Yesterday morning just before I headed out to a couple of meetings at the uni, there was a knock at the door. It was someone who lives a couple of streets away, and who was the realtor who sold us our house. (I’ll call him John for the purposes of this story). He and his wife are splitting up, and he told me that he was about to put his house on the market. He wanted to know if I knew anyone who might be interested. John then went on to tell me what he had originally paid for the house, and that he didn’t expect to get anywhere near that price in the current market. (Property values in this area seem to have been going sideways for at least a couple of years).
I told him that I would be happy to tell friends about his house, but that most of the people that I know who are looking at a possible purchase in my local village or the countryside around, have noticed that there is a lot of real estate that has been on the market for a long time. Their simple analysis is that asking prices must be out of step with market reality. So they are sitting it out.
It is a classic case of a deflationary state of mind – “if I wait longer, price will go down”. The problem with this, of course, is that unless market realities are met, the concept of waiting longer becomes a self-fulfilling prophesy that is so embedded that even when prices go down, buyers want them to go further down…. leading to a never ending spiral into market oblivion!
My neighbour, John, is not a believer in that. He is actually an extremely good salesman when it comes to real estate. He gets the who concept of the potential of deflation big time. John’s franchise operation is up in the next little hamlet up in the hills and his comments about the broad market were rather interesting:
Here is a digest of what he told me:
His sell-through rate for the current calendar year in his area is approximately 23 houses sold. This is against an average for the realtors in my local area which is apparently 12 – 13.
Median prices of transactions in his area are running about 10-12% higher that in my local area. He told me that this is contrary to accepted practice for the local economic area, and this ratio should be in reverse.
He gave me his reasons for what is happening: He said that the local realtors in my local village establish unrealistic price points for property that they put on their books. They do this in order to impress the vendor and to win the listing. In a bull market, you can do pretty much anything and the purchasers and vendors come to an agreement about price, so you get to a sale. In a static market, which we very definitely have, unless the realtor manages vendor expectations, sales don’t eventuate fast enough and then prices go much much lower when sellers start to feel the pain.
His case in point: A house in the last 12 months that was listed at $1.5M by another realtor. John thought that the market value price of the house should be around $1.15M. He told me that if he had listed this particular house he would have put a sticker on it for $1.25M and would have been able to close a sale at his target price fairly rapidly. As it happened John had a client who was interested in making an offer which was $1.1M. The agent representing the vendor was unenthusiastic about recommending that price to the owner, and downsold the practicality of it to the vendor. As a result the offer was rejected. John’s client didn’t make any further offer, but instead moved on to look at other properties and bought elsewhere. The house stayed on the market for a full year, and has recently been sold, but has realized a price just under a million.
So from the point of view of all the participants this has been a bad exercise. The vendor had the continuing cost of maintaining the house for the period in which it was on the market; the vendor had the continuing costs of capital, either through debt or inability to access cash tied up in the property; the realtor ultimately had to take a commission on a lower number than he may have liked…. And everyone’s properties in the area is, as a result of this, a little less valuable today than it was a year ago, whereas if the property had sold faster at $1.15M there would be market momentum and a less negative impact on real estate values.
I asked John about a property that has just gone on the market and is near where I live. It is one acre block of land with a run down fibro house on it that is essentially a tear down. But it is on prime quality land, that is the best dairy country in the state. The place is listed at $575K. I asked John what he thought about that price.
He told me that he thought it was a great case study of exactly what was happening elsewhere in the area. He thought that the real market value of the house was $45oK. His view was that it should have been listed at under $500k to generate a quick sale. He said that the underlying land value would be $350K and that, while it is a tear down, the existing house would have the ability to generate some cash flow from rental while plans were developed etc, and as a consequence there needed to be a slight uplift beyond raw land value. His view was that this house, like so many in the area, will stick.
So this area is now caught in its own deflationary spiral waiting for something to break. I can’t imagine that even the most cashed up realtors in the local village can survive very long with only 12 sales in a year. If you figure that these days they would earn a commission of 2% and the average house price would be in the region of $875K, they would generate a shade over $200,000 in a year, which may be a good living for some, even after overheads. And it would be the overheads that would be crippling.
In the meantime all the people in the area who want to sell, are going to find themselves in a long, long line with no end in sight.
How much does this quietly impact the local economy? It may not be something that is highly visible, but it clearly means that there are less builders employed (people who buy, invariably renovate or upgrade); it means that council services are not upgraded (people who are selling are more interested in getting out, than in ensuring that the local infrastructure is performing optimally); and in a more general way, when new people come into town, and have cash, they are going logically going to buy a lot of consumer items locally because it is easier. All these contribute to the local economy in a quite significant way.