There have been many recent stories on television and in the paper talking about how many homes are for sale now, how it is taking longer to sell, and how some sellers are giving concessions to get the deal closed.
Some sellers are considering waiting to sell their homes in belief that the housing market will improve. Yes, the market is definitely in the buyer’s favor right now but this is the beginning of a multiyear trend. The number of houses for sale has increased each year for the last four or five years, and will probably continue to rise for at least another year. Houses that are priced correctly do sell relatively quickly. As interest rates slowly rise, this will put further chill on the market. Many of the homes that have had to reduce their prices were priced based on 6%, 8% or more appreciation over last year. In fact, appreciation is 1%-4% and will likely average 2%-3% each year for the next several years. So on $250,000, some of the houses listed are $10,000 or $20,000 high because the sellers think there should be higher appreciation than there really is. Prices may decline slightly but we are not seeing signs of any dramatic price depreciation… just flat or slight appreciation.
The competition that’s in the market means you do need to be competitive with others for sale, and that includes price, location, style, amenities and condition. So if you price the house with others that have newer appliances, roof, windows, furnace, flooring, etc then you would also need to have those features to be competitive.
As a seller it is tougher, but as a buyer you are more in the driver’s seat. Though you may not get quite a much for your current home, your next home will also be priced lower than it would be otherwise. If you’re planning a move to a higher price range, it should actually be in your favor. Additionally, interest rates are expected to rise .5% to 1% over the next 6-12 months, which can take 7%-15% of your buying power away because of the higher monthly payments.
So my suggestion would be that if you are planning to move in the next 18 months, then I would strongly consider moving now to take advantage of the good interest rates. If you’re comfortable for another couple years or more, then I wouldn’t worry about trying to time the market and just move when you’re ready to.
Aaron Dickinson
tim273 says
Thanks for this post, it’s very informative, now I have a question for you if you don’t mind. We’re currently selling our house on the Edina/Richfield border. We bought our house 2 years ago (summer 2004) and paid $240,000 for it (it was listed at about $229,000) with the seller paying the closing costs. Does it appreciate on the purchase value or on the original listing value? We currently have it for sale for $259,800 and part of that price is the addition of new windows costing $9000. When I figured a 1% appreciation per year for the last 2 years, plus adding $6000 for the windows, it comes to about $250,000 which I assume we’ll end up dropping the price to. Does that sound reasonable?
Thanks again!
Aaron Dickinson says
Your comment touches on several points. Because I do not know your specific situation in detail, I’ll answer in general.
When estimating appreciation, I estimate it based on the sales price minus any seller paid contributions (i.e. if it was $240,000 with $5,000 seller paid closing costs, then I use $235,000). I say estimate, because appreciation rates are an average of an entire market and can and do vary house to house. I remove seller paid closing costs because my feeling is that a buyer with a cash down payment would have negotiated the price down by a similar amount.
As for figuring improvements into resale value, very few improvements actually net you 100% return on resale. According to the National Association of REALTORS 2005 Cost vs Value Survey, windows in the midwest are worth approximately 83.7% of their cost at resale. (see http://www.realtor.org/rmomag.NSF/pages/feature1dec05_window?OpenDocument) I also believe it depends on how bad the windows were. If they were original single pane and rotting, the replacement has more benefit than if they were 20 year old double pane windows.
Regardless of what you paid, how much it might have appreciated, and what the cost of your improvements were, the true value of your home is of course whatever a buyer is willing to pay. It sounds obvious but many people focus on the statistics and don’t step back to view the big picture.
In today’s market I counsel my sellers to look closely at how their home compares to the others listed, then make theirs just a little bit more competitive. There’s twice as many homes on the market today as when you purchased, meaning buyers have twice as much to consider.
If there are 15 houses under 2 miles apart from each other that are the same style, beds, and baths and are priced within $10,000, then to get an offer a seller has to have the best combination of price and condition, otherwise the buyer will pick another home to offer on.
Many sellers choose to start the price high and plan to either drop it as the go or negotiate a low offer. In the past that worked just fine but now many buyers will simply skip past overpriced homes!
When I’m pricing a home in today’s market I look to see what has Pended or sold in the last 3-4 months (longer than that is ancient history) and then preview the homes and/or show a couple of them to my sellers.
While it is tempting to price according to what is for sale, just because it is priced at that point doesn’t mean it will sell there, so I use the solds to determine the price and then look at the other actives to make sure my clients are priced competitively to the competition.
It may be hard to look at gaining little or no “profit” from the sale of a home, but if moving up to a higher price bracket, remember that the price you negotiate on the buy side will be lower too.
The historic trend is to see 3%-4% appreciation each year and we were higher than that for a decade and will probably now be below that for a few years or longer as interest rates rise and inventory swells. This is perfectly normal but does require buyers, sellers and agents to re-evaluate their thinking.
So to sum it up, look to your agent to help you review the comparables and competition and focus your pricing around that.