When real estate values are rising, homes that are well priced, well staged, well marketed, well photographed, and easy to sell tend to sell quickly and for top dollar. In that situation, it’s almost impossible to price a property too low, because buyers will rush in and bid it up. If it’s priced extremely aggressively, it may create a larger crowd of willing buyers and the ultimate effect may be a higher than expected sale price. That’s a strategy that often works well in a hot market. That’s less effective now, as conditions have mellowed. The question, then is how to price a home in a correcting market? Or one that is flattening or generally cooler?
Right now the Silicon Valley real estate market is leveling off. Some pockets are rising a little, some are declining a little, and many are back and forth month to month. Overall, prices remain lower than a year ago and offers are fewer and less strong than a year ago, too. We have had a correction since the spring of 2018, when prices hit their peak. Housing prices fell about 25% in many areas with a low point in December – January, but values rose in 2019 somewhat, but have not (yet) recovered. Buyers are cautious and some sellers may not understand the level of concern. I am seeing some pricing misfires in Silicon Valley. Prices are down about 10% in San Jose as compared to last year. This remains a seller’s market, and I do not want to suggest that we are in a buyer’s market now – but this could change. The market can be fickle and there are lots of movements up and down over time.
What happens with pricing in an overheated seller’s market
First, let’s talk about what happens with pricing when the market’s hot, because that’s what both home owners and their Realtors have gotten used to. It is a myth that all offers are great in a deep seller’s market. Even in the strongest seller’s market, not every buyer comes in way over list price, and not every buyer comes in with no contingencies. Sometimes, actually just one home buyer will spike the price, and we see the closed value but don’t know that 90% of the would-be buyers did not go anywhere near the closed sale price. What we never see is the range of values offered. I work with clients who are both home sellers and home buyers, and from the listing side, I can see that there’s a variety of prices and terms offered. (Once in awhile, all buyers come in high. Usually, though, there are a few who don’t get it and come in quite low.)
Here’s what a spread of pricing looked like a few years back on a listing that I had which received multiple offers. The green line represents the list price, and although it was well known that the home was priced a little low and would be getting multiple offers, one buyer came in at exactly list price. The other 14 all came in higher, with a couple which were compellingly higher than most. Just as with the price, there was also a spread of down payments and of contingencies (or lack of them). Most of these purchase contracts came in with no contingencies for loan, appraisal, or property condition.
What happens in a cooling or correcting market (with price and terms)
When the market cools down or corrects, buyers pull back on both price and terms. There are lower numbers of offers, though open houses may still be quite active. Buyers are looking more than actually buying!
It does not have to be a buyer’s market for this to happen. It just has to be “less hot” than previously to make buyers cautious. Our current market has leveled off. It is a seller’s market, but less hot than a year ago. Buyers are worried about over paying, among other things. Nervous buyers don’t pay as much as confident ones. That seems to be where we are today.
Now imagine the graph above but with 1/3 of the offers, and all of them in the bottom 1/3 of pricing. Five offers would still be great! But the seller may be disappointed if the buyers’ offers are not what was hoped for. When sellers get a few offers all in a band of pricing – that’s the market value. The home’s not worth more if no buyers are willing to pay more. The definition of real estate market value is the price that can be agreed on when both buyer and seller are not unduly pressured. If the seller wants a price and no buyers are meeting it, then the seller is effectively the highest bidder on the property.
Here’s what happens in a correcting, cooling, or flattening market.
- the number of offers is lower
- buyers’ contracts come in at prices closer to list price
- offers are more likely to have contingencies
- offers subject to the sale of another home reappear and may become viable (good news for move up buyers)
- smaller down payments may be seen more often
- prices flatten or decline since buyers are no longer pushing the market up as dramatically
- the number of expired, canceled, and withdrawn listings increase
- as sellers worry about further declines in values, more put their homes on the market
- the days, weeks, or months of inventory may increase if buyers do not keep up with the increased supply
- many sellers will eventually change their list price strategy and will only list the home close to the anticipated sale price rather than a teaser price to attract multiple offers at a number the seller would never accept
- sellers may do more repairs upfront, or provide things like a Section 1 pest clearance
During the hot markets, many sellers intentionally under-price their homes to get a lot of offers and to drive the price up high. In a cooler or correcting market, this can backfire if offers come in close to list price but the seller had no intention of accepting pricing so low.
