Interest rates have been quite the hot topic for a while now, and it was no surprise they took center stage at the Berkshire Hathaway HomeServices California Properties LUX event in Ojai, California last week. At the conference, the always-incredible, wise and worldly Steven Thomas, renowned economist of Reports on Housing fame, imparted his knowledge to the crowd. He said: “Look, everyone is still hanging onto every word the Fed is saying but whatever they say, the opposite is happening.”
In slide after slide, the economist showed that after the Fed made a prediction, the opposite would happen every time. It was a real testament to the fact that this market is completely unpredictable. Thomas did show us three different possible long-term projections, but added this disclaimer: “There are just so many moving parts now when analyzing the data, including the economy, jobs reports and everything else that impacts the real estate market,” he explained. “It’s a volatile environment and a lot of different things can happen.”
However, if there was a prediction to make, best-case scenarios see rates dropping below 7% by Q4 of 2024.
And while interest rates generated a lot of conference buzz, so did the idea of pricing, and specifically pricing a home correctly, which is critical in a market like this. Today, it’s key to price ahead of the market, and not behind it, letting go of 2022 fantasy prices and using relevant, realistic and up-to-date comps.
When it comes to pricing, I’ve always believed you have to be the engine, not the caboose, or else you’ll get left behind, which is what’s happening to a lot of people right now. They’re hanging onto what their neighbor or friend got for their home in 2022, and the sobering fact is that the average mortgage payment has doubled in the last 15 months – not just gone up but doubled. What was once a $4,000 monthly payment today is an $8,000 monthly payment, yet incomes have not doubled and prices of houses have not gone down 50%. It’s what we call bad math and it’s not friendly math for the marketplace.
But even this bad math shouldn’t bring doom and gloom among brokers. In a regulating marketplace, a positive attitude really does make a quantitative difference. At the conference, I was among the 14 people who woke up early for a fantastic 7 a.m. sunrise yoga class led by California Properties agent Serge Bandura, who had a total sense of humor about the market (as we all should). Serge said, “You’ve got to maintain a positive attitude because negativity translates to reality in the market.”
I totally agree. If everyone is negative about the marketplace that negativity gets perpetuated with clients and other agents, which makes a bad situation far worse than it needs to be. The fact remains that good houses are still selling and the lower end of the market is booming. Buyers in the upper-end market are taking a back seat, and that sense of urgency is gone. Unless a listing is perceived to be an advantageous deal, a home in an A+ neighborhood or a totally unique property, a lot of buyers in the luxury sector are in wait-and-see mode.
I’ve had buyers recently say to me, “I’m not really sure if it’s the one. We’re going on a family vacation for two weeks. We’ll revisit it then.” And if the home sells during those two weeks? They’ll just wait for the next one. There’s no rush among buyers today. They’re casual and take their time.
Another huge conversation right now is around low inventory and I’d like to debunk a few myths with that one if I may. Sure, there is low inventory but the low inventory we have is lasting longer. Plus, new homes are coming on the market so we’re slowly seeing that low inventory levels rise. In most price ranges, average days on market has doubled (right along with mortgage rates), but this is particularly evident in the higher ranges, making it an inverted marketplace. In our market, for instance, homes priced right under $2 million are selling relatively quickly, and homes over $2 million must be absolutely perfect or perceived to be a great deal in a fantastic location to sell, otherwise they’re remaining on the market for longer.
I’ve seen this trend play out online. Overall, we’ve experienced about 10x the amount of online activity for our listings in the past week or two, though we haven’t seen 10x the amount of people coming through the door. I call these types of buyers “shadow shoppers” because they’re on their computer screen at all hours of the day and night, watching listings but not coming through the front door. What’s stopping them? They perceive the homes are priced too high, they’re not ready to buy or both. It’s almost like a game. They’ll watch the listings carefully and say, “Oooh, this home went down in price!” And it’s often the price improvements that motivate these shadow shoppers to get out from behind the screen and through the front door.
This curiosity also translates into the famous real estate question, and it’s the one I’ve gotten asked the most throughout my career: “How’s the market?”
Right now, you have to respond to that question with another question: “Which market are you asking about?”
The general market and the luxury market are two different things. The general market is going strong, while the luxury market has slowed down. It’s the same theme we talked about earlier: there’s a wait-and-see mentality among high-end home buyers and any buyers still left looking are those that really need to move (marriage, expanding family, selling condos). For the most part, these buyers in the general market are getting some kind of assistance (a gift or loan from family or friends) and putting more money down to equal about 5% or 10%. The rest of the buyers who remain on the sidelines are renting or even moving back in with their parents to save up money to buy a home. Analysis of Census Bureau data by the Pew Research Center found that half of Americans aged 18 to 29 were living with their parents. Most likely, these would-be buyers are priced out of the marketplace and want to save up to put more money down for their eventual downpayment.
On the seller side, it’s about setting expectations that align with the current marketplace and staying positive, so they’re positive about the prospects of the sale, too. I’ve had many conversations with seller clients who don’t want to improve the price of their home and it goes something like this:
Me: “The home isn’t going to sell at this price.”
Seller: “But I think we’re priced competitively compared with other listings on the market.”
Me: “That’s wonderful but those listings aren’t selling either because they’re not competitive. None of us are selling. We have to lower the price to become competitive.”
The whole theme when the market starts to constrict is this: You’ve got to be the best condition, best priced product in your market because that’s how you sell and you’re the first one to sell. It’s not going to sell if it’s overpriced or in poor condition. Then, you’ll be falling down the ladder and the last to sell, not the first.
I also get this line a lot from sellers: “Well, we’re not going to give it away!”
And I always reply the exact same way: “Don’t worry. There’s no danger of that at our current price structure.”
(Usually this gets a price improvement happening sooner rather than later.)
You have to have a sense of humor with it, and even more importantly, you have to be direct and honest, telling your clients things they often don’t want to hear. This is especially true for pricing. An honest conversation must happen right up front. Once you’re out of the gate with an overpriced property, it’s hard to catch up. There’s nothing wrong with changing the price, and it’s really not a negative. In many cases, it’s a market tactic. A price improvement is one of the best marketing tools we can use to hurtle a listing right up to the top of the search field. Anyone who has checked out that listing online gets an email or text message notification that the price changed and that spurs activity most. However, the price improvement has to be done properly in order to motivate buyers. For instance, in the luxury market, you can’t change the price by $100,000 and think that will make a difference when in reality, it won’t make a blip on the rader. In the luxury market, search increments usually increase by $250,000, so unless you improve by at least that amount, you won’t get much reaction. The difference between a home priced at $3.9 million or $3.8 million isn’t going to change anyone’s mind but the difference between $3.9 million and $3.75 million can absolutely create a change.
To sum things up for sellers: I’ve never met one person who found a house for less than what they were looking for it in all the 30+ years I’ve been in this business. Everyone climbs the pricing ladder in their search process and almost exclusively spend more than what they planned, but if your home isn’t priced correctly that buyer will simply find another home on the ladder before they ever get a chance to consider your house.
Andrew Manning • REALTOR® • Berkshire Hathaway HomeServices California Properties • DRE: 00941825 • 818-380-2147 • firstname.lastname@example.org