(Super) Market Talk?
Working as a Realtor in a small town has many advantages. One advantage is running into clients and potential clients in the grocery store. They always want to know how the market is doing. Especially lately, the big question on buyer’s minds is, “Is it time to buy yet? Have we hit bottom?” Sellers want to know when recovery will begin. Those are some heavy questions to answer while filtering through the potato bin. Since I hold myself out as a market expert I’d better have some good answers. So grab a cart, and let’s talk about real estate, super market style.
The most accurate assessment of the current real estate market is to define it as a Lender’s Market, since banks are holding most of the aces. Buyers and Sellers have come a long way in the great pricing standoff of 2008-2009. An increase in activity in the last quarter of 2009, which continues thus far into the New Year, indicates the willingness of buyers and sellers to make nice, but lenders are in the driver’s seat, and they’re playing a tough hand of Texas Hold ‘Em (i.e., their money).
In a true Buyer’s Market, buyers call the shots on price and terms, and they do have the upper hand in the negotiation process. However, if a loan is involved, which is frequently the case, the power shifts. While buyers and sellers hold their collective breaths, lenders are wielding unprecedented control with two distinct tools: their underwriting guidelines, and the appraisal process.
The underwriting guidelines determine who gets a loan and who doesn’t. These guidelines have experienced a severe swing to the conservative side in response to the generous guidelines of several years ago-making it quite difficult for even the most qualified borrower to secure funds to purchase a home. Difficult, but not impossible. Going through the lending process, as one supermarket encounter recently described, is like trying to navigate an obstacle course while nails are being thrown at your tires from every angle.
New appraisal guidelines now require appraisers to limit comparable sales to sales no older than 90 days, sales that are within an unrealistic geographic proximity, and sales that have an asset differentiation factor of no more than something like 20%. Since the cheapest (distressed) homes typically sell first, the relevant comps that fall under those stringent guidelines are almost always distressed sales.
Under this cycle of control a buyer and seller can agree all day long on a price, but if there is a traditional loan involved, the bank calls all the shots, including when the transaction will close (based on when they get around to funding it).
Sellers and buyers are feeling a complete lack of control over their real estate destinies. Even if a seller isn’t upside down on their mortgage (meaning that they owe more on a loan than the property’s current value, according to the bank’s valuation method), or even if they’re not behind in mortgage payments, they don’t have negotiation leverage with a buyer who has to get a loan. Some sellers just want to sell for personal reasons, but once their Realtor informs them that their house is worth X% less than it may have been a few years ago because the distressed sale down the street established a lesser value for the whole neighborhood, they begin to realize who really controls the definition of “market value”. How is this fair? Mr. and Mrs. Seller played by the rules. They were fiscally conservative and didn’t over-leverage their nest egg. So why are Mr. and Mrs. Seller suffering the sins of their neighbors? Because the definition of market value has changed. It is no longer ‘the price an informed buyer will pay and a motivated seller will accept.’ So long as there are distressed sales (bank owned and short sales) they set the value.
Restrictive (over-reactive) underwriting, low appraisals and the, seemingly, never-ending onslaught of foreclosures remain the triple-threat defining the current real estate market. Specific to the Napa Valley however, there are encouraging signs that stability, which is the precursor to recovery, is at hand... Here in the valley we have built up an inventory of buyers who have been circling and waiting. Lately they’ve been buying. I think it’s because buyers and their smart agents realize that prices are stabilizing, and therefore, if a buyer has had their eye on a particular property now is as good a time as any to snap it up. The risk of waiting to buy has shifted from ‘What if the price goes down even further?’ to ‘I’m not the only buyer out there who recognizes this bargain, and I may lose out entirely if I don’t act on it now.’ In other words, the concept that pigs get fat and hogs get slaughtered is being internalized by smart buyers.
This table of St. Helena sales, going back to 2007, is representative of the trend of absorption, which is vital to the foundation of getting back to supply/demand market conditions
Market Snapshot Early January 2010: St. Helena
Katie Sompleowns Lifestyle Properties, and is a 10-year veteran real estate broker in St. Helena.