Growing up, one of my favorite games was Masterpiece. It was always an adventure trying to determine which pieces of art I liked, which were valuable, and which were forgeries. The real estate market, in times of uncertainty, is much the same game or can feel that way anyways.
As you are probably aware, interest rates have nearly doubled over the past few months and at the same time prices, have jumped 20% year over year. For a buyer today, it’s difficult to know if you’re buying a gorgeous property that offers value or if you’re buying a dud or, heaven forbid, even a forgery. Now I know what you’re thinking, there are no forgeries in real estate, and if you are you’d be correct. That’s the beauty of real estate, it’s not just an investment that hangs on the wall but is something you also get to live in. So, there are no forgeries, but the feelings of self-doubt and nervousness are real.
I recently came across a Winslow Homer painting that was part of my Masterpiece game. “The Herring Net,” is that painting where you see two sailors in a small dingy in what appears to be a rough sea. [See what your home is worth here] They’re wearing rain slickers and caps; the sky is turbulent, and the waves are as high as the men, if not higher. As a kid I always thought this as a very foreboding image. However, as I looked at it today, it’s not really foreboding at all and in fact it’s an image of two men working to pull in a net full of fish. As an allegory for today’s real estate market, I don’t think I could find a better one.
On the surface, this market is starting to show some signs that the frenzy may be easing and the shortage of available homes not so acute. In my local market, the Conejo Valley, we started the year at an unprecedented 92 available homes. Today we stand at 250 – a dramatic change. And yet, in 2020, we had 440 and in 2018, we had 550! Still, it’s undeniable that the inventory is increasing. As you can imagine, this makes buyers feel insecure. “Am I buying at the peak?” “Are prices going to drop?” Just last month I had one listing where a buyer came in over ask and gave up most of their contingencies.
When I told the agent the seller was going to accept without a counter, he said, “Hold on…” The buyer was so accustomed to losing bids on multiples that when they didn’t’ get a multiple counteroffer, they assumed they were over paying and cancelled. I always remind my buyers that when they win the bid, it is precisely because they offered the highest price and best terms that they won, which means of course they will be paying more than someone else offered. Just to put a point on it, I did end up selling that home for a little less than what the first offer came in at, but not by much.
It’s funny really, but as a keen observer of economics all I hear these days is that we are heading into a recession. That the Fed rate-hikes and “Quantitative Tightening” are going to drive the economy into the toilet. Extrapolated out it has been suggested this means we will see a correction on home values. And while it is true that there are substantial headwinds for the economy, inflation being a potential hurricane, we still have an incredible shortage of real estate to house our population [Find us on social media here]. And if you think that multiple offers are going away, you would be surprised to hear that just this week I had two offers in two vastly different price ranges and markets, one in Los Angeles and one in Simi Valley, lost to multiple offers. In fact, both had 7 offers and even though both my buyers wrote well over asking, we still lost out. As did 5 other buyers on both, I might add.
I will concede this much however, the days of sellers commanding the moon and stars may be coming to a conclusion. You can see this as evidenced in the rise in inventory and in the price reductions that follow. According to Redfin, 1 in 5 homes reduced price. But that is not the same as price correction, not yet anyway. One trend that I am seeing, is that some agents/sellers are pricing very aggressively to the low side. I saw this with my Los Angeles buyer where one home we thought about writing on had 20 offers and was probably 40% below market. If you looked on the surface at the asking price, you’d initially assume that the market was correcting, but when it finally closes the price will suggest otherwise. It seems some agents are anticipating that buyers will feel more confident if they receive a multiple counter, so they’re pricing to ensure they get multiples. After all, we’ve been dealing with multiple offers for several years now and the herd mentality is what we’re used to. As a result of the price reductions and in response to the nervousness out there, if a home has been sitting for a few weeks, I’m having my buyers write aggressively below ask [Contact Tim here]. Because just as buyers are watching the market nervously, so are the sellers. But you see, like the Homer painting, if all you do is look at the waves and the stormy skies, you’re likely to miss the net full of herring.