Prices Are Officially Flat

As we near Fall in the Twin Cities, we’ve now entered a new stage in the housing market we have not seen for many years: the Average Selling Price is now unchanged from last year at this time.

In recent years we have seen a large runup in Average Sales Price during the spring and summer months.  This year was marked by much smaller gains, which has lead to us “catching up” with last year’s price.  While this means that sellers cannot expect any appreciation in their home over last year, it also means for sellers that are moving up that their future home will not cost as much as they expected.

This is not a sign of a bursting bubble, this is only a continued ease in the housing market that is bringing more historically common market times and appreciation back into the market.  We’ve been cooling off for several years now and this has sharply reduce the chances for a dramatic price drop.

   RMLS Average Sales Price Year of Year July 2006

Selling a Home in 2006

There’s been a host of articles, TV shows and books that have come out recently to educate sellers on how to stage their home for sale, but little focus on how sellers should cope with the changing reality of the housing market.

Appraisals are not necessarily an indicator of market value
Over the last few years many sellers have refinanced their homes to lock in lower rates or to take cash out for remodeling, a 2nd home, etc. I have seen some appraisals that showed significantly over-inflated values. If I turn my head sideways, squint out of one eye and hold the comparables far enough away, I could have come to that same number! Likewise, some appraisals can be lower than true value since unless otherwise instructed, many appraisers will stop counting once they’ve hit the value necessary for the transaction. While appraisals are helpful, I rarely see them as the definitive answer of true value.

Taxable values can vary greatly
Many people look to the Taxable Market Value in county records as a benchmark for value. Considering that most assessors are in the subject property for just a few minutes, and maybe see the home every 4-5 years, it is easy to see how the taxable market value can be off by 10% or more. I’ve seen many cases where two nearly identical properties that are just blocks from each other have market values that are more than $15,000 apart.

Homes currently listed for sale (and have not sold) are not your basis for value
Though a house like yours just down the street may be listed for $255,000, if one just like yours sold last month for $240,000, you should expect that your house will sell closer to the $240,000 price point. Just because the sellers are asking $15,000 more for a similar property does not mean they will get it. Price yours at $245,000 and interested buyers will come and negotiate with you instead of them.

Sales activity is changing quickly
Because the housing market is changing quickly, your best comparables will be those that have sold in the last 90-120 days. Sales longer than 6 months ago are ancient history.

Each week, look to see what has just been listed for sale, what has received an acceptable offer (pended) and what has closed. Take a look at how your competition is doing; if many homes are selling in 3-4 weeks and you’re already at 5 weeks on the market, it’s definitely time to reevaluate your strategy.

Price it right from Day One
There are probably 2-3 (or more) houses very similar to yours for sale within a mile or two of your house. If you’re priced even $5000 higher than the other comparables for sale, buyers will likely go and negotiate with them and not with you. If you’re priced considerably higher than you should be, many buyers will not even schedule a showing to see your house!

Many sellers decide to “try it at this price and we can drop it later if we need to.” The problem with that is that most buyers will notice that your home has been on the market for a long time and will perceive your home as being overpriced or having some kind of problem even after you bring the price down to the correct level. In addition, the greatest amount on interest in your house will come in the first 30 days on the market… not the best time to be “testing” a price!

Provide a pre-inspection
If you complete an inspection of the house at the time you list it for sale, you get the benefit of being able to fix some of the problems before a buyer sees them. Additionally, this is a great way to stand out from the competition since your house has already been through a thorough examination, buyers will feel more confident about its condition. It may also speed closing as it eliminates one of the steps in the after-offer process.

I think the biggest benefit for sellers is that it eliminates a 2nd round of negotiation after the offer has been accepted. What would be worse than thinking you’re going to walk away with a certain amount of money at closing… only to find out a week after you’ve accepted the offer that there’s a list of items that are in disrepair and the buyer expects you to fix them? In some cases the inspection turns up such large unexpected problems that the buyer will decide to cancel the contract. Talk about a huge, and expensive, disappointment.

Any offer should be taken seriously
Some buyers are submitting lowball offers. While it may be upsetting to see an offer that is considerably below your asking price, remember that this is a negotiation and that you have a ready, willing and able buyer interested in the home. Talk with your agent about presenting a fair and well thought out counteroffer. An effective agent will work hard with both parties to find a solution that works for everyone.

When an offer does come in
Make sure that the earnest money is enough to motivate the buyer to follow through on the deal; 1% of the purchase price is typically appropriate. If a buyer only gives you $500 earnest money and then does not show up at the closing table, you only get $500 for your troubles.

Ask for the lender to provide a final underwriting commitment well before closing. Without a final commitment from the lender, the day of closing may come before you learn that the buyer can’t secure the financing to buy the home.

Check the loan officer/lender’s credentials. A quick call to the loan officer by your agent to verify the information in the pre-approval letter can sometimes uncover problems that you were not aware of. The pre-approval letter itself provides no guarantees whatsoever that the lender will fund the loan.

Sell Now or Wait?

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.