AVOIDING THE MUSHY MIDDLE

I listed a home this week which has booked over 40 showings (!!) in just over 24 hours on the market.  We've got two offers in hand already despite the fact we plan to spend four more days on the market before making any decisions.  

The prospects for a bidding war are excellent and in some ways, this whole experience feels a lot more like the market of 2021 than the market of 2024.

So what gives?  In short, it’s about value. 

This is a single owner home dating to 1972 with lots and lots of “original” inside of it.  Original kitchen, original baths, original windows, original paint and carpet.  There are security bars on every window, heavy duty steel security doors on every entrance and it takes about 13 different keys to navigate through all the random installed deadbolts that have been added to the home through years.

 

You would think this is a dangerous neighborhood, but it’s not.  It’s actually a super nice neighborhood, and a quick look at the comps shows that homes routinely sell in the $600k - $700k range with any updating at all. 

 

It’s an estate sale situation, and rather than take four months fixing it up and sinking $50k or $60k into it, the family wants to move on.  So it’s listed at $525k, making it a true “value play”. 

 

There are two types of homes right now that are drawing lots of attention in our early spring market.  Elite homes in great locations which simply stand out regardless of price… and fixers priced well below market but with the promise of instant equity for anyone willing to do the work.

 

Between these two extremes is what I call the “mushy middle”, and that’s a much harder space to navigate. 

 

If your home is an okay area with some updating but also some not updating or it backs to a busy road or if it’s priced based off a comp from April of 2022… you are in the mushy middle and that a very tough place to be.

 

At the high end of the market, rates are not as big of a factor.  Reality is there is tons of money sloshing around in this economy and most of it sloshed up to those who were already well off.  For them, it’s see it, like it, buy it.

 

At the lower end of the market, properties that have the ability to generate instant equity constitute value.  In challenging economic times, value is gold. 

 

But in the middle, it gets mushy.  And that’s where 75% of the market resides.  Sellers pricing off a market (and interest rates) that no longer exist, and buyers deliberating endlessly over the actual cost of buying a home in a 7% rate environment where house payments are often 25% or more higher than rents, even with a 20% down payment.  That formula leads to doubt, fear, uncertainty and delay.  Sometimes endless delay.   

 

So you have to know what you’re doing and what segment of the market you are shooting for when you list a home for sale.

 

We’re leaving our Centennial property on the market for a full five days before looking at any offers.  I’ve told agents to back twice… go back three times… do whatever you need to do to make sure you and your buyers understand what you’re getting into and are willing to own whatever offer you ultimately submit… because the sellers are not making repairs and will not renegotiate once we go under contract.

 

Measure twice, cut once. 

 

I’ve already received two offers on the home from agents trying to beat the rush (again, we’ve been on the market for all of 24 hours).  The last thing we want is a rushed offer from a buyer who spent 15 minutes in a home and made an emotional decision to engage with a property that needs a lot of work. 

 

Slow down.  Count the cost.  And for the agents, understand that your reputation is made or broken by the behavior and decisions your clients make while under your tutelage. 

 

What we want is a solid offer from an educated buyer with a knowledgeable agent who has run the numbers and counted the cost.  For a bunch of buyers, this deal will make tons of sense.  For others, it won’t. 

 

As an agent, the fastest way to disqualify your buyer is if I get the impression you want/need the deal more than they do.  And there are a lot of agents right now who desperately need deals.

 

That’s why we’re riding this out for five full days and will take 60-plus showings on a property that has lots of upside, but which will also entail a lot of work. 

 

The last thing we want is to choose the wrong buyer, go under contract and then see the whole thing blow up in a week when the buyer’s inspection reveals the home needs pretty much everything we said it would need in the MLS, in our property disclosures and in the dozens of conversations we will have had with agents.    

 

It’s exciting to have a listing that the whole world seems fired up to see.  We’ve had very few listings like this since the spring of 2022, when rates zoomed past 5% and then kept right on going. 

 

Today, it takes either the right property or the right value proposition to get buyers to compete.  And if you aren’t aware of this, you’ll be one of the hundreds of sad, sad agents in the mushy middle with listings they can’t sell, sellers they can’t please and closings that never arrive. 

LIVING WITH THE MARKET WE ACTUALLY HAVE

For the past 20 months or so, the real estate market has been in a state of upheaval.

In reality, it's been a state of upheaval for about four solid years now, since the pandemic and subsequent rate cuts unleased the biggest real estate surge since the Oklahoma Land Rush of 1889.  

Buyers were everywhere, most every listing had five to 15 offers in a weekend, prices went up 40% or more and then... around Memorial Day of 2022... the music stopped.

We all know what happened.  Two years of record money printing, deficit spending and supply chain issues caused the inflation monster to roar, driving up the cost of living and prompting the Fed to slam on the brakes with the fastest series of interest rates increases in modern history.

I called it the Crash Test Dummy Market.

For nearly two years, transaction volume has been cratering.  In the Denver metro area, there were 64,000 closings in 2021... about 51,000 in 2022... and just over 40,000 in 2023... representing a 36% drop in sales (and commission checks).

Agents, lenders, title reps, stagers, inspectors and appraisers have all left the business in big numbers.  Many of the survivors are still wandering around like accident victims, trying to figure out what just happened while holding out for the next big market surge. 

