If you haven’t experienced a buyer’s market before, everything you know about selling real estate is going to be upside down. Trainer Bernice Ross is here with the strategies that have helped her successfully weather many meltdowns.
As of July 28, 2022, the US is officially a . is in recession, The days of multiple offers, short market hours, rising prices and high buyer demand are fast becoming a distant memory. If you haven’t experienced a buyer’s market before, be forewarned: Everything you know about selling real estate during the last decade is about to be upside down.
Are we headed for an epic accident?
Signing a contract to buy a home will continue to fall as long as mortgage rates keep climbing, as has been the case this year to date.
zerohedge Cited 14 signs that the economy is headed for an epic crash, three factors are directly related to real estate:
- Sales of previously owned homes fell 5.4 percent during the month of June. This is now the fifth consecutive month in which we have seen a decline.
- In three-quarters of the metro areas that Redfin tracks, at least 25 percent Homesellers reduced their asking price during the month of June.
- Blackstone’s War Ark $50 billion So that it can scavenge depressed real estate across the country after declining housing prices in the coming months.
three stages of recession
During the last four recessions, the real estate market went through the following three phases as it moved from a seller’s market to a buyer’s market.
- phase 1: Prices are still rising, but sales volumes have started to decline. an amount of inventoryDays on the market, cutting prices and expired listings is also increasing. In the last recession, Phase 1 lasted at least six months.
- phase 2: Prices flat. This usually happens between six and 12 months after Phase 1 ends. Depending on how bad the economic situation is, stage 2 can last for a long time or can last as long as 30 to 60 days.
- step 3: As soon as the inventory volume exceeds seven months or more, prices begin to drop. The more months there is inventory in the market, the less sales are made. This translates into an even greater drop in prices as desperate sellers lower their prices to sell before the price drops further.
Take These 5 Steps Now to Be Prepared for a Down Market
Here are five strategies that have worked in past recessions and will definitely work if your Market seems to fall.
1. Prepare for the ‘sticky pricing event’
In a buyer’s (down) market, you need to shift your focus from price appreciation to price depreciation. The pivot point from a seller’s market to a buyer’s market is when the market has seven or more months of inventory.
In a seller’s market, prices will move faster to meet market demand. Conversely, the decline in prices is slower in the lower markets. This is known as the “sticky pricing phenomenon”. As mentioned above, this occurs because price declines lag behind actual market conditions by six to 12 months.
According to first tuesdayThe “sticky pricing phenomenon” is already happening in six of California’s top markets:
- San Jose For sale inventory 10 percent up and the price falls are up 9 percent
- of sacramento Inventory is up 39 percent and fall prices are up 24 percent
- Oakland’s inventory is up 43 percent and drop prices are up 12 percent
- Stockton’s inventory is up 58 percent and falling prices are up 19 percent
- San Diego list is below 4 percent and price drop is up 17 percent
statewide, home sales volume The initial peak was reached in March 2022. Since then, sales volumes have bucked general seasonal trends, declining throughout the spring season — typically the busiest time of year for real estate agents.
At this rate, total annual sales volume will decrease over the past two years, but will also drop less than in 2019 (the last “normal” year for sales volume before the pandemic in 2020).
2. Help sellers avoid ‘chasing the market’
Anyone who has experienced a buyer’s market with few transactions, falling prices and high foreclosure rates is familiar with the concept of “chasing the market.” See here how it works.
- Once your market reaches Phase III, your MLS comparable sales for August 2022 are based on sales that closed in May or June. Assuming that those assets took 60 days to sell and then 60 days to close, this means that your comparable sale is based on prices from 120 days ago.
To illustrate the point, as noted above, Sacramento has a 39 percent increase in inventory, with 24 percent of sellers reducing their price. Assuming that the market peaked in March 2022, by August 2022, prices would have already been declining for four months.
- For listings taken in August 2022, which take 60 days to sell, there will be a total of six months’ worth of depreciation.
