According to the U.S. National Bureau of Economic Research, The Great Recession ended in June 2009. Every year since the US economy has grown and strengthened. During this same period of time, my real estate sales have, more or less, flourished in pace with the national economic expansion. Nine years ago, my team and I sold approximately $37 million worth of residential real estate. Eight years later, we had sold $63 million- a remarkable 41% increase! Well, as Blood, Sweat, and Tears stated in their 1968 hit “Spinning Wheel”, “What goes up, must come down” and, suddenly, I find that my sales have, year to date, fallen a full 19%! Concomitantly, the Greater Rochester Association of Realtors has reported that sales throughout the region have decreased 18.8% through the end of May. While these statistics bring me some comfort in knowing that this market adjustment is playing out in the macro, not the personal, it still hurts!
Obviously, my colleagues and I aren’t particularly happy about the diminishing width of our wallets. Our sellers, on the other hand- particularly those who own homes worth less than $250,000- are ecstatic. They’ve enjoyed an impressive 11.2% increase in the value of their property in the past twelve months! The reason has to do with the most basic law of economics. There’s been plenty of demand, but the supply of homes available for sale this year has been challenging. This past winter, there were 60% fewer homes for sale than that which was available during the same period of time two years ago! Yep, that’s not a typo. Sixty percent! Inventory began to increase as the year moved forward, however, it was a slow, gradual slog. In April, levels were 30% below where they were two years ago. By May, the gap had closed and we were looking at a 20% shortfall. June numbers aren’t yet available but anecdotal evidence leads me to believe that there was further improvement.
The reasons for the shortage remain similar to those that I described back in February.
- There’s still uncertainty surrounding the federally enacted tax bill.
- Homeowners now remain in their residence upwards of eleven years on average as opposed to the seven-year average that prevailed a few years ago.
- Finally, American consumers don’t make large financial moves as a result of uncertainty and I think that, regardless of one’s political orientation, we would all agree that we are living in uncertain times!
One of the newer phenomena that has been playing out in this year’s real estate market has to do with a level of competition and bidding wars unlike anything that I’ve seen in the twenty-eight years that I’ve been selling. Today’s determined buyers understand that, given current market conditions, they’re going to have to enter the local real estate Coliseum with brandished sword, engage in combat with other buyers and, if lucky, emerge victoriously. However, victory oftentimes comes at a price. The most desirable homes are often only secured as a result of engaging in a bidding war with other would-be-homeowners and paying top dollar. Tales of buyers paying $15,000 or $20,000 over asking price have been commonplace.
Most buyers understood that this is simply the price that one needs to pay in today’s real estate market in order to fulfill the American dream of owning a home and enjoying a more secure future. However, there appears to be a narrow understanding of property valuation and one’s tolerance to “overpay”. It seems that many buyers are willing to fork over large sums of money for a property if a home has been vetted by other buyers and deemed worthy of a lofty price tag. These buyers are deriving validation in their analysis when others are placing value on a home by bidding on it and writing offers over asking price. They logically conclude that, as a result of other buyers engaging in a bidding war, a property must be worth a sum of money above and beyond a home’s list price. This behavior is contrary to the behavior exhibited by buyers stumbling upon a home that is listed for sale by an overly exuberant seller. These homes sit because buyers aren’t willing to blindly or stupidly pay any sum of money for a new home. They’re not interested in paying top dollar simply because a seller is attributing a heightened valuation to their property. In a buyer’s mind, homes need to be priced appropriately and, if market forces drive the price up, they at least take comfort in knowing that this is what the property, in this market, is worth.
You may have noticed that in the last paragraph, I placed the word “overpay” in quotes. I chose to do so because I don’t believe that, despite an 11% increase in property valuation in the past twelve months, buyers are overpaying in today’s market. I would contend that they are simply paying market value. With the exception of the 2 1/2 year period of time when we suffered through the recession, I’ve never seen local prices decrease. Rochester real estate traditionally increases 2%-4% annually. After a period of time, we wake up to realize that property values haven’t really kept up with national trends and there’s a sudden surge in value. We then revert back to our traditional slow, plodding upward trajectory. The advice that I would offer up to buyers who are currently abandoning their search because of a fear of paying too much is to rethink their strategy. The only thing that they will accomplish by setting aside their quest is the near absolute certainty that a larger portion of their monthly mortgage payment is going to cover the interest that is attributed to the inevitable increase in interest rates. If past performance is a good indicator of future behavior, Rochester will soon begin, once again, it’s slow, upward climb without having to endure any reduction in price as a result of a market correction.
I’ll conclude this edition of my newsletter by stating that a lot of that which I’ve just described may be changing more quickly than the amount of time it took Kanye to snatch that music award out of Taylor Swift’s hands. My team and I experienced fewer sales and diminished dollar volume every month of this year through the month of May. Thankfully, things began to change in June when we sold nearly $9 million worth of real estate- one of the best months I’ve experienced during my career. Team sales for the month of July are already double what they were last year. And, the calls and inquiries from prospective clients lead us to believe that the next few months are going to be strong. Only time will tell if the tide has turned. I’ll be sure to bring you up to speed sometime this fall.
As always, thank you! We continue to be fulfilled by the kindness, the warmth and the loyalty of our clients. Thanks for helping us to get through such a rough patch and, as always, thank you for your referrals. If we can be of any help to you, your family or friends, don’t hesitate to call me at 461-6375. Thanks!