Expectation Fatigue

If you're a regular reader of my market conditions columns and blog, you know that lately I haven't reserved a lot of sympathy for sellers or their agents that support, consciously or unconsciously, their unrealistic price expectations.  But I'm becoming more sympathetic — not to the sellers necessarily, but to their agents. Because the mirror of the price expectation gap is intensifying on my side, the buyer side of the table.

In the past few months I've emailed, talked and been out to see property with a lot of buyers who have wildly unrealistic expectations, in terms of price and what they can get for that price. (Not all buyers, by any means, but a noticeable and growing percentage, from what I'm gleaning in talks with other real estate pros.)

For the sake of illustration, I'm going to use a hypothetical composite here. A potential buyer wants to spend $200,000 to $250,000. They want something charming, on some acreage on a quiet country road. That's possible here — for something small, 1,000 to 1,200 sq. ft. with 2 bedrooms, 1 or 1 1/2 baths on 1 to 3 acres, not totally secluded or private. It will be structurally sound, but might need updating. But that's not what the buyer wants for $200,000 to $250,000. They're often looking for a larger traditional farmhouse, 1,800 or more sq. ft., with 3+ bedrooms and 2 baths with privacy and seclusion on 5 or more acres — renovated or with a lot of original woodwork and detailing. A pond, stream or view would be nice. Now, that is available here, too — generally for $400,000+.

In this case, I usually show the buyers a few houses in their price range that I know don't hit on all cylinders because of their price ceiling. And I'll usually do a few drive bys of houses that have sold recently that do hit on all cylinders and note their sales prices, which are in another budget range. A year or two ago this scenario would crop up occasionally, and the result would usually be that the buyers would get the message and decide to compromise on what they're looking for or up their budget. Today, the response of buyers is often "Thank you so much for showing us those houses. What you showed us was really 1) too small, 2) too new, 3) too ugly or 4) too near neighbors. But we're not in a hurry and willing to wait until a larger, charming house on acreage with view and privacy comes on the market at the price we want to pay."

Its sort of the equivalent of a seller saying to a listing agent, "Thanks for taking the time to show me all the comps and share your thoughts that you think that I should list my house for $399,000. However, I want to list it for $550,000. Let's put it out there and see what happens." Listing agents are saying to me all the time lately that they're giving feedback to their sellers, showing them comps and encouraging them to list at a realistic price. But they shrug their shoulders and say its like talking to the wind. The sellers just aren't listening to the advice and guidance of their agent.

I gotta say, the same thing is happening on the buyer side. I can show houses, discuss the trade offs at the buyers' price point and advise on price and value. But recently, I might as well be talking to the wind, too. It often has little effect on the buyers' expectation. Sometimes I say, "I don't think I can find you what you want at the price you're looking to pay. If you'd be willing to make this or that trade-off, though, I think we could find something you'd really enjoy." In many cases, the people kind of disappear. Either they drop out of the market or they look further away from NYC where prices are lower. But I think its better say that than to imply that what their expectations are realistic and its just a matter of time for the right house to come on the market.

Its not a lot different than taking the listing for the seller who wants to price their house at $550,000 when the market for similar houses is $399,000. Getting that $550,000 is not a matter of time. Sure, the market could rise to that, but right now, and in the foreseeable future, it isn't. Likewise, for the buyer looking for that larger $250,000 farmhouse, the market could drop sometime in the future so that would be a realistic price. But right now, and what I see over the next few months, it isn't. So to keep looking for it at that price now is wheel spinning. Could market factors and seller circumstances result in a house with a 'value range' around $400,000 sell for $350,000 in the near term? Sure. That's within the realm of circumstances, negotiation and timing. But it would take a huge turn in the market, and not just savvy shopping, to bring that house into the $250,000 range.

I want to make one thing clear. This scenario is not universal among all buyers. I'm working with a number of clients right now who have realistic expectations about what they want. We're just waiting for the right house to come on the market, or for the right house to drop in price to what we consider its supportable value range. Sure, they're waiting — but their waiting is different. It doesn't require a huge market downturn to make their house dreams come true.

Comments

[TR]

DK:
"...Today, the response of buyers is often 'Thank you so much for showing us those houses. What you showed us was really 1) too small, 2) too new, 3) too ugly or 4) too near neighbors. But we're not in a hurry and willing to wait until a larger, charming house on acreage with view and privacy comes on the market at the price we want to pay.'"

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As stated before on this blog - the gap regarding realistic expectations has now widened with buyers thinking that they can bottom fish and roll back their offering prices to sometime in 1990's and sellers not quiet motivated - or willing - to offer prices on their homes pegged to recent comp sales from the previous six months.

The difference is that it's a lot easier to take a listing -albeit a high one and wait for buyers and other realtors to come to your listing - than it is to drive buyer / clients around the country - which is as large as the state of Rhode Island - at $3.45 a gallon for regular - only to hear them state the objections that you listed above.

