Spotting and Managing Declining Market Conditions
The good times won’t last forever. This is the second in a series of three posts on strategy.
Houston has been in a balanced or rising market for years. How will we know when the market starts to turn?
When seasonally adjusted sales volume falls off and months of inventory grows, it’s time to be on the lookout for a turning market. This phase can be long and subtle or hard and short; it may even take the form of a temporary freeze. However it occurs, motivated sellers will eventually reduce their list prices to attract buyers, and when enough of those deals have closed, MLS data will register a seasonally adjusted price decline. If that trend continues for several months, Houston will officially be in a declining market.
By the time a declining market is official, however, by definition those market conditions have been in place for some time. So it’s important for sellers to be aware of the factors that may contribute to the process. No seller wants to find themselves chasing the market down. In a declining market, time really is money.
What new factors might contribute to a gradual slowdown in the Houston residential real estate market?
First, uncertainty around the federal income tax treatment of local property taxes may play a role. This effect is felt unevenly in greater Houston; homes with property taxes below the $10,000 SALT deduction cap (or those homes owned by sellers whose total deductions are not high enough to itemize) are unaffected, while luxury homes and higher-end suburban homes in high-tax MUD districts may be disadvantaged.
Second, mortgage rates have begun to rise, and are unlikely to decline again to the lows seen in recent years. Even though buyers would be well-advised to lock in current mortgage rates, many are still psychologically anchored on recent past rates — and reluctant to commit to what feels like a raw deal. Buyers should keep in mind that if rates turn around, they can always refinance; if rates rise, they’ll be glad they bought when they did.
Finally, the aftereffects of Hurricane Harvey are beginning to factor significantly in some areas as more and more renovated properties hit the market. Some neighborhoods still haven’t found the price per square foot at which buyers will reliably purchase these previously flooded homes. Meanwhile, other hard-hit areas have bounced back with a spring in their step.
Due to the uneven effects of these factors, some neighborhoods and price points may still find themselves in a robust seller’s market, while others have already been in declining market conditions for months. It remains to be seen whether or when market conditions in weaker neighborhoods will begin to exert downward pressure on stronger areas.
How should strategies change in a declining market?
For buyers: don’t try to time the market, trust your agent to do their research well, and if you’re buying for yourself or your family, keep in mind that you’re buying a home as well as an investment. Deals can had, but it’s a mistake to focus exclusively on the numbers. A beautiful, appealing home at the right price will always be a better bet than an unappealing one. And finally, enjoy the selection! Not too long ago buyers were screaming with frustration over too-tight inventory.
For sellers, pricing strategy in a declining market is very simple. Listing agents should nail the market value in the initial list price, track comparable closed sales in real-time, and adjust the list price to reflect updated market values as necessary (at least monthly, and sometimes as frequently as every two weeks, depending on how rapidly the market changes). Failing to update the list price as the market moves will maroon the seller in the same position as a seller with an inflated list price in a rising market, discussed here.
Accordingly, it’s more important than ever that sellers work with a listing agent they can trust, and then follow that agent’s pricing recommendations. Pricing right from the beginning is always the best way to sell quickly and move on.