2021 marks the tenth straight year that central Ohio home prices have climbed above the traditional norm of 4% per year. Will 2021 be the year that the housing market correction, and is a crash ahead?
Given the low unemployment, wage growth and low interest rates, most economists today don’t foresee a recession in the near future, however, the housing market, along with the economy, is cyclical and a market correction is inevitable at some point.
While I’m not going to speculate on where the housing market is headed (as I’ve covered this in prior posts including Is the Housing Market Headed for a Crash), what I would like to discuss is what to expect when the market does inevitably correct and shift from a Seller’s Market, to a Buyer’s Market.
Given that I received my real estate license in 2003, 4 years prior to the Great Recession, and one of the weakest markets in history, I’m quite qualified to speak on this topic. Back then the real estate market, and general economy were completely different, and not at all comparable due to the following key factors:
(1) Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages. U.S. government policies encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness. Subprime mortgages including so called liar loans required little to no documentation to qualify a buyer and support their ability to repay the loan. This also included buyers with mid-to-good credit scores created a speculative bubble in house prices, and then wrecked local housing markets and financial institutions after they defaulted on their debt en masse.
(2) Record levels of household debt accumulated in the decades preceding the crisis resulted in a balance sheet recession (similar to debt deflation) once housing prices began falling in 2006. Consumers began paying off debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced.
(3) The U.S. economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by over four percent of GDP. Consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. The U.S. government was unwilling to make up for this private sector shortfall.
(4) While inflation is currently driving prices for just about everything higher, deflation and a lack of demand contributed to falling prices during the Great Recession. During this time consumer prices fell on an annual basis for the first time in more than 50 years.
Many real estate agents active in the market today were not licensed during the recession, and in fact most are new to the business with less than 3 years of experience. These agents have little understanding of how different things are now, or what it takes to sell a home in a Buyer’s Market. This is important to consider as knowing the difference between an up and a down market can help consumers navigate the changes with better success.
Buyers become kings
During the housing bubble of the early-to-mid 2000s, the real estate market was considered to be a seller’s market. Property was in high demand and was likely to sell even if it wasn’t in the best condition, or overpriced. In many cases, homes would receive multiple offers and the price would be bid up above the seller’s initial asking price. Does any of this sound familiar?
The subsequent housing market crash created a buyer’s market in which sellers had to work much harder to generate interest in their properties. Buyers expected homes to be in excellent condition or priced at a discount. In this market buyers could often secure a purchase agreement for less than the seller’s asking price for the property.
A buyer’s market is one in which there are more sellers and homes for sale than buyers. Since supply is greater than demand, homes will be lower priced, making them more attractive to buyers. In a buyer’s market, sellers may have to accept a lower price than they want to sell their home and may have to resort to staging and incentives to help entice buyers. This is the ideal situation for buyers, as less demand not only means a far lower likelihood of multiple offers (though this can still be possible for the most desirable properties that are appropriately priced) and forces sellers to compete for buyers.
In this type of market buyers are kings.
Inventory is everywhere
I work in Columbus and throughout Central Ohio where currently there are just 2,546 homes available for sale. To put this in better perspective there are just 47 available in New Albany, 41 in Lewis Center, 75 in Dublin, 70 in Westerville, and 72 in Upper Arlington. We’ve been experiencing low inventory problems since 2017.
Today, most of my listings receive multiple and are under contract within days and well before many buyers can even get in to see the property. This is the reality for today’s buyers in this Seller’s Market.
Now as a buyer, imagine sending your agent 20 homes you want to view over the weekend, and that all of them are still on the market by the time the weekend rolls around. Further, when you’re ready to make an offer, there are no competing offers. This is what a buyer’s market is like.
In 2009, we were in such a buyer’s market and during this time buyers had an abundance of homes to view. The market was flooded with new construction inventory, regular resale listings and foreclosures. At this time inventory levels were so high, and the buyer pool so small that sellers were forced to aggressively compete. This type of market is difficult for a homeowner as it is incredibly difficult to compete with foreclosure listings and builders who were dropping their prices to beat out resale listings.
During the recession, offers not only included inspections, remedy requests, and home warranties, but many included seller concessions (3% towards buyer closing costs was not uncommon), regardless of whether my clients needed them. Rarely would agents submit a full-price offer. Sellers were growing exhausted, waiting anxiously for any offers. This scenario gave them little leverage, making it incredibly hard for them to negotiate well.
In these markets real estate agents often talk about how painful it is to work a listing for 12 months and never get paid, thus taking a financial loss in the form of the un-recouped marketing expenses. Meanwhile, every preapproved buyer an agent works with is likely to find a home and make it to closing. In these markets many agents have far less interest in working with sellers.
Listing strategies change
Many Realtors complain about listing agents who take horrible photos, but they watch those houses sell in a day regardless of poor marketing. It’s frustrating. At the moment, listings agents are not compelled to produce high-quality listing content.
Homes are selling with minimal effort. I applaud those who still strive for marketing excellence, even when they don’t need to expend much money and energy on it, as these are the agents who are doing right by their sellers and doing their part to ensure they fetch top dollar for their clients.
When I started selling homes in 2003 in Columbus, the average number of days on the market was around 120. Some properties would take nine months to sell. Over 40 percent of them would expire before selling.
Anyone who hasn’t experienced that kind of market has no idea what it’s like. The journey from meeting your seller for the first time to getting to the closing table was a long one.
Selling a home in a seller’s market is concentrated around managing a high volume of offers and helping your seller net the greatest amount of money possible. Selling a home in a buyer’s market is focused on pricing a home appropriately right from the very start and working aggressively to market and expose the property to the most buyers possible utilizing a finite marketing budget all the while keeping the sellers calm week after week as their house sits on the market and often for months on end. Sellers are overly stressed in this kind of market.
Shifts are normal for markets, including real estate markets and whether we experience one now or years from now, it’s important to think through the possible changes and how this might impact your future sale, and/or purchase.
It’s also important to consider how factors such as inflation and mortgage interest rates are likely to affect the value or your current home, and the cost associated with financing a replacement property. For example, if you have a 20% equity stake in a $250,000 home and inflation causes Central Ohio homes to appreciate at 16% this year, you would experience a ROI of $40,000 on your $50,000 investment. The same $50,000 equity stake in a $500,000 property would offer a ROI of double this at $80,000.
Given that mortgage interest rates are expected to rise in the months and years ahead, home shoppers should also consider how rising rates will impact affordability and their cost of financing. For example, a 1% rise in mortgage interest rates is equivalent to a 10% increase in the total cost of the home. While no one knows with any certainty how high rates will go or how quickly, rates dramatically impact not only the monthly mortgage payment, but also the total finance charges which is why even small changes in rates can significantly impact affordability.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call at 614.332.6984 and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235