I know it sounds like it goes against everything in your core. Real estate is negotiable and a good deal means a big discount. Right?
Well, that is not necessarily true any more.
Price is Not Value
The price of anything — a house, a car, a gallon of milk — is the owner’s estimate of what they think their product can command.
But the value is what the market is actually willing to pay.
Ask yourself this: If every house on the market was simply labelled as ‘available’ with no set price, how would you, as a buyer, behave? In this market, that might be the best way to think about it.
Musical Chairs, Sorta …
Do you remember the game of musical chairs — where there is always one more person than there are chairs. Well, instead of ten people and nine chairs, imagine the game with ten people and one chair.
This is what the market has become. It’s a ridiculous comparison, of course, but it applies. Low supply and high demand means prices rise — and right now, the supply of homes has never been lower.
Show Me the Numbers
The fact there is an inventory shortage is pretty well known. The issue is very few understand how extreme it has become.
Check out how much the market has changed:
- In May of 2008, there were 11,000 homes on the market and 1,200 under contract (a 9 to 1 ratio.)
- By May of 2011, there were 8,800 homes on the market with 1,200 under contract (a 7.3 to 1 ratio)
- By May of 2017, the numbers were 3,800 and 2,300. The ratio had fallen to a never before seen 1.65 to 1.
- And now in March of 2018, 3,000 and 2,100 is where we stand for a ‘you have got to be kidding me’ ratio of 1.42 to 1.
And when you look at some of the mature urban markets, especially those that are supposedly affordable, those markets have actually inverted with more houses under contract than there are homes available!
Per the chart above, the Museum District and Windsor Farms area has only one house for every three buyers! (April 2018 shows 18 active listings vs. 56 pending sales.)
Competition is fierce, to say the least.
There is No Fix
Here’s the bad news, there really isn’t a fix.
For one, we are not going to build our way out of this problem.
Housing can only be built (in any substantial quantity) in areas where there aren’t already houses. In other words, the only place we can build houses is in the outer suburbs — further and further away from the urban core. And for many, what is quickly becoming a 40 or 50 minute commute simply isn’t an option.
On top of that, the price of home building materials has never been higher and the labor pool has never been smaller, resulting in correspondingly large cost increase in new construction.
Two, owners where houses are few and far between are electing to simply stay put. Why? Because once you sell a home, you have to go buy another one – and why would any seller in their right mind sell their home only to have to go and buy another one in this crazy market? Especially if they have a 3% 30 year mortgage and their equity is rising as rapidly as it is?
The situation we are in is going to be here for quite some time.
The Lesson — Don’t Mistake Tactics for Strategies
The decision to buy or sell is a strategic one. But how you buy or sell is a tactical one.
Paying over asking price does not mean you or your agent is a bad negotiator — nor does waiving inspections, or appraisals, or offering rent-backs (provided you are not putting yourself in financial danger!) All it means is that you are doing what you can to secure an asset that is in demand.
We get it, the inventory crisis is causing some of the most extreme market conditions in history, which is unnerving to navigate. And yes, we fully acknowledge that it takes a time or two to really figure out what you need to do to win.
But just know that the smartest people in any room want to own the most valuable assets available and will do what it takes to secure them. And for the best houses in the best neighborhoods, there is going to be intense competition. You have got to come correct if you want to win the battle.
I know it is difficult to hear, but today’s market doesn’t resemble the markets of the past – even the very recent past. Make sure to adjust yesterday’s strategies to today’s conditions and don’t mistake paying asking price or above with a poor decision.