Buyer's Market Tests
Sellers' Resolve, Patience
Every market poses its own "gut check" question.
In a strong Seller's market, the "gut check" question Buyers must wrestle with is, "how much do I really want this particular house?" That's especially true if there are multiple offers, and the winning offer is likely to be over the asking price -- sometimes well over. My advice to Buyers in this predicament is, "the right price to offer is the price you can live with if you get the house . . . and if you don't."
Today, Sellers are having to face their own version of this question. In a strong Buyer's market, many Sellers receive offers well below their asking price -- if they receive any offers at all. Often their realtor can work with the prospective Buyer to improve the offer . . but not always. The question such Sellers must ultimately weigh is, "If I pass on this Buyer's offer, am I willing and able to wait for another?"
In the final analysis, "fair market value" for any given property, at any particular moment, isn't about the comp's (comparable sold properties), general market statistics, historic cost, etc. Rather, it's what a financially qualified Buyer is willing to pay.
Wednesday, May 21, 2008
Wednesday, May 14, 2008
Negotiating 101
"Would Your Client Take $__ for Their Home??"
Listing agents (representing the Seller) know that there are three cards you never show the other side: the client's bottom-line price; terms; and motivation. Which doesn't mean that Buyers don't try to find that out. One of the most common ploys, in the early, informal stages of negotiating, is for a would-be Buyer to verbally ask (through their agent), "would the Seller take $__ for their home?"
The problem with such a hypothetical question is that it flushes out the Seller's price, but doesn't obligate the Buyer to buy. Especially in a soft market, if the Seller answers "Yes," the chances are fair that any resulting offer -- assuming there is one -- will come in below the just-tested price.
An experienced agent will parry the question by asking the Buyer, "are you offering $__?" If they answer affirmatively, their next sentence is, "Great! Put it in writing."
If the Buyer subsequently makes an offer at that price, and the Seller agrees to it, there's a deal. However, if no offer is forthcoming, the Seller hasn't revealed their position.
Listing agents (representing the Seller) know that there are three cards you never show the other side: the client's bottom-line price; terms; and motivation. Which doesn't mean that Buyers don't try to find that out. One of the most common ploys, in the early, informal stages of negotiating, is for a would-be Buyer to verbally ask (through their agent), "would the Seller take $__ for their home?"
The problem with such a hypothetical question is that it flushes out the Seller's price, but doesn't obligate the Buyer to buy. Especially in a soft market, if the Seller answers "Yes," the chances are fair that any resulting offer -- assuming there is one -- will come in below the just-tested price.
An experienced agent will parry the question by asking the Buyer, "are you offering $__?" If they answer affirmatively, their next sentence is, "Great! Put it in writing."
If the Buyer subsequently makes an offer at that price, and the Seller agrees to it, there's a deal. However, if no offer is forthcoming, the Seller hasn't revealed their position.
Monday, May 12, 2008
"Loss Aversion"
Psychology, not Economics,
Holds Key to Buyer Behavior
Economists trying to explain the slow housing market may be barking up the wrong (academic) tree. Rather, it is their colleagues in the psychology department who may have the best insight into what's underlying buyer's actions (or lack thereof): a behavioral phenomenon called "loss aversion."
In study after study dating back decades, psychologists have documented that people perceive gains and losses very differently. Irrational as it may be, a financial loss causes the average person roughly twice as much psychic pain as a similar-size gain causes them pleasure. As a result, people are far more likely to govern their affairs to minimize pain than to maximize pleasure.
What's that got to do with the current buyer's market?
Basic math suggests that a weak market is a bonanza for move-up buyers. The middle-market, $500k house they have to sell may be off 10%, or $50k, but the upper bracket, $1 million house they aspire to buy is also marked down 10%. Ten percent off of a much more expensive house translates into a much bigger absolute discount -- in this case, $100,000. Truth be told, given the recessionary environment and tighter credit markets, in many Twin Cities neighborhoods the formerly $1 million house could probably be had for the high $800's now.
The Move-Up Conundrum
So why aren't the move-up buyers moving up? Because the $50k loss they're contemplating hurts more than the $100k (or more) they stand to save.
It's impossible to prove whether loss aversion explains move-up buyers' hesitation. However, a good test would seem to be the behavior of buyers not affected by loss aversion (or at least not as much).
Fortunately, such a group exists: they're called "first-time buyers." While first-time buyers are understandably nervous about the market declining after they buy (just as loss aversion theory predicts), by definition they don't have to realize a loss on an existing property first.
