North Sound Property News

There are as many approaches to what it takes to sell a listing in today’s market as there are listing agents and sellers.  For most of the last couple of years, something on the order of 90% of the listings that went on the market didn’t sell, and neither agents or sellers knew at first what to make of it, and later, what to do about it.  This may sound like a criticism, but in fact, it’s just an observation that we have been in a period of “price discovery” resulting from major changes to the lending market that drives buyer activity. 

As agents, we suggest prices to our seller clients relative to comparable sales, and failing that, relative to other homes on the market.  However, FINDING a comparable sale - a TRULY comparable sale - was the challenge for the last few months of 2007, and most of 2008, even heading into 2009.

But over this period, some homes have sold.  Foreclosures, short sales and builder liquidations have led the market in a downward direction.  “Regular” sellers have also had to adjust their prices downward, to compete.  So it seemed we were in freefall for a while there.

That’s where the laws of economics appear to be kicking in.  One of the most basic laws of economics is the law of supply and demand.  That law says that in a competitive market, price acts as the equalizer between supply and demand.  Too much supply means prices come down, too little means they go up.  When they come down enough, demand increases, stabilizing the market. 

Finally, it seems that price reductions over the last couple of years seem to be combining with other incentives (such as still historically low interest rates, and the first time buyer tax credit) resulting in more buyer activity.  The last couple of months of pending sales numbers are up over 2008, even if prices are lower.

So, things are starting to stabilize, and we are now getting used to “the new normal.” 

At the micro level, agents and their clients now seem to be falling into two camps in regards to what it takes to sell a listing.  Just like they always have!

One camp believes that it’s all about the money.  “Price is king.”  These folks think price is literally ALL that matters, and you can tell when you walk into these listings because although the price is low, you can tell that no effort has been spared to make the place seem as unlikeable as possible.  I would go so far as to say some of these listings are downright scary.  From caved-in ceilings, to dog doo on the carpet, and rats in the toilet - I have seen it all!  (Okay, these are extreme examples, I admit).

I often think that there are some homes you would be challenged to give away.

The other camp thinks that love is all you need.  To these folks, staging, preparation and marketing still make all the difference.  In fact, some folks in this camp believe those things make so much of a difference that they are still pricing those listings like it was Spring of 2007, or based on what the seller owes (from their 2007 refi). 

These listings will never sell either because the elements are not in balance - these places may look great but you can’t ignore the price element.

Fundamentally, both camps have it half-right.  Price needs to be set attractively, and in keeping with comparable sales in the area.  And if your area has few comparable sales it may take some work to figure out what it’s going to take to attract a buyer. 

But, that is just the first step.  Buyers have a lot to choose from, even if most of that inventory seems to be priced relative to other listings on the market rather than relative to actual sales.  (Sales are the more reliable indicator of likely price than people who are on the market and have failed to sell). 

And since there is a lot to choose from, it takes a well-prepared listing to be the one that buyers will choose. 

It is true that staging still makes a difference.  Love may not conquer all, but it will definitely work in your favor as a seller if you can make a buyer fall in love with your home.  However, all the staging and marketing in the world won’t matter if buyers don’t see the value, and don’t come to look at the listing.  Price and value, along with the right kinds of marketing, are what will get the buyer in the door.  Staging and careful preparation are what give your home the appearance of being the best value of all the choices in a buyer’s price range, and helping them mentally move into, or fall in love, with a home.  When other factors are equal, staging makes your home the one buyers choose.

I heard it put very well recently - we are in a price war AND a beauty contest.  You have to win both to be the house that gets the offer. 

Did you know that the $8,000 first-time buyer tax credit has been “monetized” and can now be used towards the down payment and closing costs for qualifying home purchases through the end of November?  This exciting news and more information of interest to those thinking of buying a home for the first time will be covered at a series of First Time Buyer’s Seminars hosted by Gallery Homes of Mukilteo throughout the summer.  Dates and times are still being confirmed and we’ll post them soon. 

 This change to the tax credit rules presents a great opportunity for first time buyers to reduce their purchasing costs now, versus having to wait to claim the credit on their 2009 tax returns.

These relaxed and informal seminars will cover the basics of buying a home, credit requirements and types of mortgages available first time buyers, advantages and disadvantages of owning a home versus renting, where to find best buying opportunities in real estate, tax benefits of mortgages, and more.  Refreshments and a goody bag will be provided, and we hope that buyers will leave knowing whether buying a home in the current market is right for them.

 If you are interested in attending a first time buyer seminar, please contact Sandy Kaduce at Gallery Homes - 425-314-3736!

Yesterday I sat down and compiled a set of real estate statistics for the city of Mukilteo going back two years.  I usually look at these statistics on a monthly basis but yesterday was the first time I compiled those into a spreadsheet to look at the market over time.  My goal is to go back as far as I can in order to get a good insight to how the Mukilteo market is performing currently as compared to previous years but I thought I would start just by comparing the last 2 years, which will show fairly clearly the decline of the local market in terms of sales volumes and pricing trends.

