The Magical Thinking of Sellers

Over the past month or so, I've gotten a similar response from a number of sellers to what they consider "low offers" for their houses. Of course, asking prices and offers are relative to your point of view, and in all of these cases where the sellers viewed the offers as low, I saw the houses as quite overpriced. But that's the nature of the beast.

However, what's notable in the responses is the similar perspective among the sellers. They're not under pressure to sell, and so plan to hold out for a better price "when the market improves." There's tacit agreement that their price expectations are too high for the current market.

What I don't understand is where they're getting their optimism about a market improvement, at least in the foreseeable future. Those who track real estate are pretty divided about whether prices will fall further or whether we've touched bottom and will plateau at these pricing levels for the next year or two. But none that I follow are seeing a surge in demand or pricing in their crystal balls, outside of the high foreclosure markets where super low pricing has led to bargain shoppers bidding up prices.

Even if we were to return to more historical rates of appreciation, say 5% a year, a house that could sell today for $300,000 would only climb to $315,000 in a year, not to the $375,000 or $400,000 a seller is probably hoping for "when the market improves."

Unfortunately there isn't any remedy for this seller malady except time. These sellers will need to sit with their houses unsold for a year, maybe two, fielding and rejecting offers, hearing (and ignoring) the feedback and counsel of their listing agents, and maybe even jumping to a new agent in hopes that they'll have the silver bullet, before they'll surrender to reality. Attempts at intervention (usually in the form of repeated reviews of comp sales) before the patient is willing to surrender are close to useless.

Comments

[I.M. DeNile]

Dave-

If these sellers are not in any 1) "hurry to sell" and will 2) "wait until the market improves" along with 3)having a unrealistic offering price - then why on earth would any realtor in their right mind even market - let alone - drive many miles and show this property knowing it's a road to nowhere?

I.M. DeNile

[David Knudsen]

That's a good point. I can't speak for all Realtors, but I can say what generally happens in my case. It's important to understand that listing agents generally won't indicate that a seller is firm to very firm on their price. Particularly with clearly overpriced listings, their general response is to "show the house" and "bring an offer." It's in their interest to have the house shown as much as possible (so it indicates to the seller they're doing their job), and to put offers in the front of the seller, even if they're low. (Every offer, even if low and rejected, helps the listing agent build the case about the price being too high for the market.) Also, sellers often say to their agent during the listing process that they are "flexible" and "negotiable", but their idea of flexible and negotiable may be far more modest than what might be expected with those terms. A seller listing their house at, say, $499,000 might see it as being very flexible to do a deal at $475,000, not $400,000. Very seldom will a seller actually divulge their bottom line to their agent.

So at the outset, when a listing first comes on the market, there's very little information about the seller's price flexibility. Over time, though, I'll collect more info on the seller's price point on a property, from deals I may have personally tried to negotiate on the property or from info I pick up from other Realtors along the way who've attempted deals. There are a number of attractive properties that, over time, move way down on my list because of seller stubbornness on price, and I stop wasting my time showing them until there is some demonstration on the part of the seller that they're ready.

[Charles Manny]

I have watched properties sit and sit and sit. What I have learned is that after enough "low offeres" are presented, some sellers get the picture and may even cut their price by 30% or more. Then it gets noticed and someone goes in for the kill. Very few properties fall into this category but I am seeing more and more of them (in and out of MLS). This is similar to 1991 coming out of that recession. But my understanding is that prices did't start climbing until 1999 throughout the catskill counties. So, these sellers who will "wait until the market improves" are in for a very lonnnnnnggggggg wait. This is much worse than the early 90's. By the time prices come back to 2006 prices, it will be in the later part of the decade into next decade.

Speaking to an actuary who specializes in finance, taxation and state budgeting, I hear it is going to be a hell of a decade.

My advice: If you need to sell, Sell now before it gets worse.

[Bix]

Back in early 1991 I was house hunting on Long Island, put in some low offers that were all rejected. I checked later: every single one of those houses, except for one I couldn't confirm, eventually sold at lower than the price I offered.

That being said, there's no way of predicting markets.

[earl scheib]

Dave -

This article was just published in a local paper out of Narrowsburg.

The guy being interviewed owns one of the largest canoe liveries on the Delaware River (ON THE RIVER!) and he can't wait for the gas drilling to begin.

Worth reading.

