The Sellers Market is Over - Be Careful (Now What)

114 Replies

Perhaps I would be have done better taking more financial risk for the past 35 year. Or perhaps I might of lost it all in 2007. I stocked a 401K for 34 years and invested in RE for the past 10 years. Now, debt free SFH rentals cash flow life. The 401K became insurance. The housing and stock markets can do whatever the housing and stock markets want to do.

Having been through the late 80’s crash(very beneficial to me) and the 2008 crash, I have never been much for the analytics of Real Estate especially on a national level. My markets are local and mostly smaller markets. Frankly, in small towns people have to live somewhere and if I put out the best product, my house will be the next one to sell

My recollection is the last 2 crashes had some legislation that fueled the flames. The 80’s had a change in the depreciation rules and the 2000’s had the sub prime fiasco and subsequent changes. We have not seen any legislation yet that could be detrimental have we ?

I will say it does make me cringe a tad when I see people post their great deals on rentals that have $100 or so positive cash flow. A small correction in their market can cost them dearly. Just be conservative in your investments and you can succeed in any market at anytime 

Is a crash coming?  History says it will happen but the truth is no one knows when

I think it's fair to generalize a broad cooling trend, though there is still plenty of money flooding into the right markets. Home sales were down 3.4% in September and down 4.1% from last year, nationally. Seven straight months of decline, which is the longest since 2014 (WSJ).

Most savvy investors are already aware that we are late in the economic cycle. Private Equity are still deploying, though the increased cost of debt will make them more selective. When they pull back, the effect will be compounded due to the sheer size of their appetites and the hole they can leave in your business or market when the buy-side turns off.

Mom and pop will also start getting more selective due to the increasing interest rates and reduced ability to write off property taxes (worse in coastal regions).

While many tend to think of RE and securities markets as independent, I think we underestimate just how much of the demand these past few years has been institutional money parking profits in property.

The first shots have been fired. It's risk off time.

Originally posted by @Rick Baggenstoss :

Atlanta tends to lag behind western markets.  If you're looking for a national flip from buyer's to seller's market, then I'd watch Phoenix and Vegas.   When they slow/change, then Atlanta, for example, will turn several months later. 

Anticipating more of a headwind, I'm restructuring my debt, culling my portfolio of less desirable properties, and accumlating cash as a result.  I'm still buying rentals and flips, but only taking on high profit projects or solid longterm holds.

I agree that Atlanta seems to mirror in a lagging fashion to the Phoenix market (for whatever reasons); and from what I can tell, both seem to still be doing pretty well at the moment. The switch from seller's market to a buyer's market doesn't just happen overnight. 3 key things I pay attention to determine if the seller's market is ending are the following:

1. Absorption rate: Basically this is how many months it takes to sell listings in a certain housing market. Real estate experts estimate the average months on inventory is about 6 months. In my market in Atlanta, we're still below 4.

2. Multiple offers: I'm technically a millennial and a lot of my friends are buying homes (some buying starter homes and some upgrading out of starter homes). Every one of them have mentioned either getting multiple offers on the homes they're selling or the home they're purchasing having multiple offers on it. My real estate investor associates also say they're still seeing multiple offers on homes. As long as you're still seeing multiple offers on a lot of homes, it's still a seller's market. 

3. Rising prices: Overall I'm still seeing rising pries in my market. One anecdotal example is, 10 months ago a friend purchased a townhouse; starting a new family he and his wife decided to sell their newly purchased townhouse to upgrade to a larger sold for $50,000+ more than they purchased it 10 months ago. That's more of a random example and not a systematic scientific evaluation, but nevertheless a personal observation. Prices aren't rising at the speeds they were a few years ago, but I'm still seeing some ridiculous prices out here.

With all that being said, I think its hard to say the seller market is over (for Atlanta anyway), however I do think we're coming up on some corrections in the market in the next year or two. Things are starting to get a little out of hand now and when that happens...things fall. Right now I'm just waiting to pick up the pieces when they do. As Baron Rothschild says "when there's blood in the streets, buy!" 

I think good investors make money in buyer's and seller's market and welcome both. Diversify your portfolio, don't get over leveraged, have some reserve cash on hand for great deals and you'll do well in a buyer's and seller's market. The change in markets is not a time of panic to me, it's just a different kind of opportunity.

@Greg H. Congrats on your accomplishments.  Just to be clear I am not calling a Crash of any sort.  If anything I see a slow leak in the Real Estate market and most importantly Sellers are not in the power position any more or at least the degree that they were.  But again I am not calling a Crash, too many people have 3.X% 30 year mortgages and don't need to sell.  Crash come when Sellers are forced to sell and I just don't see that happening any time soon 

Couple things to report from the Maui market (for whatever it's worth!): 

3rd quarter of 2018 vs. 3rd quarter of 2017:
Home sales are up 6%, Median sales price is NC, Dollar Volume is up 6%

Condo Sales are up 22%, Median sales price is up 11%, Dollar volume is up 32%

Land sales are down 5%, median price is up 33%, dollar volume is up 59%

-Source: Fidelity National Title and The Realtors Association of Maui 

"The median price of a single-family home on Maui jumped 16 percent in September, compared to a year ago, and the median price of a condominium jumped 18 percent, compared to September 2017, according to statistics from the Realtors Association of Maui.