As the Silicon Valley real estate market gets closer to a balanced or normal market, different strategies will help to get the home sold for the best price in the current market. During the market crash and recovery, which ran from about 2006 to 2012, it was an uphill battle to sell. The days of inventory were incredibly steep by local standards. (Right now in Santa Clara County it’s just 23 days.) With conditions like we had during the Great Recession, sellers were making drastic cuts to their sale prices in order to get the homes sold. Many, as you know, were lost to foreclosure, and this compounded the downward spiral.
While we are NOT experiencing a market similar to 2006 to 2012, it is a good reminder that prices move up and down, and when they’re moving down we don’t try to sell as if they are moving up. There are false starts to both market declines and recoveries – please note the changes in market direction in the graph above. We never really know what the market is doing until it’s in the rear view mirror. Right now, we do know that it’s cooler than a year ago, and it’s not as easy to sell in 2019 as it was in spring 2018. What if it continues cooling? If that happens, it will be time to adapt again.
How to make sure your home sells in a cooler market
If you want or need to sell now, and don’t have or want the option to wait for it to become another red hot seller’s market, there are strategies that you can employ to increase the chances of your home selling.
- Find out what the odds of success in selling are right now. Your agent can tell you what the inventory is, and what the rate of sales is (the absorption rate). If 8 out of 10 homes are selling, that’s great, but if it’s 2 out of 10, you’ll need to work harder to get your home into that short list. (Even in the hottest markets, some homes never sell. That’s even more true when it cools.)
- Study the real estate market for your home / condo / townhouse and its special features or size etc. – if you’re on an acre and have an estate or luxury real estate without a pool, you need to study how similar properties near yours are doing on terms of sales. Knowing how the other big homes on big lots are faring may not be enough if the buyers only purchase properties with pools. Studying sales just by zip code is not enough.
- Consider pricing the home where you believe it will sell a month into the future at the closing date. If prices are declining, try to estimate the rate of the decline and jump ahead. Remember, the closed sale prices were mostly negotiated 30 days prior, so in a sense that’s old news. If the market is especially hard, you may need to jump ahead more than one month.
- If the amount of inventory is rising but sales are not rising, you’ll want to strategize with your agent to make your home the most attractive one for the money. For example, let’s say only 3 homes out of 10 will likely sell. You don’t want to be just another one of the 10 homes. Yours has to be the best value for the money in that situation.
- Part of the value proposition can be doing repairs. When home buyers and their Realtors see condos and houses with major issues already addressed, they are not worried about signing a blank check and having a horrible financial surprise later. Buyers appreciate solid, safe homes and conversely worry about things like bad electrical panels, foundation cracks, and other big ticket items. Many home fixes done to sell a home will provide a good return on investment.
- For buyers and sellers both, it’s a matter of price and terms. In addition to doing some repairs, there are other “terms” you can provide to a buyer to make the sale possible. In the past, these have included the seller paying points on the buyers’ loan to make the house payment lower, providing a home warranty for the buyer, possibly providing a credit at closing for something small (like new carpet for a room – lenders don’t like credits, so there will be a limit on that). Talk with your listing agent about the kinds of things you can do to attract more home buyers.
We are not in a cold market right now. The change from a year ago is palpable, though, and it’s been hard for some home sellers to adapt. At some point, we will have a market correction, or maybe even a crash. Ups and downs are part of the reality in real estate, just as is true with the stock market. Knowledge is power, and understanding the market in which you sell your home, and knowing what it takes to sell in a down market will enable you to be a successful home seller even when most of the realty listings around you languish. The current, more balanced market with the sellers having just a little bit of an upper hand may be a blip on the screen, and maybe come September it will turn into another red hot market. Or something could happen and the cooling will increase. We do know, though, that the market can and will change from time to time. If your home is on the market and not selling, you may want to get more information on market conditions and reassess with your Realtor what it will take to get your home sold. You may get 1 – 3 offers instead of 10 or 15, but remember that it only takes one solid buyer for your home to sell.
Finally, a word for home buyers: this softened market is a great opportunity to purchase a home with much less competition. If you write an offer on a Silicon Valley home that has been on the market awhile, you can probably keep all of the normal contingencies, too – and sellers will be glad to get a contract from you. It is important to not confuse a softer market with a buyer’s market or a distressed market, or you may price too low and not be successful. Right now, the days to sell in Santa Clara County is just 23, and homes are selling for more than list price.
Looking to buy or sell a home in Silicon Valley this year or next? Please reach out to me for a confidential, no obligation & no pressure conversation. Because I do get my listings sold and my buyers into homes, I am always looking for more clients with whom to work. If you’re interested in learning more about me, my background, etc., you can do a web search for me, or check out my profile on my popehandy.com website.