Publications

Phillip C. Querin, Partner
Partner - Portland, Oregon Office

philquerin@dwt.com
(503) 241-2300

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Challenges and Opportunities in a Buyer’s Market
[December 2006]

Not much more than a year ago, Realtors® were dealing with multiple offers and escalator clauses. Many sellers’ biggest concern was making sure they were able to drain the last dollar of profit from the sale of their home. The market was so hot that some buyers were gladly discarding the use of standard contingencies such as financing and professional inspections, just so they could get to the front of the line of other purchasers. For the first three-quarters of 2006, we watched as the market gradually shifted, interest rates ticked slightly upward; and the press, in their chosen role as harbingers of gloom and doom, began the drumbeat of clichés about a “the bursting bubble,” “a recession,” “hard landings” vs. “soft landings.” Ultimately consumers began to believe everything they were reading and a slower marketplace became a self-fulfilling prophecy as buyers stepped back to catch their breath.

As a result, over the last few months there has been a gradual, but dramatic, shift in the real estate marketplace. Clearly, it is more of a buyer’s market today than at any time in the last few years. In order to succeed today, the task for many Realtors® is to be able to alter their marketing strategies in order to deal with this new dynamic. Here are some random thoughts:

Dealing with Buyers. If these changes were occurring in the stock market rather than the real estate market, one would be preaching the maxim, “Buy on bad news, sell on good.” But today, in most real estate markets, buyers are holding on to their money, even while more sellers are listing their homes. As a result, marketing time is getting longer and inventory is increasing. However, interest rates are at the lowest point they have been at since January 2006.¹ Lower interest rates mean that more buyers can qualify for higher loans. With more inventory to chose from, prices softening, interest rates falling, and more time to make a rational purchasing decision, what more could a buyer ask for?

For most home buyers, livability is the major factor in their purchase: Location, schools, safety, commutes, etc. These motivations have never changed, regardless of the economics of the marketplace. However, what seems to have occurred is that buyers are hesitant to take the plunge, believing that for some reason “this isn’t the right time.” So the task for a good Realtor® is to explain the opportunity that this marketplace currently offers. Here are some concepts to remember:

• Profit on resale is primarily determined by what you pay for the home, not what you sell it at. Last year, with the limited amount of inventory, owners were selling their homes at the top of the market. But those that made the real money were the ones who had paid the least when they bought – i.e. they started with the lowest basis. Why does this make a difference? Because sellers usually become buyers – which means that selling at the top of the market only results in buying at the top of the market.² So those who really benefited in last year’s hot market were the ones who were able to pull out the greatest profit, because they had a lower basis in their home to begin with.
  
  
• Market timing is not really feasible in real estate. In the stock market, there are those who are “market timers,” making their purchasing and selling decisions based upon what the market is doing at that precise moment in time. However, the real estate market does not work this way, since there is no such thing as the Dow Jones or Nasdaq, which reports changes on a minute-by-minute basis. The best the uninformed real estate consumer can do is scour the Internet, newspapers and magazines, to get anecdotal reports that are usually months old. Even the Zillow-type websites are not totally reliable, since they are based primarily upon public record information that depends upon tax assessors, deed recorders, and other bureaucrats to document events that occurred months ago. The information is inherently stale. This is where a good Realtor® comes in.
  
  
• The condition of the national market does not represent the local market. Oregon is a unique market, primarily due to its attractive quality of life. However, in addition, there are sub-markets, such as the Coast, the Willamette Valley, Southern Oregon and Central Oregon. Anyone who relies upon news reports about the national housing market in making purchasing decisions in Oregon is making a big mistake. That would be like looking at national weather patterns in deciding whether it would be a good day for a picnic at Washington Park. For Realtors® this requires getting to their buyers, accurate, up-to-date, and reliable information about the current local housing market – right down to the neighborhood level. Besides a well-informed Realtor®, there is no one else with this unique on-the-ground information.

Dealing with Sellers. An equally daunting task for Realtors® today is to educate their sellers about what is actually happening in the marketplace. Frustration and disappointment stem largely from unrealistic expectations. It is the Realtors’® job to let their clients know what to expect during the marketing and selling process today. Equally important is to make sure sellers don’t buy into everything they read about the national market, and concentrate instead on what’s happening locally. Here are some points to remember:

• Today’s local marketplace is not an aberration. Look at the RMLS™ Market Action report and compare it to a couple of years ago. Available inventory and time on the market today are much closer to the days when the marketplace was in more equilibrium, than during the last 24 months. This is not necessarily bad. When listing inventory is 5 to 7 months, for example, there is enough time for buyers to make rational decisions among various alternatives. When time from listing to sale is under 30 days, poor decisions and recriminations are bound to occur: e.g. sellers feel they’ve sold too low and blame their Realtors®; purchasers fail to conduct their due diligence and sue sellers for nondisclosure; and Realtors® get marginalized as the value they bring to the transaction becomes questioned because the selling and buying process is perceived as simpler than it really is. Today’s marketplace should be viewed as more balanced and rational than in the recent past.
  
  
• Old anecdotes no longer apply. Sellers cannot live in the past, expecting the marketplace to treat them as it did their former neighbors or friends who sold their homes during the last couple of years. Moreover, relying upon the Zillow-type websites, to the exclusion of real time information a good Realtor® can provide, is also problematic. Again, this is simply a job of education by the listing agent. Perhaps it requires giving the seller a crash course in the historic RMLS™ data and helping him or her follow the trend lines. A good Realtor® will have this information already prepared and at the ready, since it underscores the real value that they can bring to a successful transaction.
  
  
• Why is the seller selling? There are many reasons that sellers sell. Some are voluntary, such as a desire to move to another home for purely personal reasons, and some are involuntary, such as divorces, finances, and job relocations. A good Realtor® will factor this information into their listing presentation. But regardless of the reason for sale, the good news is that a nice profit will probably be made upon closing, if the seller has owned the property for at least a few years. A closer look at the statistics will show that while time on the market has risen over the last few months, locally there has not been a dramatic reduction in the price of home resales.³ While the profit may not have been as high as it was at the peak of the market, that was then, and this is now. There is still good profit to be made in the market, although it may take more time to realize. And if a seller will soon be a buyer, their purchasing power will still be maintained.

Conclusion. This time last year, the mainstream press was suggesting that the Realtor® industry was dead or dying. Epitaphs were being written. The Internet was exploding with websites offering new and different ways to sell homes without the help of Realtors®. The idea that Realtors® brought any value to a transaction was regarded as outmoded and passe´. That was then and this is now. Today, thanks to a more rational marketplace, Realtor® knowledge and information is more valuable than ever. For sellers who want to maximize their profit in today’s marketplace, and buyers who want to know if “now is the right time,” a knowledgeable Realtor® can be invaluable.

FOOTNOTES

1 Inman News, November 30, 2006, article “Mortgage rates approach 2006 lows” by Frank Nothaft, Freddie Mac.

2 Unless one changes housing markets, e.g. moving from one of the highest priced housing market, such as San Francisco, to a more moderately or lower priced local market.

3 This is not necessarily the case in new construction, especially with homes that are marketed at higher price points.

© Copyright 2006. Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.