The buzz at NAR is that even the most heated markets are now slowing. Inventories are increasing at a dramatic rate. Could the next buyer's market be just around the corner?
A buyer's market is our industry's worst nightmare. Unlike a seller's market where there is limited inventory and what is listed sells quickly, a buyer's market is one where there is too much inventory and very little activity. Worse yet, while sellers cannot underprice their property in a strong seller's market, in a buyer's market, overpricing is the kiss of death. Imagine a market where prices are going down 1.5 percent per month. (This was the case in Southern California in the early 1990s.) You work hard to obtain a price reduction and then the market takes another nosedive even before you can post your price reduction to the MLS. Your sellers become increasingly more desperate and often blame you because no matter what you do, their property doesn't sell.
If we are actually entering a buyer's market, expect dramatic changes in how you will be doing business. Here's a list of things that you may be saying "Bye-bye" to in the very near future.
1. Multiple offers
When there is too much inventory, buyers rule. Instead of receiving several offers at once, you may be waiting months before you see a single offer. When the seller finally does receive the offer, it is often substantially less than the seller wants to net.
2. Short market time
In a buyer's market, you have to work to sell your listings unless you have an unusually desirable property listed at a low price. Agents who have become accustomed to selling their listings without marketing will be struggling to come up with marketing plans that generate buyers.
3. Discounted commissions
When there are too many sellers and not enough buyers, home builders generally take the lead in paying increased commissions. The trend generally starts with builders offering mortgage buy-downs, free up-grades, televisions and other benefits. When sales slow, builders raise the commission rates that they pay to agents. When owners of resale listings become desperate, agents advise their sellers to match these incentives. Instead of a competition to see who can undercut commissions the most, the exact opposite happens. The competition becomes about who can offer the best incentives to motivate agents and buyers to see their listings.
4. Weak business models
The strong market coupled with extremely low interest rates has been very forgiving of poor business models. In the last major downturn, only the very strongest companies survived. Many of these exist today only because their mortgage and title business carried their companies while their real estate businesses hemorrhaged money.
5. Flipping
Flipping comes to a grinding halt in a buyer's market. No more painting a property and then selling it for a huge profit. As a result, remodeling slows down dramatically. The market shifts to professional investors who search for bargains. Their strategy is to acquire distressed properties and hold them for long-term rentals. They may sell in the next seller's market or hold these properties as part of their portfolio. There's no profit in flipping if it takes months or even years to sell your product.
6. Lenders making aggressive loans
Lenders who have made 100 percent loans may very well be out of business when there is a dramatic increase in the number of foreclosures. The same may be true for banks that have secured business loans with real property. Many owners have refinanced their properties in order to buy cars or pay off credit card debt. When these owners have no equity and are unable to pay an adjustable-rate mortgage rate increase, those with marginal credit may simply decide to give the keys back to the lender.
7. Brokers and agents who don't track and evaluate ROI
In a down market, knowing your numbers is critical. Since there are only a limited number of transactions, marketing costs soar. Agents and brokers who fail to track which advertising vehicles are effective will soon find their profit margins dwindling. In the case of brokerages, if the owner is not profitable, the agents may soon be searching for a new place to work.
Want to know how you can cope with a buyer's market? See next week's column.
Bernice Ross, co-owner of Realestatecoach.com, has written a new book, "Waging War on Real Estate's Discounters," available online. She can be reached at bernice@realestatecoach.com.
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