Beyond BuzzFeed: Tackling the 25 Toughest Homeownership Questions – #10b
Are we headed for another Great Depression in Real Estate?
The following is the third of a six-part response to Suzanne’s Buzzfeed comment. Here are the links to the full series:
- Introduction
- Are Home Prices Really Dropping?
- The Reality of Home Value vs. Price
- Crisis and Recovery
- Current Market Dynamics
- Conclusion
“I was in the process of building a modular home on my small 3/4-acre property but then stopped the process in construction. Ultimately, the interest rates were too high, and my mortgage payment would still be $2,500. I make $90K a year and can’t afford to buy a house. That used to be considered good money. Here in California, home prices are dropping, but I was told that prices have nothing to do with the ‘value’ of a home. I call bullshit. When enough people stop buying at the prices that are out there, and prices fall, then the value of homes is falling. They need to fall off the cliff; we need another Great Depression to bring home prices back down to reality. Big Business has its fingers wrapped around our throats because everyone needs to sleep somewhere, right? It’s a consumable that they have figured out how to wrangle every last dollar out of people, forcing people to be renters forever.” –Suzanne, 53, California
The thing I like about the real estate business as a business is that it’s a lot like toilet paper.
Unless you live in almost any civilized society where the use of a bidet is normalized, and well, just you know, cleaner—here in the U.S., you absolutely need toilet paper. And even with a bidet, you still need to dry yourself off otherwise you are walking around town with a soggy bottom. This is probably the last metaphor you ever thought you’d see on a blog about real estate, but there you go.
In New Hampshire, we have an extreme problem with homelessness. According to the NH Coalition to End Homelessness, the state has over 6,000 people unhoused statewide.
“About 653,000 people were homeless, the most since the country began using the yearly point-in-time survey in 2007. The total in the January [2023] count represents an increase of about 70,650 from a year earlier,” wrote Kevin Freking for the Associated Press. “New Hampshire, New Mexico and Colorado along with New York saw the largest percentage increases in homelessness. In all, the number of people experiencing homelessness increased in 41 states and the District of Columbia…”
Often these homeless issues are compounded by mental health and substance abuse issues. But I don’t think homelessness is really what a lot of people assume homelessness is. Certainly, if I was left without a house, without a safe place to lie my head at night, I would develop all sorts of mental health issues rather quickly. (My kids already have diagnosed me with ADHD and autism). But you know, I taught college composition at Great Bay Community College for ten years, and every semester I taught, I had at least one homeless student in my classroom. That’s at minimum 30 people that I knew of. All of them dragging themselves up out of the situation they were in—or at least attempting to do so.
I once knew a guy who lived underneath a bridge in Iowa City. He’d dug a hole underneath one of the abutments. He’d dragged a wire from an electrical pole, had a water heater, a working shower, full kitchen appliances, TV, a couch. A job. I’m not sure I can even call that homeless in the traditional sense.
Earlier today, I drove past a FSBO—a home for sale by owner without any assistance from a Realtor. People don’t hire Realtors for a number of reasons. One of the main reasons is they hope to save a buck or two on commissions. Why pay a commission on something they can do themselves, right?
The NAR keeps touting research that states FSBOs sell for about $95,000 less than if you hired a real estate agent.
Honestly though—that’s like Purdue Pharma paid scientists saying OxyCotin isn’t dangerous. Anyway, I called the FSBO. I told him, “You know, your house is really underpriced.” They had priced the home at $415,000. It wasn’t that much underpriced—under by $15,000.
“I’m well aware of my price and I am doing my part to make this home affordable. Although the market is highly competitive, I will be looking for my asking price and not engaging in a bidding battle.”
Except, he’s got a three-day open house, and if enough people see the property on Zillow, he’s going to get a crowd, and he’ll be stuck in a bidding war whether he wants one or not.
Since I’ve been in the real estate business, I have not been to a single open house that has had less than ten people through the doors, and not including the first house I ever sold, I’ve never had less than five offers. My buyer clients often compete with seven or more offers. In fact, my last buyer clients lost out on a burned-out home by a whole whopping thousand dollars and the winning bid turned the property into a parking lot.
In essence, when Suszanne says, “When enough people stop buying at the prices that are out there, and prices fall, then the value of homes is falling,” she’s basically asking for a boycott. But when you need toilet paper, you need toilet paper and in 2020 people actually purchased $40 toilet paper. I lived paycheck to paycheck pre-pandemic and a bit post-pandemic. I watched in horror as TP disappeared from grocery store shelves as I waited for my paycheck to arrive. By the time I was able to hit the stores, we were left with cobwebs.
When I write a Comparative Market Analysis (CMA), I try to figure out how much a house will sell for in the current market conditions.
The city property card for the FSBO assessed value stands at $389,800, which is considerably less than the $415k they are asking. But remember, I told the guy he had underpriced the home!
Pricing a home is a matter of marketing and not a matter of value. The assessed value is one thing; the market value is a different thing.
The CMA points to current market conditions and similar homes that have sold within the last six month period within the same geographical area. I talk about the town’s general market conditions first. How many homes are currently for sale? This is your competition after all. Second, you want to take a look at Zillow’s Zestimate. A lot of real estate agents get upset with me when I look at Zillow, but that’s everyone’s first stop when house hunting; it’s what’s familiar. I’ve discovered Zillow’s numbers are on average either too high or too low because their algorithms aren’t really looking at the nuances of the market around the subject property. You want to look at other details too: like how many days similar properties were on the market before it sold, did the properties go under contract for over asking, under asking, or right at asking?
Rule of thumb is that you generally want to be at the lowest price point in your class—for example, a three bedroom is in a different class than a two bedroom. A million-dollar home is not a four-hundred-thousand-dollar home. You get the idea.
A severely underpriced home or the opposite of that—a severely overpriced home—will cause the property to sit on the market longer than it should. The Realtor joke is that selling a home is like dating—the longer you’re on the market, the more people wonder what’s wrong with you.
You know, during the pandemic, I purchased some terrible toilet paper, the roll that was stuck all the way back in the shelf, that you had to crawl into to get a hold of. Some real John Wayne toilet paper: tough as grit and wouldn’t take sh*t from no one. But I bought the TP because I needed it.
We go into the grocery today, plenty of toilet paper. All the toilet paper you want. I bought a 38 pack yesterday for eighteen dollars.
The principles of supply and demand are inescapable.
Other posts in this series:
