The New Rules
Of Real Estate
As Inventory of Homes Nears 10-Year High,
Pricing Becomes Crucial, Relocating Is Trickier
By RUTH SIMON
March 28, 2006; Page D1
As the spring selling season moves into high gear, the cooling
housing market is upending the conventional wisdom that guided
buyers and sellers during the housing boom.
The changing dynamics have implications for a wide variety of
players in the real-estate market. Some brokers are advising sellers
to price their homes in the bottom 25% of comparable properties.
People looking to enter the market for the first time are being told
not to overly stretch their finances because rising home prices may
no longer bail them out. Employees who are relocating are being
advised to steer clear of new subdivisions where competition from
brand new construction could make reselling soon difficult.
Such strategies aren't entirely new, but they had fallen from favor
in many markets as home sales heated up early in the decade.
Recently, markets have shown signs of cooling. The number of homes
for sale has climbed about 30% over a 12-month period, reaching its
highest level in nearly 10 years, according to the National
Association of Realtors. The group recently predicted sales of
existing homes would drop 5.7% this year versus a 4.4% gain in 2005.
Higher mortgage rates are making houses less affordable in many
metro areas. Rates on 30-year fixed-rate mortgages now average
6.46%, up from 6.14% a year ago, according to HSH Associates, with
rates on adjustable-rate mortgages moving up even faster. Another
increases in interest rates by the Federal Reserve, expected today,
could push mortgage rates even higher.
What this new environment means for buyers and sellers varies from
market to market. To be sure, sales are strengthening in some
markets, including Albuquerque, N.M., and Indianapolis. Economic
growth and an influx of investors have helped to push home sales in
Houston up 13% in the first two months of 2006 from a year earlier,
says Steve Barnes, president of Coldwell Banker United, Realtors.
But in many parts of the country, after several years of sellers
calling the shots, 2006 is shaping up to be a market in which buyers
are gaining bargaining power. In New York City, where the housing
market has begun to cool, some buyers are now getting condo
developers to pay city transfer taxes and certain other expenses
that can total 3% to 4% of the purchase price, says Jeffrey Jackson,
chairman of appraisal firm Mitchell, Maxwell & Jackson.
What follows is a look at what this means for different groups of
buyers and sellers.
Sellers
Say goodbye to the days when sellers could simply look at what their
neighbor's house sold for and then list theirs for 10% more. Brokers
are advising sellers to make sure their house comes across as a good
value relative to other homes on the market.
"Pricing is absolutely critical right now," says Rosey Koberlein,
chief executive of Long Realty Co. in Tucson, Ariz., where sales are
off 20% so far this year.
In determining a home's value, Richard Druker, a managing broker
with Baird & Warner in Chicago, considers everything from the height
of the ceiling to the quality of any renovations and whether the
front door creates a good first impression. "A great thing to do is
to look at properties that are priced comparably to yours and
ask, 'Which would you rather buy?' " he says.
Overpriced homes may never even catch the eye of their intended
audience. That's because buyers and brokers increasingly rely on
computers to screen listings based on price, size and other
parameters when new properties come to market. Also, listings
typically generate the most excitement and interest in their first
few weeks on the market.
David D'Ausilio, a broker-associate with Re/Max Heritage in
Westport, Conn., is counseling his clients to price their homes in
the "bottom 25%" of comparable homes and to cut their asking price
by 3% to 5% if the listing doesn't generate several showings or
written offers within three weeks.
Brokers are also telling sellers to fix problems that buyers might
have overlooked in a more heated market. Bo Menkiti, president of
the Menkiti Group of Keller Williams in Washington, D.C., recently
advised one couple to replace their old stove and refrigerator in
their otherwise updated house. While the return on the investment
was likely to be minimal, "you don't want to leave things that would
be a total turnoff," he says.
First-Time Buyers
As the housing market cools, first-time buyers have the opportunity
to be more thoughtful about their purchases and to negotiate for a
lower price, a more flexible move-in date, or incentives such as
seller-paid closing costs.