Based purely on anecdotal data I've seen, the lower end of the market does in fact seem to be much healthier than the middle and high ends. Neighborhoods that traditionally attract first-time buyers -- Longfellow, Nokomis, parts of Kingfield, St. Louis Park's Birchwood neighborhood (west of 100) -- have surprisingly little for sale under $200k or so that has a decent amount of space (more than 1,000 FSF), some kind of yard, has been reasonably updated, and can legitimately be called "move-in ready."
Of course, it's also true that there are a lot more people who can afford a $200k house than a $1M house, especially in a soft economy.
Holds Key to Buyer Behavior
Economists trying to explain the slow housing market may be barking up the wrong (academic) tree. Rather, it is their colleagues in the psychology department who may have the best insight into what's underlying buyer's actions (or lack thereof): a behavioral phenomenon called "loss aversion."
In study after study dating back decades, psychologists have documented that people perceive gains and losses very differently. Irrational as it may be, a financial loss causes the average person roughly twice as much psychic pain as a similar-size gain causes them pleasure. As a result, people are far more likely to govern their affairs to minimize pain than to maximize pleasure.
What's that got to do with the current buyer's market?
Basic math suggests that a weak market is a bonanza for move-up buyers. The middle-market, $500k house they have to sell may be off 10%, or $50k, but the upper bracket, $1 million house they aspire to buy is also marked down 10%. Ten percent off of a much more expensive house translates into a much bigger absolute discount -- in this case, $100,000. Truth be told, given the recessionary environment and tighter credit markets, in many Twin Cities neighborhoods the formerly $1 million house could probably be had for the high $800's now.
The Move-Up Conundrum
So why aren't the move-up buyers moving up? Because the $50k loss they're contemplating hurts more than the $100k (or more) they stand to save.
It's impossible to prove whether loss aversion explains move-up buyers' hesitation. However, a good test would seem to be the behavior of buyers not affected by loss aversion (or at least not as much).
Fortunately, such a group exists: they're called "first-time buyers." While first-time buyers are understandably nervous about the market declining after they buy (just as loss aversion theory predicts), by definition they don't have to realize a loss on an existing property first.
Based purely on anecdotal data I've seen, the lower end of the market does in fact seem to be much healthier than the middle and high ends. Neighborhoods that traditionally attract first-time buyers -- Longfellow, Nokomis, parts of Kingfield, St. Louis Park's Birchwood neighborhood (west of 100) -- have surprisingly little for sale under $200k or so that has a decent amount of space (more than 1,000 FSF), some kind of yard, has been reasonably updated, and can legitimately be called "move-in ready."
Of course, it's also true that there are a lot more people who can afford a $200k house than a $1M house, especially in a soft economy.
Sunday, May 11, 2008
Wall Street Bust, Midwest Boom?
[Why (Some) Twin Cities Real Estate is Headed Higher - Part Two]
Commodities Boom, Weak Dollar Benefit Twin Cities Companies
The Twin Cities may not be Dubai or even Houston, but thankfully it's not Wall Street, either. As companies like Citigroup and Merrill Lynch write off tens of billions (never mind Bear Stearns) and lay off thousands, some of the biggest corporate winners are located . . . here. In turn, that bodes well for the local housing market, which ultimately is driven by two things: job growth and interest rates.
Consider:
--In contrast to Citigroup, Merrill Lynch, Lehman Brothers, and Bear Stearns, whose stocks are down anywhere from the 50% to 95% (ouch!) the last year, a relatively obscure, Plymouth-based company, Mosaic, has appreciated almost 300%, or $40 billion (yes, billion!). Thought that 3M, Target, or United Healthcare was Minnesota's most valuable, publicly-traded company? Think again.
--In fact, the state's most valuable company likely isn't a publicly-traded company at all: it's a $100 billion, media-shy behemoth named "Cargill." Minnetonka-based Cargill is to agriculture what the old Standard Oil was to petroleum: a multi-national, vertically integrated, seeds-to-grocery shelves conglomerate. Because it's privately-held, it does not have to report financial results, but it's clear that what's good for Mosaic is great for Cargill (assuming there's a difference: Cargill insiders own about two-thirds of Mosaic's stock).
--How do you know when farmers are flush? They're quiet (maybe they're afraid of jinxing it). To a non-farmer like me, it seems like farmers are always complaining about something: it's either too hot or too cold, too dry or too wet. If somehow the miraculous occurs -- growing conditions are perfect and there's a bumper crop -- farmers inevitably complain that excess supply is depressing prices.
Upper Midwest 'Black Gold'
Not this year. Demand for corn (food and ethanol), wheat, and soy beans is soaring -- and with it the land needed to grow it. Minnesota is to farm acreage what Wall Street is to finance and Saudi Arabia is to oil; if farmland has conservatively risen 50% in the last three years (Barron's; 12/31/2007), Minnesota's roughly 25 million acres of farmland has appreciated almost $20 billion since then. To put that in perspective, that gain is about twice the cumulative drop in Twin Cities residential real estate since the market peak.
