As I come up for air after the release of my latest market report, I was struck by how much the interplay between buyers and sellers has changed in New York and possibly in other markets in the past 6 months. When I was in college, I remember reading Tom Wolfe’s The Electric Kool-aid Acid Test and thinking, I don’t know what the title means but someday when blogs are invented, I am going to use the title in a post [wink] and still not know what it means.
One of the changes in the current New York market has been the closing gap between buyers and sellers. Buyers have been disillusioned at the resistance of sellers, who were annoyed at how unrealistic buyers have been. The price spread between then kept down sales activity.
When the housing boom ended in mid-2005, buyers immediately thought the market would switch from extremely pro-seller to extremely pro-buyer. And why not? Inventory was growing and mortgage rates, especially adjustable rate mortgages had been rising. Seemingly overnight, buyers became as unrealistic as sellers had been and began to threaten to go to the rental market. Buyers figured that, hey, if there are so many competing properties, then I can name my price or I am out of here.
Much of the attention of the growing inventory supply was placed on new development, both locally and nationally as being the key cause of the supply problem.
Of course, lets not forget slowing demand and its contribution to rising inventory. New housing units kept entering the market at the end of the proverbial conveyor belt on the assembly line and there were fewer buyers at the end to take them. A pile began to form that the market is still dealing with.
But its not all about new development. One of the biggest factors was the rise in re-sale inventory.
Shortly before the end of the boom in mid-2005, sellers started to look to cash out of the market en masse but they didn’t look at current market conditions. After all, sellers had been programmed during the boom to name their price and a buyer would always come along. The market was rising so rapidly that if the property was overpriced, it might take an extra month to sell, but it would sell. Pricing was an after thought. It was all about them (sellers) and what they wanted to get for their property.
A year went by and the New York real estate market went from price appreciation averaging 20% per year for the past 3 years to averaging 6% in 2006. However, re-sale properties were being priced and placed on the market in large numbers as if the market was continuing to rise 20%. Sellers were disconnected with the change in the market. Buyers were frustrated because the inventory numbers suggested more choices yet so many were not priced close to market levels. A large portion of the sellers were not very serious, armed with the notion that if you make my price, I will move. Since a large majority of the listings were not priced realistically, buyers skipped over them focusing on the sellers that were. These seller however, were priced closer to market and were not amenable to much negotiation because they were more in line with the market.
The phenomenon of re-listing “cash-outs” cluttered the listing landscape. The buyers threw up their hands in disgust and decided to wait. The overpriced inventory got little if any activity or offers and these would-be sellers let their listings expire. The growth of inventory levels over the past two years was exaggerated by those looking to cash out, piling on to the new development inventory that was being released too quickly. It gave buyers overconfidence in the strength of their position and was a large reason for the friction or disconnect between buyers and sellers.
Last fall, in local markets across the country, including New York, as well as the aggregate national statistics started to show inventory leveling off. In New York, inventory leveled off in the third quarter and dropped sharply in the 4th quarter. Levels are still well above were they need to be for a more balanced market condition but perhaps its a start.