For a real estate broker, one of the most common comments we hear is "I'm not giving it away." All good brokers get to be pretty good actors and actresses and hide their true reactions to that statement. I sometimes believe it's possible to track the marketplace by how often in a given period of time I hear that statement. The more I hear it the more I know it's a buyers market, the less, a sellers market. We are pre-programmed to want the best deal (for ourselves), and while we think we are all sensible data driven people, we are equally programmed to view data mostly from our biased point of view.
I partially blame our educational system. The lack of understanding basic economic principles starts in elementary school and continues through college. This failure to understand even the most common economic vocabulary terms (such as the meaning and use of the word the "Market”) makes matters worse. By definition, a "market is the process by which the prices of goods and services are established." To further understand a market, some additional information is helpful. For example, for a market to be competitive, it should have multiple players (buyers and sellers). If fact, the more buyers and sellers, the more "competitive" the marketplace. All markets should have as a goal the maximum amount of competition.
If the numbers on either side of a market transaction are smaller than the opposing side, it can become either a "buyers market" or a "sellers market." This is not an opinion. This is simply the way the markets work. The typical pricing of a product or service includes the cost of materials, labor and a desired profit (or in the case of a service, the actual cost plus a desired profit). Under normal circumstances the only real variable is the profit margin, however in a market with a lack of either buyers or sellers, this formula may not work. If I want to buy a bag of popcorn in a movie theater I am likely to pay far more for this product then by simply walking outside the theater. Conversely if you bought a parcel of land, installed the infrastructure, foundation and finally the house itself, its' cost would reflect the price of all those parts of the final product. It is assumed that these prices would be arrived at through a competitive process.
To further our example let's say that final cost of the complete house (including land and infrastructure) was $250,000.00. Two years pass and we find ourselves in a deep recession. The market which for the past several years always had more buyers then sellers and the price reflected this fact. The recession grows deeper and after two more years of falling prices the actual price of replacing the house has dropped 10% due to lower costs (both materials and labor) and a smaller profit margin. This new replacement price might be $225,000.00. In reality however, because the seller is now selling a "used" house and the market for these houses will have dropped far more the the 10% reflected in materials, labor and profits, but instead has dropped 25% (which would be $187,500.00) and as there are now far more sellers then buyers, a comparative analysis (actual sales data) shows this house would sell for approximately $167,500.00.
While most people understand the above example, for some reason when the real estate broker (under practices and principles in state law) recommends a listing price of between $170,000 and $190,000. "I'm not giving it away" is likely to be the response. It's now time for the popcorn story. Seriously, this exact conversation is taking place daily all over the country. While there are areas of the country that have recovered better then others, there are very few variations of this conversation.
Now I understand that for many people there are extenuating circumstances. Some may owe more then the current value, some may need to move to a new location for a job or some other personal reason, some may have assumed that when they sold their house they would have enough "left over" funds to retire or worse, retire and buy another house. All of these are understandable, but don't change the facts. I was offered $800,000 for my own home in 2007. I paid $250,000 for that home and have put another $250,000 into improvements. Even with all these improvements I know that I would be lucky to get $400,000.00 if I had to sell it today. That's a $50,000 real cash loss (and $300,000 imaginary loss) in my mind from the high value that existed in 2007.
Unfortunately markets are not nice. Markets are not fair. Markets are simply markets. My way of advising my clients in these situations is to explain the above, adding this: "People fall into two categories, those seeking pleasure and those trying to get away from pain." You would think that those trying to get away from pain (like a potential foreclosure or just growing debt) would be the most motivated to end this problem as soon as possible, but you'd be wrong. I've continued to be amazed at people who really do need to sell their homes who fail to see this need and continue to price their home to high, above the market price (or current value). Some actually believe that they are "motivated" because every few months they reduce the price by 5% or 10% (while the actual market value is 15%-20% lower). Surprise, surprise, this marketing technique never works.
On the other hand, those that are pleasure seekers face reality and price their homes where the data shows them the market is. Some lose money, some make less then they wanted to but all move on with their lives. This is ultimately the question. When I sold my last house in 1986 I sold it for $350,000. It's worth 1.5 million now. I never look back. I never count my imagined loss. It made me able to move to my current home which I love and has now become the "family" home. I'm happy. Be happy. It's your choice.
No comments:
Post a Comment