Those that "have to sell", and those that don't.

Anyone who has been remotely following the real estate market knows there has been a shift with increased inventory, longer days on market and price reductions on many properties. The information that is made available is wide ranged and nearly always on generalizations from National to State, sometimes County or City but very rarely does it target your neighborhood or street. Through all of this information most everyone concern comes down to a very simple questions, how is this affecting my property values. The answer to this question is not as simple as the media surmises.

Whether we are in a buyers, sellers, or neutral market roughly ten percent of the population will be moving this year simply because they have to. They lost a job, relocated, bought a new home before they sold their old one, got a divorce, increase their family size etc. So what is causing the increase in homes for sale? There are many factors that can help cause the shifts we are seeing. I’d like to focus on the fact that much of the additional inventory belongs to people who "don't have to sell".

Why would someone list a home they don't have to sell? They may have believed the bubble was coming and figured they should sell their house at the top of the market, then rent for a while waiting for the market came down so they could buy a similar house for less money. Some are simply second homes while others are investment properties they have owned for a while enjoying acute appreciation. Since the rental rates have not kept up with property values they are now sitting on large sums of equity that is not giving them a competitive return.

Example: Let’s say you own an investment property without debt worth about $1,000,000 and you rent it for 3,000 a month. After paying expenses your net income on the on the property may only be 25,000 per year. That means you are getting a very low return of 2.5% on your money (by the way current CD's are paying up to 6%), and since you feel the huge appreciation for housing is over for a few years you may as well sell the house and invest your money in a higher return.

Properties are generally listed exclusively with a broker for a minimum of 6 months. Since the “don’t have to sells” have it on the market they may as well ride it out to the end when the listing expires. For them there is no reason to lower the price too much, values will certainly go up over the long run, and they can get their price later rather than taking a big hit on it now. We are beginning to see these properties expire and many are in fact not re-listing.

When it comes to the sales price the difference between the people that have to sell and the people that don't is, with increased inventory, the "have to sells" are force to lower their prices below market value to compete with the inventory and motivate a buyer- which is not an easy task right now. In an interesting twist, many people who put their homes on the market with a “don’t have to sell” plan have lowered their comps by forcing their neighbors who have to sell to reduce their price. I have begun to hear owners stating they are taking their home off the market because they don’t like what their neighbor’s house sold for. “We’ll wait ‘til next year and put it back on”

What has exaggerate the situation is the buyers, who never need to buy- they can rent, have gone into a wait and see mode since there has been so much previous talk of the “bubble” and their is plenty of homes to choose from. They are thinking maybe the "have to sells" will reduce it again and they can save a few more bucks. Not necessarily a bad strategy, as long as you are not staying out of the market too long by renting. There are actually some pretty good deals out there right now if you are a buyer and have the patience, and a good professional, to examine the specific areas of choice closely.

The year has also been a time where there was uncertainties pertaining to interest rates and our new Federal Reserve Chief Ben Bernake. Rates rose consistently for the better part of the year and as you know interest rates effect purchasing power which is directly correlated to how much you can get for your home. Some good news for both buyers and sellers is the rates have actually dropped the last 3 months and the consensus on wall street is the Fed is most likely done raising rates for the some time. There has even been some scuttle over the past two weeks that he may lower the rate next year.

Now that the "bubble" has not burst, and the interest rates are not rising, the fact still remains that there is an over supply of homes on the market, and with the buyers in their wait and see mode, a lack of demand. This is still causing some price reductions on the "have to sells", while the “don't have to sells” are holding firm. As the “don’t have to sell” take their properties off the market and some properties get bought the inventory should continue to reduce. In theory this will equal the playing field a bit between the buyers and sellers and increase the volume of transactions as the buyer become engaged.

For property owners looking to sell or not, it comes back to the question I stated above, "how does this affect my property value". To answer this you would have to look at the very specific area that your property is located in. Take into consideration many factors including desirability, total supply, and ocean view or not, which side of the PCH is it on. Proximity to the beach and which beach is it. Adjacent sales histories and when you may plan on selling.

Only one thing is for sure. Time will tell.


Tobias