Kindest regards,
TR

[David Knudsen]

Tony, I agree it takes a lot less time/effort/expense to take a listing than to drive buyers around. But the key is the word 'take' rather than 'manage' a listing over its lifetime. When I was selling my condo in Florida, I would occasionally (very occasionally) get a call from the listing agent. He would pretty much only call to give me an 'update' on the market and how the marketing/sales of my condo was going when the listing was about to expire and it was time to renew. After a couple of renewal cycles, when I would answer the phone and he would say, "Hi David, this is James," I would interrupt and say, "Oh, James, it must be time to renew the listing." I think in our business that scenario is actually all too common.

One of the problems in our business is that both buyers and sellers see us as 'free', at least until a sale is made. There's no cost to the seller to put their property on the market at whatever price, because they don't owe a commission until then property is sold (that is, under the common contingency commission model. There are some other fee-for-service models where a seller does pay upfront.) And for buyers, at least in terms of how we commonly work in this county, there is no cost to them to be taken around to see 2 or 4 or 6 or a dozen houses. Maybe the system would become much more efficient if both buyers and sellers had to pay a modest amount out of pocket to use our services. It would cost buyers X dollars per month to have their property listed, and cost buyers X dollars per house they wanted to see.

[David Knudsen]

Tony, one more comment about the price roll back. If I look back at the historical numbers, the roll back in buyer price expectations is to about the 3rd quarter of 2003 / 1st quarter of 2004. As a general rule of thumb, I've found the 'sweet spot' of the second home market to be about twice the median sales price. That would be typically for a medium sized (1600 to 1900 sq. ft.) renovated farmhouse on a 5 to 10 acres, a nicer 'vacation chalet' style with a view or pond, or the entry point for a 2BR lakefront house. The median sales price here peaked last May/June (2007) at $198,000, which would correspond pretty well to about $400,000 for one of those types of houses — about the right price for last spring. Today, the median is hovering around $165,000, which would roughly correspond to about $330,000 as the 'right price' for one of those houses. But we have to go back all the way to the period from August 2003 to February 2004 to find a median price in the range of $125,000 — which, if my rule of thumb holds any water, would correspond to a sales price for one of this type of house to about $250,000. Right now, it seems like many buyers have that $250,000 number in mind for one of these houses. I'm painting a broad brush stroke, but I think its an interesting way to look at it.

Another way to think about it is "When was the 'golden age' when people thought of Sullivan County as a killer value?" Back in 2003/2004? If I had a cute little lakefront cottage to sell today for $250,000, or a reasonably sized farmhouse, they would sell in a heartbeat.

[TR]

DK
"...Another way to think about it is "When was the 'golden age' when people thought of Sullivan County as a killer value?" Back in 2003/2004? If I had a cute little lakefront cottage to sell today for $250,000, or a reasonably sized farmhouse, they would sell in a heartbeat."
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My guess is that Sullivan County was "a value" prior to the various write ups and window dressing from The New York Times (and other NYC media) which would be pre-2003.

Lowering interest rates from 2002 to 2005 certainly were the main catalyst in leading to price escalation up here (and elsewhere) - however the semi monthly (or seemed to me to be) "Weekender" pieces about Jeff, Bethel, Narrowsburg, Callicoon, etc.) kind of gave many cityfolk the green light that "it's O.K. - maybe not yet... cool - but O.K." to be looking up here - especially since their friends or associates at work might have purchased up here.

Here's a excerpt from The New York Times piece on Narrowsburg which ran in April of 2005...

At either:

http://www.tusten-narrowsburg.org/new_york_times_narrowsburg_1.htm

or

http://query.nytimes.com/gst/fullpage.html?res=9807E1DE173EF93BA35757C0A9639C8B63&fta=y

====================

{excerpt from The New York Times - credit given in URL above}

"You're looking at green and light and trees, and all it does is bring your blood pressure down," said one weekend resident, X., a sales executive for a women's clothing company whose 1,500-square-foot two-bedroom, two-bathroom farm house on eight acres cost him and his partner, Z., $125,000 in November 2001.

He has only good things to say about the people he has met, particularly the neighbor who's teaching him and Z. general manager of the boutique on Madison Avenue in Manhattan, to use things like chain saws and tractors. "He's impressed by how much we've picked up, but that's a reflection on him," X.

One weekend resident, Y., spends his afternoons in antiques shops. "The prices are terrific," Y.. who last year paid $100,000 for a three-bedroom farmhouse on 14 acres with a lake.

Good, used double-wide trailers can be had for a song, but houses for sale are scarce in Narrowsburg, and tight inventory with record demand is driving prices even higher, said B., associate broker with XYZ Real Estate, who said he closed eight deals in the area between Christmas and mid-January.

Although some sellers are not getting their asking price, the market is strong and active. ''On a great listing, you could have three people bidding, all of them from the city,'' B. said. ''It's booming.''
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Well, you get the point.

How times have changed.

Kindest regards,
TR

[John L]

I think the media portrayal of the current real estate market is negatively overblown. While there are issues in California, Nevada, and Florida (and other states too) but real estate is local and the Catskills is its own microcosm of the real estate world. While prices have come off it is unrealistic to think that sellers (unless they are desperate and I am sure some are) will drop their prices dramatically to appeal to buyers perception that values have collapsed. My own view of real estate is that is a bit like going to an art gallery - no 2 pieces are the same. This complicates valuation. However, it is my belief that at any given time there are very few desirable homes on the market at a reasonable price. I think David mentioned before that if you find something you like in your price range then go for it!!