- Listing $500,000 in an area where prices will decline 8 percent this year, that home’s value will decline by $40,000 over the next year, or as long as the property goes under contract after 60 days and after 60 days. By the time it closes, the value of that house will decline. , In other words, the value of the property today would be $480,000 at closing.
- Now suppose the buyer is not eligible for a loan after 60 days due to another increase in mortgage interest rates. The seller must bring the property back on the market. At this point, it would have had eight months of depreciation to make the asset worth $473,200 at that point.
- If that seller were to relist at $500,000, the home would be at least $27,000 more. In addition, for every month the seller is on the market, the value of their home is $3,333 per month.
- To avoid chasing a market downturn, the seller will need to price their home at least $30,000 under its original asking price ($470,000). If prices are in free fall, they may need to list at least $450,000.
3. Prepare to Show Sellers That the Market Is Down
Helping sellers to transition from the psychology of a rising market to a declining market is no easy task. The three strategies below can help you do just that.
- Use your local MLS statistics or Realtor.com to generate a list of all properties that have been depreciated and/or expired in your local area. If it’s above 10 percent to 20 percent, your market is peaking, and prices may begin to decline.
- Look at primary automated valuation models (AVMs) such as Redfin, Realtor.com and Zillow for their pricing. Please note that Realtor.com provides an interactive 2017 graph that tracks prices from the three most advanced artificial intelligence (AI) AVMs: Collateral Analytics, CoreLogic, and Quantarium (The most advanced AVM because it is the only one that includes over 900 internal features in their pricing model.) Show sellers the graph, and if there is a flat or a downside, Prices are already going down.
- Once your market has experienced a decline in prices for about six months, your MLS comparable sales will begin to show a change. To get an idea of how much the market is declining, calculate the average price per square foot in your market area for the past 60 days.
Repeat the process for the last 60 days. If the current average price per square foot has decreased, you can get an idea of how fast the market has declined over the past 60 days by subtracting that number from the current average. Multiply this by the square footage of your listing’s improvements, and it will tell you how much the home’s value has declined over the past two months.
4. Make These Two Important Changes to Your Purchase Agreements
Mortgage interest rates are volatile, even though NAR chief economist Laurence Yunu At present, there is no big jump in interest rates. To ensure that your trades close, the interest rate should be written at least to one point higher than the prevailing rate in any eventuality.
The second stage applies when the buyer plans to obtain a fixed rate mortgage. Be sure to include a provision that states, “If the buyer cannot qualify for a fixed-rate mortgage, the buyer agrees to take out an adjustable-rate mortgage.” Along with the rate, be sure to check if the mortgage has a fixed rate component. (A typical example is an ARM where the first five years are at a fixed rate.)
Please note, never write “Prevailing Rate”. For your purchase contract to be valid, it must state the exact interest rate where the buyer can walk away.
5. Adopt This Tried Strategy That Has Worked Every Recession Since 1980
The “sell probability” script with “rate of absorption data” is golden in down markets. Here are the steps to follow:
- Begin by researching your MLS to see how many months the listing is on the market for the specific neighborhood or zip code where the property is located.
- Let’s say there are currently eight months inventory,
- This means that if no new listings hit the market, it would take eight months to sell 100 percent of the existing inventory.
- When you meet with the seller, explain that this number means that 12.5 percent (1/8) of the listed properties will sell every month and 87.5 percent will not sell, that is, the next month will be listed.
- Close the seller by saying, “For your property to sell in today’s market, it must be priced in the top 12.5 percent of all listings in terms of value and value. Otherwise, you’ll be in the 87.5 percent of listings that will still be listed next month.” will be in the market.
- Two other persuasive techniques are giving the seller a list of properties that have decreased in value as well as those that have expired.
Based on past recessions, a buyer’s market with declining prices is the most difficult type of market you will ever experience. On the other hand, agents who are prepared and who understand pricing dynamics and bargain in a down market may have the best year ever. That was certainly the case for me in the last four recessions, and it could be for you if you’re prepared enough.