pundits to maintain an active read on the market of the day 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. 

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.

Do: Be patient

Sales in a few short days will disappear in most cases, do not to panic if your 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.

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, listen to real estate experts and respond the quickest will come out ahead.