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Realities of Real Estate: What to watch for in a changing real estate market

By nearly every statistical measure, the real estate markets are in a period of transition. We’ve gone from boom to bust, and now we’re on a path to renewed growth. In its most recent analysis, the widely recognized Case-Shiller home price index summarized the health of the housing market as follows:

“The news of home prices in this report confirms recent good news about housing. Single family housing starts are well ahead of last year’s pace, existing home sales are up, the inventory of homes for sale is down and foreclosure activity is slowing. All in all, we are more optimistic about housing. Upbeat trends continue. For the third time in a row, all 20 cities and both Composites had monthly gains. Stronger housing numbers are a positive factor for other measures, including consumer confidence.”

In a changing real estate market, the rules of the game also change. For those engaged in the buying and selling of homes, it’s important to understand how a shifting landscape will affect the ability to produce a successful outcome. More specifically, here’s what you should keep an eye on, as we turn the corner.

-Inventory: The number of homes available for sale is significantly lower than normal. The lack of inventory is the result of several factors, but with respect to a changing market, low inventory can be a reflection of sellers who are taking a wait-and-see attitude.

This time of year, many sellers are already predisposed to holding off until spring. With signs of an improving market, this tendency is further reinforced, as sellers hope for higher prices.

However, a flood of new listings in the spring also means more homes competing for limited growth in the pool of potential buyers. As a result, waiting for spring and a stronger market probably won’t benefit sellers as much as they might think.

-Lending: Interest rates are at historical lows, and the Federal Reserve has indicated that it intends to take the actions necessary to keep rates low for the foreseeable future. Nevertheless, rock bottom interest rates don’t really help buyers if qualification standards on the part of banks remain exceptionally tight.

Should the economy show signs of improvement, lenders are likely to loosen up. This will enhance buying power and should serve to push prices up. But don’t look for big changes here, or the price appreciation they might inspire. Given poor visibility for the nation’s fiscal future, we expect that the banks will continue to be cautious.

-Balance of power: During the recent implosion in the housing market, four years of declining prices have put buyers squarely in the driver’s seat. For a long time now, they’ve held the upper hand, but the deck is being reshuffled, and sellers are getting some better cards.

Many buyers mistakenly believe the power is still completely on their side, only to get a wake-up call, when they’re outbid on a property or see a home they’ve been eyeing for some time suddenly go under contract. In an improving real estate market, buyers, sellers and agents need to be mindful of a turning tide and adjust their expectations accordingly.

-Negotiation strategies: Commensurate with the transfer of power from buyers to sellers, contract negotiation strategies must also be modified. Low-balling a seller on price has never been a particularly productive tactic, but as sellers become more emboldened by a better market, looking to get a house below market value is even less likely to result in a successful sale. Sellers are starting to hold the line on price and be more willing to wait, knowing that prices are improving.

As a result, it’s becoming more important for that initial offer to be reasonable. Otherwise, the well can be poisoned to the point that the two sides will never come together.

The same holds true for all the additional aspects of contract negotiations, things like home inspection issues, settlement dates and various other contract contingencies. Overall, buyers will need to realize that it will become more of a give-and-take process, and they will need to show more flexibility.

-Pricing: In the move to more of a seller’s market, theories behind picking a list price take on a new light. When the market was declining and prices were falling, sellers tended to opt for a higher list price, knowing that buyers were likely to come in low. This is different from what we experienced during the housing boom, when you could price a house closer to market value, in hopes that a bidding war would ensue and ensure top dollar.

These days, we aren’t anywhere close to that scenario, but we are beginning to see more multiple offers. Consequently, sellers looking for a reasonably quick sale are more inclined to go on the market without feeling the need to build-in a lot of negotiating room. So, buyers should be aware that they can no longer automatically knock a significant amount off the asking price. In many cases, homes are now priced fairly close to what they might ultimately be worth.

-Foreclosure activity: As noted by Case-Shiller, foreclosure activity is slowing, and it sees this as a sign of an improving market. However, although the number of foreclosures by banks might be declining, the sale of foreclosed homes could actually increase.

The reason for this is something called the “shadow inventory.” Lenders have been holding on to a large inventory of foreclosed homes, waiting for better times. When the real estate market strengthens, previously foreclosed homes will increasingly come to market. Lenders are in the business of loaning money, not selling homes, and they’re eager to get these properties off the books.

So, although it might be counter-intuitive, an increase in foreclosure sales doesn’t necessarily mean that real estate is backsliding into another recession.

-Days on the market: At the height of the housing boom, the time it took to sell a house fell to less than a month. Then, we went into free fall, and homes languished on the market for a year or more. Buyers not only became desensitized to how long a property was listed for sale, they actually looked for homes that had been hanging around for a while, believing that a long time on the market would encourage the seller to capitulate on price.

Now that we have an uptick in the market, houses that are well-priced can go quickly. So, if you’re a buyer, and you spot a house you want, don’t be lulled into thinking it’ll wait for you to make up your mind. It’s not uncommon to see a good buy get snapped up in just a few days.

-Herding effect: Finally, changes in the housing market can happen rapidly. Due to the duration of this recent downturn and the length of the recession, normal patterns of home buying and selling have been greatly disrupted. People have put off upsizing, downsizing and moving to accommodate job changes.

Plus, initial household formation has been thwarted by the difficulty for first-time buyers to secure a job and the necessary cash on hand needed to make a purchase. But as conditions evolve, a sort of herding effect can take hold, where buyers become more aware that prices, and perhaps interest rates, are headed higher. Suddenly, they get concerned about missing the boat and find a new sense of urgency to make a move.

Given the anemic state of the economy, we don’t anticipate a hard turn for the market, but it will build over time as consumers become more optimistic about the future.

Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is