At:

http://www.riverreporter.com/issues/10-01-07/news-jones.html

Drilling advocate says ‘everyone will benefit’

By SANDY LONG

UPPER DELAWARE REGION — “You’re going to see a lot of Jed Clampetts running around,” said Dave Jones as he shared his perspective on natural gas extraction in the Upper Delaware region with The River Reporter recently.

The co-owner of Kittatinny Canoes, Jones is a private landowner with property under lease to Hess Corporation and a member of the Northern Wayne Property Owners Alliance (NWPOA), a coalition of Wayne and Susquehanna landowners. Jones is proud of the lease that the NWPOA negotiated with Hess. “The NWPOA lease is very good,” he said. “We wanted to make sure it was done right, so we went beyond the state regulations. I think Hess wants to be a good partner here.”

{article continues. go to link}

http://www.riverreporter.com/issues/10-01-07/news-jones.html

[Bix]

Oh, here's my favorite: there was this FSBO I saw. Still remembered it. Small house, had a big fat greenhouse in the backyard. What do I need a greenhouse for? I'd have to tear it down.

His price was 150K or whatever. Firm. I was sort of interested so I said, "would you take 145K?" No. It's firm. He felt the price was fair, and that was that. I said fine, very nice, thank you. Went home, never thought more of it. The house, as I said, was anything but a dream house.

A week or so later I got a call from the wife on our answering machine: just calling to follow up about the house or whatever.

I forget what it eventually sold for. Maybe 125K or whatever, well below his "firm" price.

[Ken]

If you're making your living by buying and selling houses, 6 months can be a really long time. If you're sitting on a house that's paying for itself with renters, 5 years isn't very long at all.

Not every house in SC was purchased in 2006. Maybe it would be good to consider a different point of reference. For arguments sake, let's say 5 years. The S&P is right about where it was 5 years ago. The Dow Jones Industrial Avg is right where it was 5 years ago.

Gee, all the sudden a 2 or 3% gain every year in your investment is looking pretty good. Will housing get back to 2006 prices in the next 6 months? Who cares. 2 to 3% is pretty good.

[Jeff]

Dave - Taken together, your last two posts validate the view of some housing economists that I've seen: there is a lot of inventory on the sidelines. So as prices begin to firm up, more listings come onto the market . . . which begins to exert downward pressure on prices. As you note, there is very little reason to believe that prices are going to take off any day soon.

[S]

This is the worst recession since the great depression and any talk of a housing bounce back is pie-in-the-sky.

Economic indicators point to further housing price declines in 2010 and thereafter prices are very likely to remain flat for some years to come. The secondary housing market is particularly vulnerable in recessionary times and this one is the deepest by far. For housing to improve, there will need to be a substantial recovery in the jobs market and this is not going to happen in the foreseeable future.

The Catskills market is not taking off anytime soon and sellers would do well to remember the old real estate rule of thumb that in a down market the first offer you receive is usually the best one.

[ms]

"You're going to see a lot of Jed Clampett's running around"[the Upper Delaware River Valley]. {http://www.riverreporter.com/issues/10-01-07/news-jones.html}...

----
Yeah. You wait and see.

ms

[ANM]

David -

Your site is an excellent source of information and analysis on the Sullivan housing market!

You are correct in describing sellers expectations as "magical thinking" as many properties are listed at 20%, or more, above fair market values.

I urge buyers to also look at the Sullivan County on-line property records. Along with 'comps,' the public records provide invaluable insights into sale histories, inventories and tax assessments.

See link: http://www.scgnet.us/orgMain.asp?sid=&orgId=541

Many sellers, especially those who have moved on, will adjust their expectations in time. Sellers will eventually realize there are economic opportunity costs associated with unsold homes (tying up capital that could otherwise be invested elsewhere). Unsold homes also leak money even without the calculation of mortgage repayments. Tax and upkeep costs can alone amount to 20K per annum on many Sullivan properties above $500K. Renting is an option, but it too can backfire if the market declines further or even remains flat for years to come as some pundits predict.

Catskill realtors should take note of media reports of realtors in other parts of the country who are refusing to take on unrealistic listings so that they can concentrate on marketing for more motivated sellers. It is also infuriating too for buyers to travel many miles and waste their time to view overpriced properties.

I have a feeling the current standoff between sellers and buyers will be resolved in the next 12 months and listings will become more realistic rather than in the realm of fantasy or wishful thinking!

Meanwhile, prospective buyers should do their homework and stay patient.