How Are Buyers Setting Price Expectations?

Sellers are often dragged over the coals for holding to unrealistic asking prices that bear little or no relation to market realities. But there's a growing lack of realistic price expectations on the buyer side. I get more and more calls and emails from buyers asking about property with price expectations that also have little relationship to market realities. My first thought is that those price expectations are being formed through internet home shopping, where potential buyers are finding the lowest prices houses in any category and setting their expectations based on that. That's long been the Achilles heel of online property shopping.

But that doesn't even seem to be holding true. For example, if you do a search on my MLS property search for farmhouses on 2 or more acres, which might be a common search for a city buyer looking for a country charmer, only 3 pop up under $150,000 (and those all have some significant drawback in terms of condition or location.) Yet buyers from the city looking for that cute country getaway on a couple of acres today typically are giving me a budget range of $125,000 to $150,000 tops. (The realistic starting point for something that they actually might like is $200,000 to $225,000.) Similarly, buyers looking for a lakefront house with a minimum of 3 bedrooms, good condition and good lakefront, often have a price target in the low $200's. (The start point for that is about $300,000, more for better lakes and more privacy.) I've gotten a few calls asking about lakefront cottages under $100,000.

I'm always curious as to where these price expectations come from. Sometimes they're based on a few properties they found online, with some misunderstanding of property characteristics (like "lake rights" not the same as "lakefront"). But often it's a number pulled off the shelf, footnoted with comments like "It's just a second home we're going to use part time, so that's what we're looking to spend," or "With the market down (or with all the foreclosures), we think we can get what we're looking for at that price." (Note: there are very few foreclosures on houses with appeal to the second home market.)

I'm not talking here about buyers being at the low end of a realistic negotiating range, but rather being way out of range for what they're looking for. The situation is not unlike what we're seeing with sellers — some are at the upper end of a realistic range for their property, but within shooting distance of finding a buyer and striking a deal, while others are way out in la-la land. Those sellers wonder why their house isn't being shown. Correspondingly, the buyers with unrealistically low expectations wonder why they don't find houses that delight them.

As a buyer agent, I face a decision whether to take on a buyer client with unrealistically low price expectations in the same way that a seller's agent has to decide whether to take a listing where the seller has unrealistically high expectations.It can be a tough call, and it's not directly related to price. A buyer looking to spend $125,000 can have more realistic expectations, or be more open to options than another buyer looking to spend $300,000.

Comments

[Josef A Hughes]

"I'm always curious as to where these [buyer] price expectations come from."

WOW David! You actually need to ask that question nowadays?

How about the reality that 2nd homes are NOT a must have...demand is ZERO or close to it. How about the reality that USA is facing a painful decade-long deflationary depression possibly followed by a sudden hyperinflationary collapse as politicians don't know what AUSTERITY means. How about the 8k taxes for a shanty on .5 acre in Bethel? How about a decrease in buying power????

[Reg]

Honestly, I think this is where you earn your nickels and dimes. Buyers with completely unrealistic expectations need a bit of education about what the market is doing right now, where they're looking. It's not the same everywhere, and if they don't have enough data when they pull $100K out of their magic hat, then it's really up to you as their agent (if you take them as clients, of course) to show them what the real situation is.

Personally, if I were you, I'd have prospective clients with out-of-line expectations read your last three market conditions updates and then call you back for a follow-up if they still have the desire to buy something.

[Bix]

They can look at comparables for the kinds of houses they want. If that doesn't convince them, then they're probably wasting your time and theirs.

[Bernanke & Obama Realty Group.]

A buyer always sets the price point in any market period. For example lets say house A has been on the market for a year and a half without any offers, along comes a buyer and offers half of asking price, is he wrong for offering half if in fact there hasn't been no activity on that home. What is that seller to do? Maybe that seller should wait 10-15 more years maybe 50 years? Why, just b/c the seller has a number in his head but with no offers to back it up?
The same holds true in an up market. When there are multiple buyers bidding on a home and the price runs up past the asking price, who set that price point? The seller? Ah the buyer, now you understand supply and demand.
David you should take those "unrealistic buyers" out and encourage them to make offers, they are the market drivers. And be 100% happy that there are people still out there wanting to purchase in this tough economic climate.

