Scrounging for the Bottom

 By Ken Fears, Economist (Reprinted with permission)

After nearly a year of bad news from the housing market, it seems like things went from bad to worse this spring. First, it was the sub-prime mess, then rising mortgage rates, and finally, home sales continue to fall lower and lower. But prices have been relatively robust, rising only 0.6% over the 12-month period ending in July of 2007. Market watchers keep predicting a secession to the declining market, but after each news release, the market is left wondering, how far are we from “the bottom”?

Theoretically, with supply on the rise, sellers should be offering a discount to entice buyers into the market. But mortgage rates have been rising this spring. This trend compounds the problem because the monthly payment that buyers face may not be any lower, despite price reductions, when mortgage rates are factored in. Sellers, reluctant to lower prices further may only be hurting themselves. Consequently, buyers are being stung from both sides, prices that are slow to come down and mortgage rates that are on the rise; the end result is a loss of affordability and slower sales. The responsibility of a seller’s agent can be very tough and there have been few tougher times than right now. In many markets, concessions, even deep concessions are necessary to move properties and sellers are never receptive to news like that. The zooming prices of the last 5 years have made it even tougher as sellers’ expectations can be grandiose.

Locally, we can see that average price concessions (the ratio of the final sale price to the original list price) in the housing market covered by MRIS have increased over the 12 month period ending in June of this year. Concessions have been strongest in the under $200,000 price range where concessions rose 2.2 percentage points from an average of 96.6% in the second quarter of 2006 to 94.4% in the second quarter of 2007. Home prices were most resilient in the over $600,000 range where the concession ratio moderated 1.0 percentage points. Average Change to DOM (days) Average Change to Concession (% points) <$200K 22.1 -2.2 $200K-$299K 24.7 -1.6 $300K-$399K 22.3 -1.6 $400K-$599K 22.3 -1.7 $600K> 17.8 -1.0 Simultaneously, the average days on market for a listing have risen. Average days on the market rose the sharpest in the range from $200,000 to $299,999 from an average of 47 days in the second quarter of 2006 to 72 days in the second quarter of 2007. The smallest increase occured in the over $600,000 price range.

Given this change in days on market, the change in the average concession ratio should not come as a surprise. It might suggest that original list prices are too high leading to a build up in days on market until enough of a concession is made to move the property. Lower initial list prices may help to move a home faster and prevent larger concessions when re-pricing listings as the days on market add up, casting a negative light on the property. It is hard to tell where prices “should be” and every market is different depending on how much prices have risen relative to buyer’s ability to purchase homes. In addition, current supply as well as new construction in the pipeline are factors. A few months from now we will have a better picture of where the market stands. But for now one thing is for certain, buyers and sellers are learning just how valuable their Realtor®’s advice and service can be.