What finally prompted me to actually get going on this was the shockingly low number of closings in Mukilteo in the month of January 2009.  When I pulled up the closings for the month, I was surprised to see that they were less than half of any prior month for as far back as I could remember.  One normally expects January to be somewhat slow but even as compared to the last two Januarys, the number of closings was extremely low. 

In January of 2009, we had 4 closings in all of the Mukilteo 98275 area code.  This is an area with a population of more than 20,000, where we currently have 135 active listings.  Yes folks, that means we currently have an absorption rate of approximately 34 months - that’s nearly 3 years worth of inventory at the current rate of closed sales.  The good news is that the number of listings isn’t all that much higher than it was a year ago, but the rate of sales slowed almost to a standstill.

Another way to look at this, is to look at a seller’s chance of sale.  Sellers in Mukilteo had a 3% chance of selling their homes in January 2009.  During the brisk real estate market, the chance of making a sale was more in the 30% - 40% range!  So that is how different things are now.

I attribute this state of affairs to continued weakness in housing locally (as illustrated by this article in the PI on Friday, calling the Seattle area out as having the largest drop in sales in the US), combined with December’s snowstorms and overall lack of confidence on the part of consumers–as well as a relatively seasonal market for real estate in Mukilteo even under the best of circumstances. 

As far as weakness locally goes, I agree with Glenn Crellin of the Washington Center for Real Estate Research, that

“I am not surprised that we have one of the weakest performances out there.  It’s largely a reflection of (the fact that) we began to decline much later, so our cycle is less mature, if you will, than some of the other parts of the country that have already taken their lumps.”

However, it’s important to remember that “this too shall pass.”  As Crellin points out, we began our decline only last year.  The markets that were ahead of us, such as California, have already begun to rebound, and the National Association of Realtors also reported an increase in sales nationally of 7% year over year in December.  My thought is that we probably have another year or so of low levels of sales and declining prices before we reach a level where real estate as an asset class makes financial sense in a more conservative environment.  That’s barring massive layoffs and widespread financial disaster.  When the cash flow picture becomes more favorable, investors are likely to begin leading the way back into the market.  I know of quite a few investors currently in “wait and see mode.”  The upshot of this in my opinion is that further price declines in the coming year are highly likely.

In the shorter term, the big question is whether we will see any sort of bounce in terms of volume in Mukilteo’s real estate market moving into spring.   Typically, that is the pattern we would see.  Currently we have 16 properties pending in the area, although there have been no closings in February so far.  So it does seem as though a spring “bounce” back to last year’s level could be underway.  But in terms of closed sales, things are still pretty weak–and in the end closed sales are what matter.

Here is a chart illustrating how the Mukilteo market is currently performing in terms of closed sales as compared to the previous 2 years.  Sales in January 2009 are less than 1/10th of where they were in January 2007 at the top of the market, and less than half of last year after the financial crisis had begun to impact us locally.

In terms of pricing, the Mukilteo market is a fairly low volume yet diverse market, so it can be somewhat difficult to identify a clear trend when looking at median sales price.  It tends to bounce around quite a bit depending on whether a given month sees more high-end sales, or more sales in the lower end of the market.  However, looking at the sales price per square foot does show us that buyers are getting more house for the same money compared to back in 2007. 

The last item I will look at in this post is Original List Price to Final Sale price. This metric tells us how much sellers are having to revise pricing to bring a sale. Typically, I feel this number is a better indicator of how flexible sellers are on pricing than comparing list price that the time of sale to final sale price (which is the metric used by most Realtors). That List price at time of sale vs. final sale price typically hovers in the 95% range, meaning that sellers on average will only accept about 5% off their list price in order to sell.  However, when you look at Original List Price and compare it to Final Sale price, you will see that over the last year sellers in Mukilteo are discounting 8-10% off of their original list price order to sell.

So what is the underlying message? The underlying message to sellers is that it’s very difficult to bring a sale right now, and the best thing you can do from the outset is to make sure your home is priced the best in its class. There is just too much competition in the market to get away with over-pricing. Buyers will simply look elsewhere.

For buyers, I think the message is that pricing is somewhat more negotiable than it has been in previous years. If you can get into the ballpark with a seller, you have a better chance than you did in the past of being able to come to terms you both can agree to. Once upon a time, list prices were firm, but today many more sellers are willing to entertain “best offers” than would have been the case two years ago.

I am finally coming back from hiatus to blog here, and the first thing I want to do is to catch up on Snohomish County Market Statistics.

The market here in the county has been quite slow for homes since about August 2007 due to the credit crunch and what is now recognized as more widespread economic problems. In a sense, up until last year the Seattle area had been fairly well-insulated against these problems, but when investors lost confidence in the financial markets, those problems came home to roost. I guess the lesson being, real estate markets are local, unless there is a global financial crisis, in which case they are not.

That said, the news is not all bad. One of the things that is actually a positive sign is that absorption rates have stabilized over the last year. They seem to be hovering around the 8 to 9 month mark overall in southwest Snohomish county for most of the last year.  The only exception to this is the Christmas season 2008, where inventory levels shot up to 10 -  12 months and then promptly returned to the 8 - 9 month level in January.   This roughly followed the trend last year at that time.