Cash is King, Peace.

[David Knudsen]

Your approach may be great in theory, but it isn't your time or your gas. Is there a chance that a buyer will 'hit' with a 50% of asking price offer? Sure, but it is VERY, VERY small.

[John]

With NYC this soft, where does that put Sullivan?

http://www.postlets.com/res/4018861

[nick]

You "understand supply and demand" if your analysis assumes that the only thing relevant is "buyers" (aka demand)?

Ummm.. no.

Supply and demand is just what it sounds like, the interaction of what buyers are willing to pay and what sellers and willing to sell for. If the lines don't cross then nothing gets bought or sold. That doesn't mean buyers decide what price things will be, it means nothing happens at all. And nothing happening doesn't mean demand is "zero" it means it's not matching up to supply at all. Very different concept frankly.

If sellers come down on prices to where buyers are, then things clear. But that works the other way, if sellers don't budge and buyers come up things clear too. Someone has to move, but the "market" is agnostic as to which side does what. It can take a LONG time for a market to get moving again if neither side will budge. But eventually it's inevitable. Sooner or later some sellers *have* to sell, via foreclosure if no other reason. And since in the aggregate inflation pretty much always moves in one direction, sheer time will bring buyers up to sellers asking prices if you wait long enough.

In reality it's generally a combination of both things, the market clears somewhere in the middle there, and anyone who claims to know *exactly* where and how is either very rich as a result or running their mouth.

[Shelly]

Any comments about the article about this couple in the Beechwoods near Callicoon that appeared in The Times Herald Record yestreday Dave?

http://www.recordonline.com/apps/pbcs.dll/article?AID=/20100627/NEWS/100629821/-1/news

Shelly

[cfranch]

Hmm some of those unrealistic expectations may be sale prices in a few months. From Barron's:

For those who are listening, record-low Treasury note yields are screaming an unambiguous message: the market is discounting deflationary, depression conditions, even if mainstream economists are not.

All assets are going to be repriced and they ain't gonna be higher. Sure mortgage rates are low and going lower but that is little comfort. Second homes, vacations, eating out and all the other unnecessary, albeit pleasant items, will see few dollars coming their way. The bill is coming due from a worldwide spending spree and there are no other bubbles to inflate to save us this time.

[someday]

never posted before but i basically come on to see what Nick has to post every now and then. very insightful. keep it up. david you do a nice job too...

[nick]

@Someday - I think your values are a little out of kilter, stream of consciousness snark versus thoughtful prose surveying the wide range of issues in SC and real estate is not much of a comparison, but do keep coming back ;-)

As for @cfranch - "The Market" ain't doing anything all that predictable, and yet again someone has their econ backwards. In fairness yes, the "market" is certainly not buying into inflation fears right now, but it ain't unambigious. It's about as ambiguous as it gets. There are a lot of reasons for long bonds to have low yields. Remember that yields are the inverse of prices, and this could be more accurately described as an unsustainably rally in bonds. You might look for your bubble there. Given the dearth of productive assets to park money in there's been a flight to gov't securities. Couple that with a breakthtaking amount of balance sheet inflation at the Fed and low interest rates aren't that surprising, and not necessarily for the reasons you think.

All assets are constantly being repriced. As you should know and reference above low long term rates tend to inflate real estate prices (absent other variables) due to mortgage effects... which is a countervailing force. But as I post here from time to time we're seeing a worldwide collapse in aggregate demand. People get hung up on everything from drilling to the Concord resort because their nose is pressed to a small, local screen. Real estate prices and other fixed asset prices are having the same issue on a *global* scale.

Lastly, there's ALWAYS another bubble coming along. Could be a generation, could be by winter. But bubbles are as inevitable as the busts that follow. And you and I will certainly live long enough to see a few more. I wouldn't bet on across the board deflation myself. Stagnation for some time perhaps, but that's different.

