Nobody Wants to Deal with a Declining Market

This past week, at various dinners and soirees, real estate was again a frequent topic. One comment a friend made, when we were discussing the general malaise in the real estate market, was "Nobody wants to deal with a declining market." That comment stuck with me, because it really rings true.

When the market was bounding up, there was this excitement and exuberance. Sellers were thrilled at the prices they were getting, and excited about the drama of multiple bids. People loved talking about real estate, particularly the 'steal' they picked up that climbed 30% in value in a year. Buyers were thrilled at buying, and getting on the 'up' escalator. Even when a buyer would lose a bidding war, they might be disappointed but not depressed. On to the next one. Everybody was excited to be a part of the happy-happy economic miracle called 'real estate'.

Turn the clock ahead a year. We're in a declining real estate market. And nobody seems very happy any more. Sellers are upset that they're unlikely to realize the $150,000 profit on the $250,000 house they bought 2 or 3 years ago, and are resentful if they're 'forced' to sell their house for "only" a $75,000 or even $100,000 profit. When buyers find a house they love, they're nervous that if they pay X dollars for it today it may be worth less in 6 months or a year. The confidence that they were making the right decision has been replaced with a nagging fear that they're making the wrong one.

Brokers are caught in the middle of this. When an agent recommends to a seller that they lower their asking price, or accept an offer lower than their expectations, sellers sometimes think that the agent is just trying to screw them out of money to make a quick sale. On the buyer side, people look to me for assurance about the value of a house, but I don't have a crystal ball to predict the future. I can't offer assurance that a house won't decline in value — but I can tell them if I think a house is a particularly good value in today's market. Or they fall in love with a house that doesn't ultimately appraise, and the seller won't budge ---  and the buyers end up walking away from something they've become emotionally attached to. (Some of you reading this are saying, "Well, the buyers could make up the appraisal gap." Get real. Would you pay 15% or 20% above appraised value in this market?)

The appraisers and lenders aren't in happy-happy land either. Everybody seems to be mad at the appraisers. But they're just doing their job, coming up with their best opinion of value. Its not their fault that the secondary mortgage markets have tightened, and investors are demanding much tighter appraisals.

Overall, the purpose of this whole process, at least in the second home getaway market that I deal with, is for buyers to find a lovely and relaxing getaway that becomes their own private 'antidote to civilization', to paraphrase the old Club Med commercial. But the process of getting there right now is anything but.

Comments

[Chuck]

DK - any appraiser or appraisal system that changed their methodology to deal with an exuberant market place, then changed it again to deal with a declining marketplace isn't doing their job. Their jobs are not to provide a redundant reassurance, but instead is to provide an independent opinion to the value of a house. If that methodology changes based on activity in the marketplace, then the methodolgy is incorrect to begin with.

Appraisers aren't supposed to be re-actors to a market - they are pivotal players in the financing of a home. I think it's clear that be it analysts in the dot-com boom, or appraisers in the real estate boom, the analyst/appraiser is completely dependent on pleasing its customer - be it an investment bank or a home - lending institution. It's a forever flawed and conflicted arrangement - and the pressure to produce the results the end user wants will produce inconsistent criteria and results - the appraiser is just a puppet of the financial institution they are working for.

DK - as we talked about - deals are still happening in Sullivan County and they are happening for 2 reasons - someone falls in love with a house, or they are presented with such a deal they can't pass it up.

I believe real estate agents should be providing their listing clients with 2 numbers - one is the number their house is worth based on the last 3 years of sales, and the other is what it will sell for quickly now- the numbers are a lot different and professional listing agents will do us all a service by introducing the new reality to sellers sooner rather than later. Although, for me, it's truely beneficial to my business to see the slow realization that your 65 yr old cottage with a flooded basement is not worth $300k, and the uninsulated, single-pane windowed, undefined septic system, and small roomed farmhouse is not worth $425k.