In case you don’t believe that price declines are coming to your market, I researched 20 different major metros using WeissAnalytics.com. Fifty-five percent of them are predicted to have price declines in either single-family homes or in condos. An additional 10 percent will experience no change in prices. Specifically:
Interpreting the data — harbinger of a downturn or simply a healthy market?
When price increases or decreases hover around 1-2 percent, you have a balanced market. The pivotal question is whether this balanced market is transitioning from a seller’s market into a buyer’s market with declining prices.
The easiest way to make this determination is to track the months of inventory on the market. If the months of inventory have steadily increased to seven months or more, price reductions normally follow 6-12 months later. If there are four months or less of inventory, prices may continue to increase or stay stable for at least the next six months.
Other signs prices have peaked
In addition to an increase in inventory, what are the other tell-tale signs that your market has peaked?
- Multiple offers disappear
- Days on market increase
- Price reductions increase
- The number of expired listings increases
- Builders start offering incentives
A major challenge in declining markets? Comparable sales
If you’re seeing any of the early warning signs above, there’s another danger lurking ahead: If prices have begun to decline, the comparable sales you’re using to price the property may be too high.
For example, assume that you’re listing a $400,000 single family home in Dallas or San Antonio where prices are predicted to decline by 5 percent ($20,000 or $1,667 per month) over the next year. If you’re using a comparable sale that went under contract six months ago, that property is now worth $10,000 less than your comparable sales data indicates.
Convincing sellers prices are decreasing
This may be one of the most difficult challenges in the business. One strategy that works extremely well with most sellers, including CPAs, attorneys and banks, is to select the appropriate comparable sales for the last six months and then calculate the average price per square foot for those properties that closed during that time period.
Next, repeat the process for the six months immediately preceding the time period you used above. If the number for the most recent six months (as compared to the earlier six month period) is lower, then prices are declining. Comparing the two numbers also allows you to calculate the exact rate of decline for the properties in your area.
There is an easier way: Weiss Analytics has taken this process down to the individual house level. You can show the sellers whether their house is predicted to go up or down in value over the next year and by how much.
Sellers may still argue with this, but Weiss Analytics has a second tool that is extremely powerful: their dynamic heat maps.
These maps display how property values have shifted dating back to 2000. They graphically illustrate what is really happening in their market. The video below shows what’s currently happening in the Dallas metro.
What’s powerful is that owners see how the prices have shifted from down markets to up markets over the last 20 years. (Dark green on the map represents prices increases, very light green or light red indicate little change in prices, and dark red indicates price declines.)
When sellers view the shifting map, they immediately recall when the market was strong, as well as when the Great Recession hit prices hard. Seeing the map display the past history that corresponds to their own memories increases the seller’s confidence in the accuracy of this tool.
Using the heat map for the Dallas metro (shown above), it’s clear that the housing values throughout the entire Dallas metro are decreasing. It would be next to impossible for a seller to conclude anything other than that when they’re staring at the historical data, and every bit of their area is bright red.
Even if you employ all of these approaches, some sellers will tell you, “We’ll wait until the market gets better.” To overcome this objection, show them the cost of waiting.
Using the example above, a $400,000 property in the Dallas metro is declining $1,667 per month for each month the seller waits to sell. They also have the cost of their mortgage, property taxes and insurance. With a $320,000 mortgage at 4.5 percent for 30 years, the local county property tax rate, plus insurance, that comes to about $3,000 per month. This brings the total cost of staying in the property to $4,667 per month or about $56,000 per year.
If your market has begun to slow down, mastering the declining market conversation is critical. Start preparing now so you’ll be ready if and when one of your high-end listings, or your whole market, slips into down market territory.