Absorption rates are based on pending sales and active listings on the market, expressed in terms of how long it would take to sell through all active listings at the current rate of sales.  Our problem since August of ‘07 has been the combination of high levels of inventory….

Along with a significant reduction in the rate of sales…

You might visualize the scenario that this created as the proverbial “pig in a python.” The thing about pigs in pythons is that a python can digest a pig, but it takes a long time. Same thing applies to the inventory level in the county. The good news, I think, is that sales seem to have found a baseline level.  This baseline is about 1/3 of where it was at the peak of the market, and only absorbs a small percentage of inventory each month, but it seems to have stabilized and isn’t continuing to drop. 

What has been selling has seen a major sea change in the last year, as well.  Where up until a year or so ago we rarely saw sales of bank-owned or short sales, we’re now seeing those kinds of sales representing a significant portion of what is selling.  That, along with “selling-off” from builders, is driving a new pricing structure for homes. 

(Note that the above chart seems to imply that prices are on the upswing in area 740.  I think this may be more a function of the polynomial charting trying to find a trend in an area where the trend isn’t actually clear.)

The big questions for 2009 are going to be whether prices will reach a level that buyers and lenders will feel comfortable taking the risk of buying in?  For sellers, the question is likely to be, “what does it take to get a home sold in this market?” And in fact, these have always been the smart questions to ask, it’s just going to be more important than ever to ask them.

One of the problems we commonly see in the current real estate market is that buyers and sellers do not tend to agree on the value of any house.  Rare is the buyer today whose buying strategy is to pay full asking price for any home on the market.  And rare is the seller whose intention is to accept the first offer that comes along, no matter the price.  Even when a house is new on the market and priced seemingly competitively, most buyers are looking to see if there is any room to make a lower offer.  After all, the thinking goes, homes are declining in price so if I buy today, prices will go lower tomorrow.  Most buyers want to take that discount upfront, and this is where they get into conflict with sellers.  Most sellers want to sell at today’s best price rather than tomorrow’s worst.

 Which brings us to the idea of the “Offensive Offer.”  One of the first things that struck me as odd when I entered the real estate field was the idea that an offer could be so offensive that a seller would just decide they didn’t want to negotiate at all with a particular buyer.  Yet, we see it happen all the time.  After all, the rational mind asks, isn’t something better than nothing? 

Turns out, the answer to that question is often no.  

 It seems to go against common sense.  After all, in a difficult market, you’d think a seller would realize that getting an offer is a good thing, even if it’s not the one you are looking for.  And in a stronger market, why bother getting offended when you can just wait until a better offer comes along?  Why get emotional about it?

Turns out, this kind of emotional response has been studied by behaviorists, and has been found to be very common.  This article in Slate today, resonated with me:

We like to think we go through life as rational beings. Much of economic theory is based on the notion that humans make rational choices (which may mean that economists don’t get out much). In 1982, some economists came up with a little game to study negotiating strategies. The results showed that rationality is subservient to more powerful drives—and demonstrated why human beings so easily conclude they are being wronged. The idea of the “ultimatum game” is simple. Player A is given 20 $1 bills and told that, in order to keep any of the money, A must share it with Player B. If B accepts A’s offer, they both pocket whatever they’ve agreed to. If B rejects the offer, they both get nothing. Economists naturally expected the players to do the rational thing: A would offer the lowest possible amount—$1; and B, knowing $1 was more than zero, would accept. Ha!

In the years the game has been played, it’s been found that almost half the A’s immediately offer to split the money—an offer B’s accept. When A offers $9 or even $8, B usually says yes. But when A’s offer drops to $7, about half the B’s walk away. The lower A’s offer, the more likely the B’s are to turn their backs on a few free dollars in favor of a more satisfying outcome: punishing the person who offended their sense of fairness. This impulse is not illogical; it is essential. In Descartes’ Error, neurologist Antonio Damasio shows that humans who behave purely rationally are brain-damaged. Patients who have suffered injury to the areas in the brain that control emotion, but who retain their intellectual abilities, end up acting in socially aberrant ways.

My job as an agent is to try to get a buyer and a seller to see eye to eye with regard to the value of a home.  Knowing that when a seller is presented with a lower offer, his response is likely to be offense rather than acceptance, the way that an offer is presented is critical.  One of the most important aspects of this is to create a situation where the buyer and seller can understand and hopefully empathize with one another’s point of view.  Sellers are more likely not to take offense, and to consider a lower offer, when it is presented as “best we can do” vs. “most we will pay.”  Buyers also need to understand that sellers tend to counter offer only when presented with an offer that is in the range of what they feel is a fair price.  This is why we rarely see offers accepted if they are not within 10 - 15% of asking price. 

This illustrates why negotiating skills are so essential when selecting an agent.  Part of what a good negotiator does is create a situation where the ultimate goal of both parties–that is, for the seller to sell, and the buyer to buy–can be reached.