A TALE OF TWO MARKETS

I continue to receive questions daily about the future of our local market and what real estate sales and prices might do next year. I’m not sure why anyone would think that I have a better crystal ball than they, particularly since I have stated for two years that we won’t know the market has actually turned until several months after it occurs.

What I can state today is that we are witnessing the emergence of two distinct markets, and they are behaving quite differently. I will call them the “traditional market” and the “distressed market”.

The traditional market is the smaller of the two, at least in terms of unit sales. This market is characterized by a limited inventory of houses owned by private sellers. These sellers have made the decision to sell their property even though prices are at historic lows. They are not being forced to sell. Rather, they have decided for personal reasons to sell now, even at low market prices, and get on with their lives.

Homes in this segment are typically in good to excellent condition. One of the key features of this market is that buyers can negotiate with traditional sellers, expect reasonable response times and set reliable closing and possession dates within a fairly short period of time.

The distressed market now accounts for over half of all closings. It includes foreclosed bank owned properties and short sales. Short sales are owned by private sellers, but the properties involved are encumbered with more debt than their current market value, and therefore require third party lender approval in order to be sold.

Homes in this segment are usually in average to poor condition. Moreover, negotiations on these types of properties can be very cumbersome due to bank bureaucracy. Average closing times are measured on months, not weeks and many never close at all. Bank owned or approved transactions are structured quite differently than traditional transactions. Buyers of these types of properties face considerably more transactional risk. For these reasons, distressed properties are normally best suited for speculators and investors.

While there is plenty of distressed inventory available (and will be for some time to come), I am being told by our “agents in the trenches” that there is actually a shortage of well priced homes currently being offered by private sellers. Multiple offers are not uncommon as traditional buyers seek the certainty of a transaction with a traditional seller.

Economics 101 would indicate that properties in the distressed category will continue to suffer from price compression as supplies continue to overshadow demand. Private sellers, however, may see a bounce in prices if current demand continues to outstrip supply.