Saturday, January 1, 2011

The Great Disconnect

Call it a result of the Great Recession, but a look back at the last year left me pondering the current buyer - seller disconnect in housing. What I am referring to is how there is a huge gulf in the mindset of home buyers vs. sellers when it comes to negotiating what constitutes a fair deal.

First, let's take a look at sellers in the current market. Many purchased their current home when the market was booming a few years ago. The average move is once every 7 years. Using that as a guideline, that would suggest the current home now on the market was purchased in 2003 - 2004 when home prices were really starting to take off.

No one likes to take a loss on what is supposedly a large asset, but even suggesting they will see a loss of 5 - 10% STILL causes a stunned disbelief (surely not My house!). My question is how does this compare to your 401K performance in the same period? 5 - 10% is the average price decline for many Cincinnati area neighborhoods. Some areas have experienced steeper declines, but these are mostly in "starter home" subdivisions where builders were offering 125% loans and where foreclosures are an outsized portion of the inventory.

The reason that it feels like they are taking such a large loss is due to the leverage factor. That is, most people carry a mortgage that, once paid, may leave them with nothing to show in equity - or worse, owing money to payoff a loan. Many overlook that it is this same leverage factor that during good times allows them to build equity faster.

Buyers, on the other hand, have seen too many news stories about the foreclosure debacle and have a mistaken impression of how everything on the market must be available at all time bargain prices. Are there bargains to be had? Absolutely! Is the house that you have just fallen in love with available at 75% of market price? Uhmm, probably not.

It often takes buyers entering this market some time to realize that we still see homes that are in top condition and priced well sell very quickly and close to asking price - even getting multiple offers. If you come across a house that you think is great, chances are every other buyer in your price range probably thinks so too. If you want a bargain - look at the house down the street that needs some work and has been on the market for the better part of a year.

These buyer / seller conditions has led to lengthier negotiations, more failed offers, and a feeling of dissatisfaction on both sides that they aren't getting the deal they should (sounds like Congress, eh?). Looking forward into the new year, I anticipate conditions to remain the same for a bit longer. That said, I do see more buyers entering the market, sellers being more realistic about price, and overall economic news being more positive. One can only hope that bodes well for 2011.

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