The Factors that Create a Normal Market – Part 2Neil Bada
Welcome and good morning to Mike Ferry TV week of October 17th. We started last week by sharing a couple of thoughts in relationship to what are the changes taking place that are creating for a lot of the veterans what we call a very normal market. And we talked about the days on market extending, which we talked about. We talked a little bit about price reductions being a big thing today, whereas six months ago, 12 to 14 months ago, price reductions didn’t even exist. We talked a little bit about the fact that the inventory is actually growing week by week, which is a good sign because it gives the Buyers several more choices. And we mentioned also last week that the COVID effect on Real Estate, which was a big effect and unfortunately for a very negative reason, which was the pandemic those Buyers have all pretty much purchased the homes are going to purchase. So let’s look at a few more thoughts that are causing this market to be considered by many, to be a much more normal market. Over the course of the last several weeks, I’ve talked to probably about a dozen of our long-term, very successful clients. And these are people doing 50, 75, 100 transactions a year without a team. And I’ve talked to them about the fact that they’ve been in the business for 5, 10, 15, 20 years. And how surprised are they by the changes in the market. And they all smiled and laughed and said, “We’re not surprised at all.” because as you’ve heard me say time and again, “Real Estate is a very cyclical business.” We’ll have three or four or five years of a rising market, prices going up, markets strong, stable. We’ll have a flattening out period that will have a little decline, which is normal after a strong upward cycle. And that decline, of course, is sends many people into an immediate panic, especially those that have not been through this type of a market before.
So this market is heading more and more into what we would call being normal, meaning, you know, there’s our listings that are going to expire and that’s on my list. There’s going to be For Sale By Owners not selling as quickly, which is on my list. Those two opportunities in themselves create a lot of potential inventory for any of us that have the courage to call and talk to By Owners and Expired Listings. But I want to mention to you also that interest rates are having an effect to bring us back to normal. You know, in the early 70’s, interest rates were 18%, 19% on a 30-year fixed loan, 18% to 19%. During most of the 80’s, they were 12%, 13%. And then for some reason, over the course of the last couple of years, they got down into that 3% range. And of course, that was happy days for the Buyers and happy days for the Sellers because the interest rates created demand which raised the price for the Sellers. And it also gave a Buyer a chance to buy a home at a very, very low cost.
Well, interest rates will continue to rise over the course of the balance of this year and probably into the first and second quarter of next year. And many times those interest rates, what happens when interest rates go up? Let’s just use the example of a $500,000 home at 3% interest. There’s a wide spectrum of potential Buyers that can buy that particular house. But then you take that same $500,000 home at a 7% interest rate. All of a sudden that Buyer now can only qualify for, say, a $400,000 home. So price adjustments become more normal in terms of this time. Offers coming in at way less than what they’re listed for becomes more normal and fewer offers taking place per listing. So for those of you that are listing property, there’s going to be fewer offers compared to 6 to 9 months ago when getting 10, 20, 30 offers was much more common. But also the reports coming out of NAR are saying that in the fourth quarter we’re going to see even a little bit stronger decline in transactions, which, by the way, that’s pretty normal.
Now the other side of that story is there’s going to be a lot of transactions during the month of October, November and December. There’s transactions taking place in your town every day. So I would say to you this … It might be wise to take a few minutes and check your MLS service and find out how many transactions took place last year and the year before, during the fourth quarter. And then what is being projected this year for the fourth quarter. And you’re going to find there will be a slight decline, but it’s not going to be major. And anybody that says to you … and we hear this all the time coming through the pipeline of our clients and customers … if anybody says to you, the market really gets really terribly slow in November or December, doesn’t understand the market. There’s always going to be a good percentage of people that have to sell, and there’s always going to be a good percentage of people that have to buy. And I’ve used this example with many of you in the past on Mike Ferry TV. If your Broker said to you, okay, today is Monday and it’s October 17. And you’re watching this for example, short little event with me today at 2:00 in the afternoon. And your broker said, “Okay, it’s Monday at 2:00, and by Thursday at 2:00 you are going to take one residential listing. And if you don’t, you lose your license for life.” Could you get a listing? And the answer is, “Yes.” Now many people would list their own homes for sale at an inflated value, overpriced. But if you had to do a deal, you could because there are deals available.
So I also want to say to you that the number of deals falling apart is increasing because it’s more difficult to get appraisals and it’s obviously much more difficult for Buyers to qualify at a much higher interest rate. So expect the fact that 15 to 20 to 25% of all the transactions will never be completed. And of course normal would be 20%, which means if there’s 100 transactions done, 20 of them will not be completed or closed. So the number of deals falling apart is not a bad sign. It’s just a normal sign. And we also know that the number of transactions are not appraising, as a result of the interest rate, which is causing a lot of concern for Buyers and Sellers both. But contingencies and home inspections are now a big deal. Some of you may not realize that we went for about two and two and a half years where home inspections didn’t exist. The urge for a Buyer to buy was so incredibly high, it really didn’t matter about anything to do with contingency and home inspections. They wanted the house. They made an offer, probably paid 10% to 15% over list price to get that property. Now. It is normal for people to pay this price and 18 months later that home be worth this price in a cycle that is down trending. So anticipate and expect that some of the people that bought between, say, June of 2020 and maybe the first quarter of this year of 2022, are not always going to be real happy with Real Estate people because they think that we control the prices when the in essence, we don’t control the prices. The Sellers and Buyers negotiating coming together control the prices.
Seller concessions are coming back into play. You’re going to hear things like the Seller bought down the interest rate one or 2% for a potential Buyer. Talk to your Broker. Talk to your lenders. Find out what kind of concessions are being offered. And then, of course, the last thing is and is probably the most important, the mindset of too many people in Real Estate is declining when the mindset should be stronger than ever because the number of transactions, as I stated a minute ago, is not declining as quickly as the mindset about the business is declining. This is a great business. It’s a wonderful opportunity because as we get back to a more normal market, which means that interest rates will be bumping up a little bit, a little harder to qualify, appraisals coming in a little lower. Deals falling apart, etc. is going to make it better for those of us like yourself who are truly strong salespeople. And we’re going to see if nothing else during the fourth quarter and the first quarter of next year, we’re going to see a decline in the number of agents selling Real Estate because so many have done nothing so far this year and they can’t afford to stay in the business because all the dues are usually coming due the first part of the next year. So I’m excited for all of you. I’m excited for the opportunities you have. I’m excited for the chance to be able to share these messages with you each Monday, and we will see you again next Monday. Have a great week.