I received a reader email the other day that went something like this: “Who decides whether the market is good or bad? Who sets the prices on homes?” People like you do, my answer goes. Buyers and sellers, by virtue of their buying and selling activity, decide the mood of the market. And the price any given home ultimately sells for is dictated by what the market bears, meaning what a qualified buyer pays for it at the moment in time of the sale.
But there’s a caveat to these general rules. A big caveat, actually. Local buyers and local sellers determine whether any given neighborhood, town, state or region is a buyer’s market, a seller’s market, or something in between. What a buyer will pay for a particular home in Cheboygan is dramatically different than what a buyer local to Malibu would pay for that same number of beds, baths and square feet. This is another way of stating the phrase so frequently uttered by media economists during the recent recession: “real estate is hyperlocal.”
During the down market, hyperlocal meant that some areas’ home values were harder hit than others. But in today’s recovering market, it can be a little more complicated. What do you do if it feels like what you read in the newspaper real estate headlines doesn’t reflect what you’re seeing in your local market? Know that you’re not alone, and make sure you have a top-notch local real estate professional who can give you personalized advice if you find yourself in any of the following situations:
National News: Bidding wars cause most listings to sell for way over-asking.
Your Town: Everyone you know is paying 10% less than asking, and buyers seem to have their pick of inventory.
From the New York Times to the Los Angeles Times, many national media outlets are devoting a lot of square footage on the real estate pages to documenting the market’s stunning reversal of fortunes. In cities where listings lagged amongst a flood of competition just two years ago, inventory is scarce and listings fly off the market and receive multiple cash offers over the asking price today.
But, not to beat a dead horse, hyperlocality is still a reality. Just because your cousin two towns over can’t buy a house to save her life doesn’t mean you are bound to be outbid time and time again. It’s really a matter of local market dynamics and supply versus demand. Some towns simply have more inventory vis-a-vis qualified buyers than others do. In places where the market wasn’t hit quite so hard, the foreclosure rate might have been lower than in other markets over the past few years. Instead of walking away or short selling, would-be sellers in many of these areas were just biding their time, quietly waiting to be right-side-up so they could sell. And now they are all listing their homes at the same time, too.
Check in with your agent. Ask them to brief you on how long listings tend to stay on your local market before they go into contract, how many listings that generally fit your criteria and price range are currently available, how many offers most listings receive and to show you the recent sales data that shows how far above (or below) asking price the average home sells for. And wherever you are, whatever you do, decide how much to offer and how high to go for a home based on the one-two punch of what you can afford, and what comparable homes are selling for, right now.
Don’t let the national media headlines scare you into thinking you can’t successfully buy a home on today’s market unless and until you know whether those headlines even apply to you.
National News: Skyrocketing home prices abound.
Your Town: Not so much.
After lagging for what seemed like an interminable run, home prices are up nationwide. The May Case-Shiller Home Price Index reports a double digit increase in home prices across the country of 12.2 percent, on average. In fact, in some places, home prices are WAY up – more than a few major metros across the country have had 20 percent growth in home values in the last twelve months. For example, San Francisco, Las Vegas and Phoenix all had year-over-year home price increases of 20 percent or more, according to this report.
But, as always, there are some cities that are simply not en trend. And they aren’t necessarily places that have weak markets. In the May Case-Shiller report, two of the slowest appreciating markets were New York City, with a year-over-year appreciation rate of only 3.3 percent, and Washington D.C., which had only 6.4 percent annual appreciation. Compare this to the May 2011 edition of the report, where all but one major metro depreciated, and the lowest end of the appreciation totem pole in May of 2011 was represented by Minneapolis, with negative 11.7 percent appreciation in the preceding 12 months.
Times are good, relative to those days, almost everywhere.
There are several takeaways for the buyer whose market is not behaving. The fact that home prices are steady(ier) in your market than elsewhere might create more opportunity for you to buy without the stress of overspending – especially when compared with your compatriots in other areas. However, you might also wonder why your market hasn’t kept pace with the overall national trend – it might even give you some pause before you buy, or create some worry about whether your new purchase will hold its value over time.
This is where it behooves you to get a more nuanced understanding of the dynamics of your local market that truly impact you. Cleveland, for example, has one of the lowest appreciation rates of all the cities on the latest Case-Shiller report: 3.4% year-over-year. But Cleveland agents point to a stratified market, where low-priced fixers and lagging luxury homes are dragging down the numbers, but entry-level and mid-priced family homes fly off the market.
Wherever you are, it pays to have an experienced local agent on your team who can help you understand the nuances of your area’s market as you proceed to pick your neighborhood and make decisions about when to time your house hunt.
National News: Foreclosures? What foreclosures?
Your Town: Every other property you see is a short sale or REO.
You’d think that markets that were harder hit by the foreclosure crisis would have more inventory and lower appreciation rates right now, but that’s not always the case. Mortgage servicers and banks grew pretty strategic near the end of the real estate recession. Many made the decision to hold onto foreclosed homes and trickle them onto the ‘for sale’ market slowly, versus inundating the market with a firestorm of listings.
We should continue to see this “shadow market” of foreclosures and other distressed homes come onto the market, slowly, for years to come. Yes, years. So don’t be surprised, dismayed or alarmed if you should happen to come across a property listing marked REO (real estate owned by the bank), even in 2014 or 2015. By the same token, don’t be overly excited at the prospect of a bargain if you see such a listing: banks expect to get the full market value for these properties, and they are just as likely to receive multiple offers as any other, similar property in town.
Long story short – your market may not move in parallel with every other neighborhood, city or even state. So you can’t count on the news to drive your decision-making or your timing. Stay informed, but make your decisions about whether and when to buy a home based on what works for your budget, your family, your career and your life. Then, take hyperlocal data and insights from your agent into account when it comes to the specifics like how much to offer, what price range to hunt in, and the like.
All: Does your market differ from what you read in the national news? If so, how?