Jill Green, a Realtor with Century 21 Award in Carlsbad, Calif., a
coastal community north of San Diego, has been making offers that
are 1% to 5% below the low end of the seller's price range. "Sellers
are entertaining the offers and are taking them," she says.
Some brokers are advising first-time buyers to leave a financial
cushion instead of stretching as much as possible and counting on
rising home prices to bail them out. They are also asking sellers to
help with closing costs.
Elise Owen, a program manager for a nonprofit group in Washington,
recently purchased a one-bedroom condo for $178,000. The seller
threw in $5,000 toward closing costs. "It allowed me to feel like I
was on more secure ground by keeping some of my savings available"
for emergencies, Ms. Owen says.
Move-Up Buyers
Move-up buyers face the delicate task of balancing a purchase with a
sale. A growing number of buyers are making offers that are
contingent on selling their current home. But such offers are often
frowned at, in part because these deals are more likely to fall
through. "You're going to get the house for a better price if it's
noncontingent," says Jane Powers, a broker with Ewing & Clark Inc.
in Seattle.
In some parts of the country, such as California's Silicon Valley,
cooling is most evident in the higher end of the market, good news
for homeowners looking to trade up. "For an extra half-million
dollars, you can get quite a bit more for your money than you did
before," says Richard Calhoun, broker-owner of Creekside Realty in
San Jose.
Relocaters
People who are relocating for a job often can't afford to let their
home sit. Tim Popadic last summer listed his four-bedroom colonial
in Monroe, Conn., for $725,000, $26,000 above his broker's initial
estimate, after he accepted a position as an associate pastor with a
church in Palm Beach Gardens, Fla. When no offers materialized, he
delayed his move and cut his price three times, before accepting a
$557,000 offer in October. "At the end of the day, [the broker] was
right," he says.
Employers are looking for ways to ensure that homes don't languish
on the market when an employee relocates. The number of company-
ordered appraisals is growing as employers seek to get the price
right before a house goes on the market, says H. Cris Collie,
executive vice president of Worldwide ERC, an association of
companies and professionals that relocate employees.
Going forward, Mr. Collie expects employers to more aggressively
enforce policies that require transferees to price their homes close
to the appraised value. He is also seeing renewed interest in "loss
on sale" programs, which compensate people who are relocating for
losses if they sell below the purchase price. One in three large
companies now offers these policies, according to a Worldwide ERC
survey, down from 42% in 2000.
Making sure the new house will be easy to resell is also crucial for
people who are likely to be transferred again in a few years. "In a
down market only the nicest homes sell quickly," notes Bradford
Charnas, president of Charnas Appraisal in Cleveland. Mr. Charnas
advises transferees to look for homes that are in top-notch
condition and in an excellent school district.
Some relocation experts also advise transferees to shy away from
buying a home in a brand-new development. "If you're buying in a new
subdivision...you're competing with new construction" when you sell,
notes Pam O'Connor, president and chief executive of Leading Real
Estate Companies of the World.
Investors
As the housing market cools, investors used to seeing quick profits
in once hot markets such as Phoenix, Washington, and southern
Florida may be disappointed. In Tampa Bay, Fla., investors can still
find buyers for one-of-a-kind homes in established neighborhoods.
But in some new subdivisions, dozens of similar investor-owned homes
are competing for buyers, says Craig Beggins, president of Century
21 Beggins Enterprises. "If you have any way not to sell right now,
don't," Mr. Beggins tells investors. "If the neighborhood is brand
new and no one is living there, my advice is to rent it if they can."
But the decision to sell or rent can be tricky, particularly if the
rental income isn't enough to cover the mortgage and other carrying
costs. Rental homes typically don't show well, says Bob Hamrick,
broker-owner of Coldwell Banker Premier in Las Vegas, and often must
be vacated and given a fresh coat of paint and new carpet before
they are put back on the market.
Some investors are turning to stagers to give a vacant new home
personality. Rebecca Grainger, co-owner of Staging Masters Inc. in
central Florida, hangs towels in the bathrooms and rents furniture
for key rooms, such as the foyer, living room, dining room and
master bedroom. "We're basically making it like a model home," she
says.
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