My advice:  get over it, and get used to it.  

Like many of my colleagues, I have fallen into the trap of sometimes saying my business has declined by 20%, 30% or more depending on how I'm feeling on any given day.  

That's not the way to look at any of it.

The market we have today is the market we're going to have for a while, in my opinion.  Rates are elevated and it's my contention they are likely to stay that way until something in the economy seriously breaks or the government dials back its deficit spending.  

Hoping for lower rates is not a strategy.

The reality is, if you are an agent, you need to look at the 41,000 transactions inside the marketplace last year and assume that's the new baseline.  We're not going back to 50k or 60k transactions unless rates go back to 3%, and that's not going to happen.

So rather than say your business is down by some percent (and feel glum about it), the better way is to be grateful for the market we had and to say that, in the old market, your business was actually UP by some huge amount.  

My hope is, for those of you still struggling to come to terms with the new reality, that you saved some money, lived conservatively and didn't buy a bunch of dumb stuff.  If you did, then your anxiety level right now is fully justified.

But if you lived within your means, understood it was only going to last for a season, and are prepared to let go of your old paradigms... your transition into the new reality will go much better.

The season we are in calls for evolution, innovation and determination.  Nowhere on that list is sadness, remorse or regret.  You've got to shift your mindset into moving forward and not looking back, because every moment you spend looking back causes you to fall further and further behind. 

THE WAITING ROOM

A new year is upon us and like so much of our world in general, the housing market seems to be suspended in midair, waiting for something to happen.

Rates are once again pushing 7%, there are more than four times the number of homes on the market that were for sale at the beginning of 2022 and uncertainty continues to abound.

It's a standoff between a shrunken number of sellers, a shriveled pool of buyers and a large (but rapidly declining) number of agents fighting over an ever-smaller pool of transactions.

The number of closed sales in the Denver MLS has plummeted from 64,000 in 2021 to 51,000 in 2022 to just over 40,000 in 2023.  

Welcome to The Waiting Room.

Interest in housing hasn't gone away, it's just been put on hold.  Aspiring buyers still want to buy.  Many with changes in life circumstance or economic situations still want to sell.  But with all the uncertainty, they simply wait.

I have a white board in my office which I use to keep track of my (prospective) buyers, sellers and current contracts.  If we meet together and discuss buying a home, you become a prospective buyer.  If we meet together and talk about selling a home, you become a prospective seller.  And if we do the deed and actually embark on the buying or selling journey, you become a contract. 

It's not uncommon, historically speaking, to have 4 to 6 prospective buyers, 4 to 6 prospective sellers and (in the good old days) 4 to 6 contracts working at any point in time.  

But as we begin 2024, the status of my white board reflects the current status of the market.

Prospective buyers: 9

Prospective sellers: 13

Current contracts:  I'd rather not say

The point is, there's a lot of repressed demand to both buy and sell that just keeps building up in our market.  Pressure has been increasing since the spring of 2022, as more and more buyers and sellers "think about it" instead of taking action.  

There's a high cost to 7% mortgages, for both buyers and sellers, and it de-motivates both sides.  

So people wait.

In my view, there are two ways this pent up demand gets released.  The first, and quickest way, would be for interest rates to drop.  While different people have different opinions about what it would take to unlock this demand, I feel like the magic number is around 5.5%.  If mortgage rates could get to 5.5%, you would have robust and engaged interest from both buyers and sellers.  The number of transactions would soar and the market would boom.

Will we get there this year?  I have my doubts.  

I personally feel like the inflation fight is far from over.  The consumer price index (CPI) bounced back up to 3.4% in December after falling for 10 straight months.  And while 3.4% may sound a lot better than the 4.7% of 2021 or 8.0% of 2022... it's a long ways from the Fed's stated target of 2.0% inflation.

Seventy percent higher, to be exact.

If the Fed is committed to getting back to its 2.0% inflation target (and who really knows, because it's the Fed)... I don't see how rates fall as much as many of the optimists feel they will.  It's more likely, in my view, that inflation remains sticky, the government continues deficit spending, and all that debt floating around on the secondary market requires continued higher yields to find buyers.  

All of it feels pretty stag-flationary to me.  

The second way to unleash the pent-up demand in the market is through (wait for it) more government intervention in the economy, likely through the tax code.  This, I admit, is unlikely to happen in 2024 with a wickedly divided Congress and totally polarized political environment.

But once we get past the elections this November - and especially if either party takes full control of the levers of power - our broken economic condition suggest this would be the moment for monumental changes to the tax code.  Especially since either Txxxx (the candidate who shall not be named) or Bxxxx (the incumbent who shall not be named) will be starting a final term regardless of who wins.  

With $35 trillion (and counting) in debt, the role of the federal government is at a crossroads.  Investment property rules, capital gains laws and inheritance tax policies could all be under the microscope soon, and any changes would definitely change how real estate is perceived and valued.  

Under the first scenario, which is lower mortgage rates... the effect would be like a strong tailwind coming back into the market.  Under the second, which is a radical rewrite of the tax code, the impact would be more like an earthquake, with lots of things being broken.  

I don't know which path we will take to releasing the pressure that continues to build up inside the market.  And until we have more clarity, it feels like the waiting room is just going to become more and more crowded.