(Super) Market Talk
Working as a Realtor in a small town has many advantages. One of them 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 have held myself out as a market expert I have to be prepared at any given time to provide valuable spontaneous answers. So grab a cart, and let’s talk real estate, supermarket 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., holding on to their money).
In a true buyer’s market, buyers call the shots on price and terms. This is the case currently, up to a point. 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. 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 is 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.
In defense of my lending colleagues, loan brokers are working extremely hard to get loans closed. They are really earning their fees and performing amazing feats of accomplishments on behalf of their borrower clients. Don’t blame the messengers. They are doing everything humanly possible to get buyers into homes, working under very stringent conditions.
Specific to the Napa Valley, there are encouraging signs that stability, 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 agents realize that prices are stabilizing. If a buyer has had their eye on a particular property for a while, instead of thinking, ‘What if the price goes down even further?’ they’re beginning to realize, ‘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. It will be a while before the real estate market in the valley is in full growth mode, but these small blades of grass poking above the soil are good signs. If Spring 2010 brings buyers out in full bloom- a typical seasonal swell-we may experience a flurry of much welcomed activity.
This table of valley wide sales, going back to 2007, indicates a trend of stabilization of sold prices beginning in the last quarter of 2009, as measured by the square foot.
Napa Valley Real Estate Values Snapshot
|
Total Units Sold |
Avg Days on Market |
Avg Price Sold Per Sq Foot |
Houses sold, last quarter 09 (Oct-Dec) |
344 |
115 |
$285 |
Houses sold, first quarter 09 |
258 |
118 |
$229 |
Houses sold in 2009 |
1291 |
132 |
$272 |
Houses sold in 2008 |
1036 |
136 |
$387 |
Houses sold in 2007 |
956 |
133 |
$458 |
House sold in 2006 |
1274 |
105 |
$493 |
Houses sold in 2005 |
1657 |
65 |
$450
|
Katie Somple owns Lifestyle Properties, and is a 10-year veteran real estate broker in St. Helena.