Bridging the (Expectations) Gap

Holding Out for 2009 Prices???

Perhaps the single best word to describe the current housing market is “cautious.” Inundated by negative media and predictions of price drops, buyers want to pay 2009 prices — or what they think they will be. Meanwhile, many sellers — notwithstanding exposure to the same media reports — are intent on holding out for 2007 (or 2006!) prices.

The not-suprising consequence of this impasse is a drop in sales activity. Just today, the Mpls. Association of Realtors reported a 20% drop in pending sales compared to the same time last year.

So what’s likely to re-start the market? Anything that serves to bridge the gap between buyers and sellers.

For buyers, the most likely candidates are: 1) lower interest rates, which increase their purchasing power; 2) tighter inventory, a classic sign of a market bottom; and 3) a strengthening economy, or at least the corner of it that the buyer occupies.

Meanwhile, many sellers are likely to lower their expectations — and their asking prices — only when they believe that the price their house is likely to fetch now is higher than what they can expect to get by waiting (“wait till next year” is no longer just the refrain of Chicago Cubs fans). For now, at least, many sellers are clinging to the opposite notion.

Of course, the other reason buyers and sellers do deals is precisely because they can’t wait. The new job in another city begins next month; the house meant for a cozy family of 3 now has 5 (or the reverse); the lease is up, etc.

Fortunately, no matter what market conditions prevail, the method realtors (and appraisers) use to establish value is the same: identify comparable “sold” properties, then compare and contrast with the subject home. Because “comp’s” by definition are trailing data (though not too trailing — sales more than six month old typically don’t count), in a rising market they need to be adjusted upwards; in a falling market, the reverse.