The clearest beneficiaries of this boom are companies that sell to farmers. That includes John Deere (capital equipment); Monsanto (seeds); and Mosaic (fertilizer). However, farmers' newfound bounty is also bullish for commodities traders, local and regional banks, and other ancillary services. To take just one example, seats on the suddenly-hot Minneapolis Grain Exchange quadrupled, from $72,500 to $285,000 in 2007 alone ("Will Grain Exchange Boom Last?"; Minneapolis/St. Paul Business Journal, 1/4/2008).
If "what's good for General Motors is good for America," the local equivalent is "what's good for agriculture is good for Minnesota (and the Twin Cities)."
--Further burnishing the Twin Cities' luster: an outstate boom in ethanol refining (18 plants producing 680 million gallons of ethanol a year); Minnesota-headquartered food processors such as General Mills, Hormel, and Land o' Lakes; the weak dollar's positive effect on export-driven companies like 3M; and the Twin Cities' historic role as the business and banking center of the Upper Midwest.
The Middle East may be oil-rich, but the Middle West is (farm)land-and-commodities rich. In the middle of an epic, world-wide commodities and ag boom, it would seem that there are worse places to be.
Commodities Boom, Weak Dollar Benefit Twin Cities Companies
The Twin Cities may not be Dubai or even Houston, but thankfully it's not Wall Street, either. As companies like Citigroup and Merrill Lynch write off tens of billions (never mind Bear Stearns) and lay off thousands, some of the biggest corporate winners are located . . . here. In turn, that bodes well for the local housing market, which ultimately is driven by two things: job growth and interest rates.
Consider:
--In contrast to Citigroup, Merrill Lynch, Lehman Brothers, and Bear Stearns, whose stocks are down anywhere from the 50% to 95% (ouch!) the last year, a relatively obscure, Plymouth-based company, Mosaic, has appreciated almost 300%, or $40 billion (yes, billion!). Thought that 3M, Target, or United Healthcare was Minnesota's most valuable, publicly-traded company? Think again.
--In fact, the state's most valuable company likely isn't a publicly-traded company at all: it's a $100 billion, media-shy behemoth named "Cargill." Minnetonka-based Cargill is to agriculture what the old Standard Oil was to petroleum: a multi-national, vertically integrated, seeds-to-grocery shelves conglomerate. Because it's privately-held, it does not have to report financial results, but it's clear that what's good for Mosaic is great for Cargill (assuming there's a difference: Cargill insiders own about two-thirds of Mosaic's stock).
--How do you know when farmers are flush? They're quiet (maybe they're afraid of jinxing it). To a non-farmer like me, it seems like farmers are always complaining about something: it's either too hot or too cold, too dry or too wet. If somehow the miraculous occurs -- growing conditions are perfect and there's a bumper crop -- farmers inevitably complain that excess supply is depressing prices.
Upper Midwest 'Black Gold'
Not this year. Demand for corn (food and ethanol), wheat, and soy beans is soaring -- and with it the land needed to grow it. Minnesota is to farm acreage what Wall Street is to finance and Saudi Arabia is to oil; if farmland has conservatively risen 50% in the last three years (Barron's; 12/31/2007), Minnesota's roughly 25 million acres of farmland has appreciated almost $20 billion since then. To put that in perspective, that gain is about twice the cumulative drop in Twin Cities residential real estate since the market peak.
The clearest beneficiaries of this boom are companies that sell to farmers. That includes John Deere (capital equipment); Monsanto (seeds); and Mosaic (fertilizer). However, farmers' newfound bounty is also bullish for commodities traders, local and regional banks, and other ancillary services. To take just one example, seats on the suddenly-hot Minneapolis Grain Exchange quadrupled, from $72,500 to $285,000 in 2007 alone ("Will Grain Exchange Boom Last?"; Minneapolis/St. Paul Business Journal, 1/4/2008).
If "what's good for General Motors is good for America," the local equivalent is "what's good for agriculture is good for Minnesota (and the Twin Cities)."
--Further burnishing the Twin Cities' luster: an outstate boom in ethanol refining (18 plants producing 680 million gallons of ethanol a year); Minnesota-headquartered food processors such as General Mills, Hormel, and Land o' Lakes; the weak dollar's positive effect on export-driven companies like 3M; and the Twin Cities' historic role as the business and banking center of the Upper Midwest.
The Middle East may be oil-rich, but the Middle West is (farm)land-and-commodities rich. In the middle of an epic, world-wide commodities and ag boom, it would seem that there are worse places to be.
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