Seasonal Trend or a Market Correction?
It’s every child’s favorite time of year – summertime! It’s one of my favorite times of year in real estate because year after year uncertainty kicks in and we see a market that changes before our eyes, if only for a handful of months. In the past weeks, several real estate professionals contacted me to discuss observations of a slowing trend in their neighborhood. This is not a surprise, as with every summer cycle we see specific trends irrespective of compounding variables such as the current political climate, equities markets, and global uncertainties. However, this summer is starting off with more fear than usual.
I’m not just hearing market flutters from real estate professionals, but I’m hearing from clients, Uber drivers, my barber, etc. Pretty much most people I encounter has read a recent article or heard from a friend that the market has been slowing. Last week a Realtor came up to me at my open house and whispered, “the market has changed”, as if she had a secret to tell me. As different as the market may be over the past several weeks, it still has signs of our summer seasonal trend, though what most interests me is whether the inertia and fear may transition the market into a flat or downward trajectory.
Thinking of selling your home this summer? No doubt you will look at recent sales in your neighborhood and are sure to find sale prices that exceed your expectations. Instinct: you want that price too. What you don’t know from that single piece of data is whether there was another buyer willing to pay that price, so if you rely too much on that price you may be stuck with a home that does not sell. Too often in the summer we see price reductions on homes and wonder if it is a sign of a changing market or a simple issue of homes being listed too high, especially when many don’t realize some of the sales in your neighborhood were anomalies and the highest price offer ended up being 5-15% higher than the next motivated buyer.
Sell now or wait until Fall – since summer months are inconsistent, sometimes I suggest clients wait until early Fall when families have returned and the priority shifts back to house hunting. The inherent risk is whether the market holds for another quarter. Notwithstanding a crystal ball, it is a decision that should be weighed and understanding the pros and cons will help keep things in prospective especially if the outcome isn’t what you anticipated.
Listing price is crucial – don’t be wooed by a single neighborhood sale and think buyers will pay it again. Have realistic expectations understanding that the best buyer for your property may be away for vacation (people like to travel during the summer months). Listing your home too high will likely result in a future price reduction and frustration as to why your home isn’t selling quicker.
Remember the 5 P’s: Property Preparation Prevents Poor Performance
I am thankful for sellers who do not prepare their homes for sale – it enables my buyers the opportunity to purchase that home for a good price. Putting a sign in the yard and marketing the home for sale is easy, but it is the preparation and knowing what is important to fix or replace that is difficult and extremely important. It is so easy to look past preparation arguing it isn’t needed because everything sells, or you want to get to market quick, but failing to prepare your home will leave a large amount of money on the table, guaranteed.
As we move into summer you will want to take note of specific trends that consistently occur. These subtle shifts individually do not impact the market, but when you put them all together it tends to put doubt in buyers resulting in less aggressive offers. Therefore, some buyers can pick up relatively good deals during the summer months if they feel comfortable with the general market climate.
Specific Trends in Summer:
Quieter open house activity – We are already seeing a noticeable slowdown to weekend open house traffic that impacts how or if a buyer decides to write an offer for a property. The slower traffic equates to less competition from the Spring months that had standing room only open houses.
Schools out (priority shift) – Like clockwork, after the final school bell, families are off on vacations, often for a majority of the summer. The priority shifts from house hunting to family time and you see a noticeable change to motivation. Whether for the whole summer or just a few weeks, you may miss the perfect property that comes to market while away.
Stock market calming – Not only do families take time off for summer, so does Wall Street. Less activity in the stock market impacts buyer’s actions, especially because so much of our market is fueled by Restricted Stock Units (RSU). If your company stock slows in the summer then you may be less interested to sell it at that time.
Uncertainty sets in – Now that you are seeing a change to what was an impenetrable market, uncertainty kicks in and you wonder if you should buy now or wait to see how the coming months play out. Not to mention the instabilities you are seeing domestically and globally.
In addition to the typical summer trends we experience, there are a few variables playing out that I think deserve special attention, which have the potential to significantly impact our market.
Will the current seasonal trend continue to a market correction? It’s possible it becomes a self-fulfilling prophecy; the current fundamentals have not been favorable: affordability is at historic lows, interest rates are rising, political and global uncertainties have been brewing and even some of the most valuable companies have been dealing with scandals and growth questions. Even so, home prices continued to rise in early 2018 leaving Buyers feeling defeated and frustrated about entering the market. The same conditions that have existed this year may turn into an opportunity for Buyers if they stay committed to the process and capitalize on what may be something more than seasonality.
Stock market – Watch the stock market and fear index. We have a unique real estate market whereas the purchasing power is significantly impacted by the stock market. Much of the down payment money I see comes from buyers selling their Restricted Stock Units (RSU), so if their company stock goes down, so will their ability to buy the more expensive home. When the value goes down they will also be less interest to sell, hoping for a rebound soon. I remember in 2009, where in hindsight it was a fantastic time to buy, many of my clients didn’t buy because their money was tied up in stocks that had gone down and they didn’t want to liquidate. I presume a similar situation will occur next time.
Employment – jobs numbers are looking fantastic, but I still hear about a tightening job market. I am unclear as to the scale of this contraction since on the other side I hear companies are still hiring. It is an interesting dichotomy that I’m trying to fully understand, however, it seems there is an issue brewing that needs to be watched carefully and we will see the change day-to-day before it makes the news headlines.
Interest rates – We’ve been talking about these historically low interest rates for many years now and how it’s fueled this amazing market cycle; low interest rates in our market with exponential job growth and wealth creation, it’s a win-win formula. However, even in the valley, affordability has been decreasing and you should pay special attention to how it impacts purchasing power. In comparison, during the last market peak of Q3-2007 interest rates averaged approximately 6.5% while the Fed Funds Rate hovered around 5%. Today those rates are much lower while affordability continues to decrease. The Fed has communicated their confidence in the market and plans to continually increase interest rates, which impacts affordability and tightens the lending market.