[ar]

And now another view on the likelihood of deflation versus inflation, this time from someone with some real credentials as an economist (if you count the Nobel Prize) who isn't whistling as he passes the graveyard of the Sullivan County second home market --

http://www.nytimes.com/2010/06/28/opinion/28krugman.html?_r=1&scp=1&sq=krugman%20deflation&st=cse

[nick]

Yeah I am quite familiar with Mr. Krugman, and not just from surfing the internet by the way, but like I said you'll just have to trust me on that. He's a genius and one of the most prescient economists out there. Too bad you don't really understand his points, as he doesn't really predict inflation/deflation even in that article. That's an opinion piece, the point of it is that if governments slash spending we could see a depression spiral and sustained deflation. I happen to agree with every word of that. This isn't economic forecasting, it's issue advocacy - he's saying that the G20 leaders are being morons right now. The question will be who wins the debates on what to do next.

Krugman's brilliant, but that doesn't mean there's an economic consensus predicting deflation. I could cite half a dozen nobel winners who believe otherwise. But the real story is that nobody knows, economics isn't all that good at predicting such things in the first place, as Mr. Krugman would happily tell you.

So if you read someone saying "all assets are going to be repriced and they ain't going to be higher" then that's a good tell that they're not too bright. Some assets are going to do real well. Some aren't. The price level (that's what inflation/deflation is called by the way) isn't going to be predictable, or homogenous. There are very mixed signals in the economy right now. Krugman is annoyed that everyone is seeing inflation coming. Which is a good point, but note both sides of that, which is yes, he sees deflation, but also that *many* people are seeing inflationary signals.

Can't count the hits and not the misses ya know. Point stands - I said signals now are ambiguous. They are. QED.

[ar]

". . . and not just from surfing the internet . . . but like I said you'll just have to trust me on that." Give me a break, Nick; getting him to sign a book at Barnes & Noble doesn't exactly put you in Krugman's inner circle. Still, I'm sure the Nobel committee in Oslo will be very relieved to learn that you approve of his intellect. For the rest of us, one doesn't need an undergraduate economics degree from a small liberal arts college out West to understand what Krugman is saying in this piece. He is not merely predicting deflation; he says the process has already begun. (Hint - go to the sentence where he says: "We are now, I fear, in the early stages of a third depression." Then read a little further to the point where he explains that the hallmark of a depression is widespread deflation. Then go back to where you wrote, unequivocally: "I wouldn't bet on across the board deflation myself." QED.) Counting on inflation to bail you out of a right-before-the-crash Sullivan County second home purchase is the real estate equivalent of Waiting For Godot.

[Nick]

Ya know since you seem to enjoy the google it probably actually wouldn't be too tough for you to fill in the blanks as to the inner circle connection... it's a little more than a book signing. And that's just back in the day stuff. You really have no idea do you. Eh... same difference I guess, opinions are like... well right.

As the saying goes, economist have predicted four out of the last two recessions. I do respect Krugman immensely. But he's usually all the way over on the bearish side of things. He's often been more right than his peers. But quoting him like it's Genesis just makes it clear which one of us understands economics (hint it's the one of us who writes about economics for a giant news outlet) and which one of us doesn't. Details matter a *lot* is one thing you might learn, he's not saying deflation has begun. That's a number, a measurable thing. He's saying we might be in the early stages of a more massive downturn. He's right, we *might* well be. We might not. As mentioned he'd be the first to tell you he can't predict such things.

And yes, I will predict with a confidence level of almost 100% that there will be net inflation during the 28 years remaining on my mortgage. There's something called the time value of money, inflation really does go in one direction in the long run, and the medium term too. It's one of many ways you dig out of a recession. And yes, it always happens. Find a 28 year long period with a negative CPI from beginning to end: http://en.wikipedia.org/wiki/File:US_Historical_Inflation_Ancient.svg

A few nasty stretches there, but... right. Not a lot of world precedent either. Asia of course, but we're talking 10 years, not 30. Yes I know what a black swan is, etc, but it hasn't happened since the era of central banking. Sure we might get squeezed. But what exactly are you predicting? And why do you keep saying I need a bailout when I can pay my bills. Can you?