[EJ]

David, i think you must realize that price moves are not driven by a desire to buy or sell at a certain price...it is driven by who is more desperate. At this point, neither feel desperate therefore stuff is not moving and there are divergences. as the economic outlook gets worse, neighborhoods will generally have a 'desperate' seller who buckles...driving prices down in the area. I work in the financial industry and see that the financial infrastructure that supported housing over the past 7 years is significantly more damaged than anybody realizes. Things won't pick up in earnest for the next 18 - 24 months and my guess is that sellers will capitulate to buyers before this happens. We'll see though

[David Knudsen]

EJ, I tend to agree with you, but not necessarily with the time frame. At least, I hope we're not going to wallow in this mire of price uncertainty for 18 to 24 months. I see some pretty clear indications from buyers about what they're willing to pay for certain types of property. Unfortunately, most of the sellers aren't at that point. The market will be made between buyers who finally decide they want a house and don't want to wait, and sellers who want to sell their house and don't want to wait.

I've written before about 'motivated' sellers making the market. Sellers who have the "we're willing to wait" attitude and hold to unrealistic prices are ultimately held hostage to the motivated seller who sells quicker at a lower price. Appraisers are no longer looking at the occasional outlyer that can justify a higher price, but rather at the meat and potatoes of the comps that focus on the closest sales, in time, price and proximity.

[Lori Turoff]

Hi David,
We're weekenders (well, Sunday through Tuesday-ers) who bought the little secluded chalet on 6 acres near Barryville last year and love every minute we spend here. I found your post especially interesting because we work as realtors in Hoboken, NJ where we deal mainly in condos.

Similar to what you explain, we have the same perception gap problem in the Hoboken market. I have to blame the media, in part, because the buyers believe the market is in a tailspin and while, as you point out, that may be the case in some places it is not the case in Hoboken. At the same time, the sellers still want 10 to 20% over what the last sale in their building brought.

Time will eventually bring the motivated buyers and sellers to agreement and the deals will happen. Those parties with the very unrealistic expectation will continue to waste our time and eventually go away.
Keep up the good work. I enjoy reading about and learning more about the area from you.

[JD]

As a broker who deals with both buyers and sellers, I have to agree with you Dave. I think that it is media driven, which brings out bottom feeders. They hear the market is bad, and figure they can find that elusive steal. And the realty is, it just doesn't exist at least not in Sullivan County.

Most of our sellers are second home owners are urban professionals, and are not desperate to sell. They will wait and see, and they want to walk with a little coin in their pocket. Unfortunately we always seem to be the bearer of bad news--the party pooper who keeps raining on their cash cow parade.

If I had a magic wand and could produce private three bedroom lakefronts for under $250,000, or older farmhouses on a few private acres with a pond and some charm for around $200,000. I would make a sale a day--or would that make me Gib McKean in the mid nineties?

But seriously, although there are motivated buyers and sellers out there, the expectations differ so much, that every deal is like pulling teeth.

Oh well, if it was easy, everyone would be doing it.

[ces]

As albeit a complete novice, It seems to me that the seller-buyer gap could be easily bridged by entrepreneurial builders putting expandable starter homes on ample available acreage. This would satisfy the buyer desire for a country home at a price they feel comfortable with, that is one that is not about to be lower because of the housing depression, while at the same time providing land sales to farmers and others selling land. Brokers could profit on this business in the interim. Plus the buyer could expand later to the size they want when income or certainty is available.

Why has this not already been done, becuase builders want to have fewer large homes with higher profit, and because if it were ever done in any major effort, the 350K 1800 sw ft homes would quickly equilibrate with the new homes, i.e. fall quickly or go un sold.

But I am just guessing.

ps I am looking for a small starter vacation home like this myself and would appreciate any links.

[David Knudsen]

ces, you eaise a very good point. Ultimately, builders and developers follow consumer demand --- and if there's demand for small, modestly priced houses, builders will build them. You may want to check out http://www.thecatskillfarms.com. Chuck Petersheim is doing exactly what you're talking about, with price starting at about $225,000. But if you're thinking of something in the $150,000 range, on a nice piece of property with some privacy (say, 5 wooded acres), I don't think its really possible. In any house in the country, there's about $30,000 in infrsatructure costs --- well, septic, bringing electric and phone in from the road, tress clearing, basic driveway and grading. Of course, that's a very rough number --- it can be more or less depending on land conditions, depth of well and size of the septic.

Also related to building inexpensive houses is a "green" issue. Many people comment that it can be more expensive to build in NYC than in many other northern states. One reason is that New York has one of the toughest building codes in the national, particularly when it comes to energy. A lot of those cute little prefabs you find in magazines just don't meet New York's energy standards. But those tough energy standards are ultimately very green-friendly, but they push up the cost of a house.