The median price of a single-family home on Maui last month was $754,248, compared to $650,000 in September 2017. That was based on sales of 80 homes, compared to 81 homes sold in September 2017.

The number of condos sold in September also declined slightly to 121 units sold, a 4 percent decline from 126 sold during the same month last year. The median price of those condos, however, rose 18.2 percent to $501,000 in September, from $423,750 during the same month last year."

-Source: Pacific Business News and The Realtors Association of Maui

Basically this data tells me that, in my market, sales have shown a slight slow down, but prices are still increasing (pretty dramatically in some areas.. in fact a little too dramatically for my taste lol). 

But it's also important to note that the Maui market has been known to follow a few months behind what's happening in the real world lol it's almost like we're on a rock in the middle of the ocean... 

I think any kind of national buyers/sellers market data is slightly irrelevant to local markets. I was just discussing how strong the seller's market is the other day with another agent friend of mine. I was able to sell a town home located in Forest Park in 2 days. We had 5 offers, and sold it for $12,000 over list! My agent friend works in Oak Park, and told me that in the higher end of the market place (600k to over a million) the home sales are stagnant and it is a buyers market. 

Last 36 months I get a call or inquiry at least 3x a week on potential homes to flip. Start this year they must be off the market(not in MLS). In a computer savvy town like Silicon Valley the sellers at least know Z, Trla, Rdfin AVM value to gauge the offering price. All the home owners felt home prices can NOT get much higher have sold or on putting on the market. We have 4 million jobs and Silicon Valley is still adding highly paid jobs. There are continuously strong demand for housing and renovated homes. But the day having 30 offers on first weekend is over. The sentiment is home prices may even drop further as the interest rate hike affects the affordability. The big stocks firms like FAANG are mostly local. I suspect over staffing and under-productivity from these momentum companies is a factor. The question is how much stock option these people will be exercising if their employers are doing poorly. That is the major source of down payment. The flippers are more cautious and more demanding in selecting homes they want to renovate. Some may be dropping out but majority will renting out their hoards with their own funds or with a small mortgage. The Uber and Lyft are local. Once going IPO the employees will cash out their options buying more... All in all, the future is very bright.

My local NAR pres was quoted in my little paper this week. She encouraged frustrated buyers to come revisit 'this new market.'

Quantity of listings for sale Sept 18 vs Sept 17 up 21%.   In my market that's 205 vs 170 LOL but the percentage increase is huge.  

DOM is longer and 5-7% price drops more frequent, but not a buyers market yet per se.  More like sellers getting a reality check.  Good discusion!

I'm also thinking that all of these articles about the market cooling down is a self-fulfilling prophecy. 

Buyers read it and then hold off from buying, because they don't want to buy at the perceived top of the market. So, then there are fewer buyers and it all follows the prophecy and then everyone says "I told you so"

Here are the September 2018 numbers for the Milwaukee Metro area fresh out of MLS.

I am looking at Milwaukee County, which includes the city of Milwaukee but also some of the in-demand areas like Wauwatosa and The Lake Shore municipalities. And then we have (my home base) Ozaukee county 20 minutes outside of downtown, which I will use as a representation for the higher priced suburbs. Let's start with inventory.

Absorption rate (how many months to sell all active listings): around 6 months is a balanced market, anything below 6 is considered a seller's market. As you can see we are clearly in a seller's market.

Milwaukee 2017 YTD: 2.96 (Year To Date)

Milwaukee 2018 YTD: 2.17

Ozaukee 2017 YTD: 3.58

Ozaukee 2018 YTD: 2.98

Both markets have tightened up and accelerated, while the number of units sold remained almost identical. Homes are selling faster and are on the market shorter on average.

Sold prices: both markets have seen significant appreciation. Like in past years, better areas and school districts appreciate faster than lower quality neighborhoods. Ozaukee Co is of course a much higher priced market than Milwaukee and has also seen higher appreciation rates:

Median Sales Price Ozaukee 2018 YTD: $328,263 - that's 9.42% more than the previous year

Median Sales Price Milwaukee 2018 YTD: $162,963 - up by 5.82% for 2017

Shift in price segments: when you look at the break down, you see a clear shift of volume to higher prices. Milwaukee has less homes sold in the lower price brackets and more in the higher priced brackets: all groups between 0$ and $140,000 are down in volume significantly and that sales volume has shifted to higher price points. The segments between $140k and $180k, as well as $200-$250k are up in volume. Overall volume is up by 0.7% to now 6,538 sold units.

