Having been in real estate sales since 1979, we have learned that real estate is cyclical. Nothing lasts forever – although at times it sure can feel that way! That brings us to the seller’s market we’ve been in since 2015. While most expected the pandemic to suppress demand and allow for a rebalancing of the market, the opposite happened. Demand remained above normal – but that is still not where the story lies. The real story is about supply. Or more correctly, the lack thereof. Supply has plummeted to the lowest levels ever. And new supply (i.e. sellers putting their home on the market to replenish the homes under contract) are arriving at a trickle rather than at normal levels. Properties for sale are down 61% from this time last year. Yikes. Combined with still inadequate new homes being built, there are simply too few homes available to house those who wish to live here. If we were old Mother Hubbard we would rightly say the cupboard is bare.
This is all confirmed by Michael Orr of the Cromford Report:
The housing market is experiencing moderately strong demand, but this is not the important matter. Variations in demand are almost insignificant. This is because the supply of re-sale homes is so poor it crashes below all time record lows almost every week…The supply situation is the worst we have ever recorded, lower than the first quarter of 2005, which used to hold the record….
Not only is the supply extraordinarily low, it has dropped by a large percentage since the beginning of the year. In a normal year we would expect to have more available supply in mid-February than we had at the start of the year. For example in 2015 active listings rose from 22,879 in week one to 24,041 by week 8… This is a 5% increase. In 2021 we started the year at 6,113 and by week 8 we have dropped to 4,731, a decline of 23%. This is unprecedented.
4,731 homes for sale in MLS is a shocking number for an area as large as Metro Phoenix with 4.5 million people. Further, about 12% of the 4371 are “out of area listings” meaning in Arizona but not in the valley. That brings the real tally of properties for sale to around 4,000 homes. To put this in perspective, a “normal” market would have around 28,000 homes for sale. Unprecedented indeed.
Rebalancing & Prices
The law of supply and demand says when supply is inadequate for demand, prices rise. In fact pricing is currently moving upwards at a rate that is breathtaking to sellers and agents alike. We saw 3% appreciation in the last month alone! Within the first half of this year, it is possible we could see prices rise 30%. But (there is always a “but” isn’t there?!) this market will not last forever. At some point rising prices cause affordability rates to drop, and that will begin to impact demand. This is how markets rebalance. As demand falls, supply begins to slowly build. Sellers sensing record pricing levels, come to market in greater quantities. Builders continue to build to exploit higher pricing and previously unsatisfied demand. Supply begins to build in earnest. The market then shifts into balance, with prices ceasing to rise or rising very slowly. This will happen. The question is only how soon and how high will prices have to go to trigger the rebalance. Correction can take some time.
Pitfalls of an Extended Seller Market
If you are a buyer, the pitfalls of an extended seller’s market are obvious. Multiple competing offers and spiraling prices can make buying a home a less than thrilling experience. It takes perseverance, a good agent, and some grit to make it happen.
If you are a seller, it would seem you hold all the cards – what pitfalls could lurk? Yet in every seller’s market we see the same mistakes made over and over by sellers.
- Taking the first offer the first day of listing – Once a seller is listed on the market they are understandably excited to receive an offer. However, in a strongly unbalanced market – waiting a few days to collect multiple offers is a winning strategy for negotiating the most advantageous deal. We counsel our sellers to allow us at least a few days to attract multiple offers and create a bidding war. That strategy has often allowed us to get an additional 5-20% higher than list price! It is critical you hire an agent that has been through more than one overheated sellers’ market so they know how to play the game to maximize your net.
- Not negotiating terms – Once the highest price is obtained, other terms can be negotiated that benefit the seller. In some cases appraisals can be waived (i.e. the buyer puts additional cash down if the appraisal comes in below the sales price rather than the seller lowering the price to appraisal). Homes can be sold “as-is” avoiding the need for repairs. In some cases earnest money can be made non-refundable. Essentially, terms to protect the seller can be as vital to negotiate as price.
- Pricing too high – This sounds counterintuitive in a red hot seller’s market. Shouldn’t any price work? Almost. But even in the best market, overpricing can still stop offers. Currently, 10% of the properties are not selling. Yes, even with only 4000 properties on the market, it is possible to miss the hottest market ever.
- Doing it yourself – In a seller’s market the easiest thing to do is sell a home. The challenge is to sell it for the most money. Any seller can post their home online or put a sign in the yard and get an offer. Sadly the “do- it- yourselfer” is missing out on the competition that can be created by being on the market. And that can cost them the 5-20% upside that competing offers can provide. Additionally, just as overpricing is a mistake – some sellers underprice by about 10% due to the rapidly rising market. They simply do not have access to the market statistics that a knowledgeable agent has. There is a saying that the seeds of failure are sown in times of success. Selling yourself feels empowering – but sadly even the best of home sellers can cost themselves thousands.
- Taking investor offers – If you have a cell phone or a mailbox, you are getting constant offers from investors trying to buy your home. It sounds so good – no commission, no showings, all cash, as-is! But let’s be honest, investors do not represent your best interests – they represent their best interests. They make money when they buy, not when they sell. That means they need to convince you that selling to them at their price is best for you. It is never best for you. Never. How can you be sure of that? Well look at what investors do – not what they say. They only buy for-sale-by-owner homes, rather than listed homes, knowing they will buy below market that way. But when they sell, they NEVER sell the way they bought – direct to buyers. They always sell on MLS. Why? Didn’t they just tell you that you are going to save because there is no commission? Yet they hire agents and pay a commission when they sell! Investors know to get top dollar they have to be on the market. Just like you.
Still have questions about this rapidly changing market? Call us! We are always happy to explain your options and get you the facts so you can make an informed decision that is right for you and your family.
Russell & Wendy (Mostly Wendy)