Yesterday’s existing home sales figures seemed to send a shock through the real estate industry, but they certainly weren’t unexpected. They only came as a shock because of NAR’s market calming rhetoric over the past year, using terms like "easing" and "soft landing" and "still at historic levels."
The tone of many of yesterday’s TV news reports was practically panicked, which was as misleading as NAR’s public relations pablum. Last evening I was chatting about all of this with a friend who’s on the faculty of the real estate program at the Columbia B-school, and an industry honcho in his own right. He had a very interesting perspective.
Basically, my friend was saying that real estate markets are less likely to crash than other markets, barring a more macro economic catastrophe like a recession or, heaven forbid, a depression. The reason? In residential real estate, only a small proportion of sellers must sell; most sellers are actually discretionary sellers. In the "must sell" category, for example, are people who are being transferred to another city, heirs selling a property from an estate, or a couple that needs to liquidate a property in a divorce.
Most sellers, even though they may perceive they’re "must sell" sellers are actually discretionary sellers. For example, a family expecting their third child may feel they need to upgrade to a 4 bedroom house, but in fact, don’t actually have to. If they can get $400,000 for their house, they’ll trade up. But if they can get only, say, $325,000, they may decide to stay right where they are and put on an addition or finish off the basement to get more space. So if they put their house on the market at $425,000, hoping for $400,000, and only get offers in the $325,000 or even $350,000 range, they may just take their house off the market.
In the Sullivan County second home market, many houses on the market are ‘discretionary’ sales. A seller here may want to sell their house for $400,000 and take the profit to buy a condo in Florida, for example. But if they can’t make a tidy profit on their place here, they may be just fine with keeping it and using it.
We saw a pretty big run up in inventory here over the last year — about a 50% increase in single family homes on the market, from under 800 to over 1,200. Since Aug. 1, however, the inventory of available houses has only edged up, from 1240 to 1266, a net increase of 26 houses in just under a month. That’s still a lot of houses in a county that sees roughly 700 to 800 sales a year. And there hasn’t been a noticebaly decline — yet — in the average and median asking price.
I anticipate 2 things happening over the next two or three months. First, I think we’ll see a drop in available inventory, as some discretionary sellers smell the roses and realize they’re not likely to get anywhere near their inflated asking prices and pull their houses off the market. Second, the average and median asking price will drop, as the "must sell" sellers have to bring their asking prices in line with market realities to move their properties, and the more motivated discretionary sellers follow suit. I wouldn’t be surprised at all if we posted a drop in the average asking price from the mid $290’s back into the $270’s or even the $260’s.
However, I don’t expect to see a direct correlation on the actual sales price side of the equation. I think most of the drama is going to be on the realignment of inventory and asking prices, to bring it more in line with buyer expectations. Buyers have been pretty clear now for a couple of months now what they’re willing to pay and I don’t see that dropping in any major way.
I just don’t see a ‘Dust Bowl’ collapse on the sales side. As discretionary sellers pull their houses off the market, supply is going to realign with demand, and prices will likely stabilize. The panicked Dust Bowl scenario is more about sellers’ unrealized paper profits than the drying up in demand. There’s one house, for example, that the current owners bought in March, 2005 for $200,000 and just put back on the market for $355,000 — an expectation of a 77% increase in 18 months. Sorry, folks, that kind of return just isn’t going to happen.