I've asked about your situation enough times, sure have a chip on your shoulder.... But hey look search engines for us all... look what turns up:

AR: "love the western SC area and owning a place up here has given me priceless pleasures; I love my fireplace in the winter and I love my trees year-round; but now that the boom has collapsed I see that I really did set fire to a pile of money representing the excess over what I could/should have paid. Live and learn."

http://blog.catskill4sale.com/catskill4sale/2009/03/real-estate-and-the-obama-budget/comments/page/2/#comments

Sorry you blew it my friend. But please stop taking it out on the rest of us and do some of that "living" and "learning" you refer to.

No point making the world miserable just because you suck at planning and/or negotiation.

QED - as they say.

[ar]

Right, Nick, the word "miserable" really applies to a post extolling my love of the landscape and my fireplace and the "priceless pleasures" of having a place up here. First it was economics, and now I see it's a problem of basic English. I have consistently tried to look at the real estate collapse up here realistically, acknowledging both the intangible enduring values of being up here and the undeniable (except by you) wealth destruction that the crash brought, while exploring whether there is any objective basis for a recovery of the market (other than sheer optimism). (By the way, thanks for the concern, but my credit rating is more than fine, and having been able to comfortably afford to pay cash for my place, I won't be paying hundreds of thousands of dollars in interest on money borrowed to pay an excessive purchase price during those 28 years that you are waiting for inflation to bring you back to even.) As for Krugman, thanks for finally acknowledging (contrary to your original post about his linked column) that he does believe we've already entered a period of deflation comparable to the Japanese scenario. Your point that he might be wrong is hardly insightful; my point was simply that his opinion carries more weight than yours (or mine, for that matter). But I don't expect you to concede that, which brings me to my final request in this thread: While you're rechecking the definition of "miserable," also check out the meaning of the phrase "delusions of grandeur." And then consider whether it might apply to describing two posts on the Huffington Post blog as "writing about economics for a giant news outlet."

[Nick]

Sorry my friend, you're called out. You refused for weeks to post what your position was in SC real estate, now that it's been dug up you're full of important clarifications and whatnot. Whatever you say. But I think we know who has a problem with English when a line like "I see that I really did set fire to a pile of money" is presented as something other than real negative.

And I don't have delusions of grandeur, I will maintain however that I do know quite a bit more about economics that you do, which seems fairly self explanatory. And yes, it's a top 10 news site, bigger than the Washington Post and many others, welcome to 2010. *yawn*

And if you paid cash and did so "comfortably" and enjoy your place what the hell are you so riled up about? Who cares? You bought a place for X. You enjoy it, etc, and it still cost you X. You got what you expected. Why so negative? Seems to me you probably paid way more than it was worth AT THE TIME and are still really annoyed. Sorry you can't negotiate and/or don't know what you're doing. Did you know I've had multiple unsolicited inquiries about the property I bought? Did you know I have an offer from a bed and breakfast owner to rent it from me for a lot more than my carrying costs? Ah, right. But who cares, it's all just puffery on the internet.

As for Krugman. He's predicted disaster every year for a long time. Like I said, he's been more right than wrong, but that doesn't make him all right. And I'm trying to figure out why I'm arguing with a Krugman strawman. His opinion carries more weight than mine. But does it carry more weight than all other economists combined? He's one very smart person. There are others. And I have informed opinions of my own, if I were to argue with him that would be one thing, but instead I'm arguing with you, someone who is parroting him as an "argument from authority" (google it) but without any insight/analysis of your own. Why don't you tell me WHY we're in a period of deflation, meaning say something that's not in a linked column, something you actually understand personally. Right you can't. You don't really have any framework for discussing this besides cherry-picked arguments from other people.

And there of course is a basis for recovery, which I've posted over and over again. I've also acknowledged the counterfactual, which is that things could get worse, and that I might end up losing quite a bit of money. Where do you recognize that the future isn't predictable and could go either way? Come on say it... the future can't be predicted, it could go either way. Wasn't so hard was it?