Ozaukee shows a similar effect, all segments under $500k are down, over half a million is up by 38.7%. This is partially driven by new construction, mostly in the $500-700k range. Rising interest rates in the last 12 months have not been able to cancel out increasing demand.

Sold to List ratio - reflects the discount sellers are willing to negotiate on average:

Milwaukee Sept 2018: over 96% (from 94%)

Ozaukee Sept 2018: over 97% (from 95%)

Looking into the details it's clear that in the first 3 weeks (>21 Days On Market) most properties sell for list price or over; after 21 DOM sellers are more willing to accept less than asking price, after 60 DOM we see some significant discounts (5-10%).

Existing Homes vs New Construction: 

This became very clear to me while I was building a spec home - the cost of new construction is substantially higher than existing homes, as it should. However the difference used to be around 10% (in 2005 is was 9% on a national level). Naturally a lot of people will opt for new construction considering the small difference. As of 2017 we are looking at a 31% gap - driven by the cost of labor, materials and land. This makes existing homes a clearly more attractive choice for many buyers, who are often willing to invest in remodeling.

On a national level we are still short about a million homes to close the gap between supply and demand we have opened in the last ten years, when a lot of builders and trades people had to close doors for good. This gap is currently maintained and not close, because of the cost gap. So we will be stuck in a short inventory situation for a while. The only way out will be that with existing home prices creeping up at the current rate, we will narrow the gap, which will make new homes an interesting option again in about 2-3 years. Then it way take another 4-7 years to for supply to catch up with demand and resolve the current conundrum. 

Another remarkable fact is that there is no new construction available in the Greater Milwaukee area for under $300,000. Anything with less than 30 minutes commute starts at 350k. The majority of new homes are sold between $400 and $600k. Total built (sold+for sale) in 2018 is only 371 - which is up significantly for 244 in 2017.

In other words, any existing SFR under $300k is a commodity with finite supply and cannot be re-created anymore at this cost in Milwaukee. If you believe that the sales price of new items influences the sales price of used items you arrive at the following conclusion. At a reasonable 15% discount to new construction existing homes in great condition should sell eventually for about $255k to 300k, which is significantly higher than the current median sales price.

Originally posted by @Craig Z. :

**My opinion** Forecasting the near future, it will most definitely become a buyers market sooner than people would like to believe.  Just because you have not seen inventory numbers rise this month / quarter, doesn't mean that the market isn't about to drastically shift.  The simplest formula to forecast if prices are too high for the average buyer in a designated area is to evaluate and use the .gov economic statistic tools to your advantage.  

For instance, in my hometown, the average household income is $78,000 (Includes incomes of both Husband and Wife and anyone over the age of 16).  Even with a sufficient amount of liquid assets and low debt ratio, what would be the average price a household family could comfortably afford making $78,000 per year?

-- Well I can for sure tell you it is not a home priced at $395,000.  That is the average list price for a single family dwelling based off of 298 listings in my area.  

This is the primary reason why the market will shift and shift drastically in my opinion.  It is simply not a factor of demand, rather than a principle of basic economics and factors of affordability.  Sellers have pushed their peak and buyers will simply revolt and or cannot afford these asking prices.  

By the way, my area is not the only area with these insane listing prices (+20-40% asking price YTD.)

 I thought I would add some stats for San Diego to demonstrate what @Charles A. was indicating.  

Median San Diego household income $63.4k.  Median San Diego home price $583k (source CoreLogic). 

It shows people find a way to afford the housing if they want to live there bad enough.  There are not many people who want to move to those Midwest towns were decent homes in safe areas can be purchased for $25k to $40k.  They may be a great place to raise a family but, in general, the people who choose to live there are the people who grew up in that area.  

If you desire to live in San Diego, you must pay for a home (rent or purchase).  If you choose to rent, historically the rents increase quickly. The high cost of homes with respect to salaries is nicknamed the “Sunshine Tax”. 

@James Wise best comment on the whole discussion. Everyone seems to have lose interpretations of how they define buyer/seller’s market, and all that matters is your statement at the end of the day. I’m not sure why the masses get so concerned with what the market is if the masses aren’t going to time the market anyways and are consistently investing..

@Michaela G. - Yes I think the negative talk track from the Press, Media and yes posts like mine cause buyers to freeze or delay a decision.  Real Estate is an Emotional purchase and no one wants to be the person who bought at the top so when the talk track switched from all positive to negative it will absolutely cause buyers to freeze and if you believe a CNBC article from this morning a large number of canceled escrows on Exsisting home purchases.

@Michael Zuber The price drop has already started in SF Bay Area. Just saw a property in south San Francisco, dropped price from 1m to 900k. 4 weeks on market no offer yet. This same house would go over 1 M this summer. EXPECT PRICES TO DROP THIS WINTER.