Transitioning Into A Normal Market by Steven Thomas

In the August 2014 issue of OC Realtor, Mr. Thomas addresses the increasing inventory and the reliability of Fair Market Value as a basis for pricing properties.

Overpricing out of the starting gate is an intentional strategy that has captured the hearts of most sellers; but today's buyers want to pay the Fair Market Value of a home, and therein lies the disconnect.  Overpriced homes are priced much higher than their Fair Market Value.  Buyers see overpriced homes as an "unfair market value" and simply are unwilling to go there.  The problem is that home values have appreciated a tremendous amount in a very short period of time, that is, between the beginning of 2012 and the end of August 2013.  Since then, unstoppable appreciation has been replaced by sellers who completely ignore market fundamentals.  Overpricing means sellers are going to sit on the market without any offers and, after a while, very few showings. The accumulation of overpriced listings has resulted in the inventory's continuously growing without pause so far this year.

The phenomenon of sellers who overprice and buyers who desire to pay the Fair Market Value of a home exists throughout Southern California.  Buyers and sellers have dug in their heels, and the tug-of-war is on!  As a result, the inventory has grown across the board in every county.  From the lows established in March of last year, the Southern California active inventory has grown by 89%.  The biggest offender happens to be Orange County, where the inventory has grown by 137% since March of last year.  That's substantially more than double.  So far, to be successful, it has been sellers who have had to succumb to the realities of the market and reduce their asking prices.  For the most part, buyers have been unwilling to flinch.

Sellers who have priced their homes close to Fair Market Value have been able to achieve quick success and often with multiple offers.  Multiple-offer situations work to the benefit of sellers, because they are able to ask for more and can pit one offer against another, but this situation can be created only by carefully establishing the initial asking price of a home.

For the most part, the juice in the market in terms of appreciation is done.  Because the inventory is on the rise and buyers do not want to overpay, appreciation has come to a grinding halt.  Also, it is extremely important to note that the housing market would not have been able to sustain much more appreciation or we would be in exactly the same boat as we were in 2006 through 2008, stuck with values too high and very few buyers able to afford to purchase.  Currently, interest rates are cheap, making affordability better.  But the sharp rise in appreciation has already eaten into home affordability.  Interest rates are absolutely going to go up.  I give it a 100% chance.  What that happens, homes will become less affordable,  For buyers, cashing in now on incredible rates is a very smart move.  In a couple of years, they will look back and realize that purchasing while rates were low was a genius idea, as rates will undoubtedly be much higher than they are today.

With buyers desiring not to overpay, the inventory has swelled, giving buyers more choices and a lot more breathing room.  Sellers and Realtors have asked where we go from here, concerned that the real estate market may change course and start to depreciate.  That is unlikely to occur anytime soon.  The current expected market time is nearly three months.  Yes, that is far different from the market time of 1.4 months just one year ago, but it is still a seller's market - barely.  Anything less than five months is a seller's market.  The problem is that everyone has gotten used to being able to randomly overprice a home and then get the asking price - or more.  Also, they were used to selling n just a few short weeks.  They were used to sifting through twenty offers and picking the very best one.  That is not today's market reality.  It is a seller's market, but not one in which sellers can get away with overpricing their homes.  They can call the shots if and only if they price their home accurately.

Realtors are so frustrated with sellers today.  When I speak to rooms filled with exasperated real estate professionals, every hand goes up when I ask who is dealing with an unrealistic seller right now. These home owners sit across the table from experts in the field and choose to ignore the facts, accurate data, and credible advice.  As a matter of fact, many homeowners decide whom to hire to sell their home based on who suggests the highest value for their home.  Instead, they should be considering expertise, track record, and marketing knowledge in isolating the best candidate to represent their interests.

Overpriced properties may attract some showing activity, but they will just sit on the market without success.  And their sellers have nobody to blame but themselves.  No marketing genius can overcome the hurdle of unrealistic pricing.  Realtors can print out a single line MLS report of every active listing in the area and show a sea of red down arrows.  These red arrows indicate homes where the asking price has been reduced.

For now, buyers can expect more breathing room as the inventory continues to increase and sellers take a while to figure out that overpricing is no longer a winning strategy.