When the real estate market shifts it is not a gradual shift. We have seen many examples of this over the last several years. It began in the mid-‘90s–prices were quickly rising and buyers were desperate to buy real estate and experience the rewards of the rapidly increasing appreciating asset. The thought of investing in real estate and getting large, quick returns attracted an abundance of buyers to the real estate market, creating fierce competition for the homes listed. This demand for the homes on the market quickly led to a depletion of the supply of homes available for sale. It became commonplace for buyers to bid against other buyers in order to secure a home. Often, buyers waived the appraisal and inspection contingency and to agreed to come up with additional cash in order to make up the difference when the property did not appraise for the inflated contract price so that they could win the bidding war.
Prices finally got to a point where buyers stopped buying and this created a market that had an abundance of homes available for buyers; however the sellers were in denial still thinking their homes were worth the inflated values of the “sellers market” that we were just shifting out of. At the same time, lenders were tightening up their standards, making it more difficult for buyers to qualify for a loan. Real estate sales came to an abrupt stop. Next, we began to see upside down homeowners (owing more than the market value of their home), losing their homes due to the economy and the fact that they over paid for them. The market began to become flooded with homes that were now owned by the banks after they foreclosed on them. At this time a large segment of the available homes on the market were “bank owned” and the banks priced them aggressively in order to get them off their books. Buyers had a great supply of homes to choose from and the prices were trending down. Buyers were in a market where they could make aggressive low offers and had the luxury of taking their time while shopping for the perfect home and negotiating for a great deal, all without worrying about competing with other buyers to secure a great investment. As buyers discovered that bank-owned/ foreclosed homes were such a great investment, the market began to see buyers returning to the market in mass. At the same time, interest rates were dropping which made investing in real estate even more attractive. For the first time in years, investment real estate was priced at a point that provided a positive cash flow and great return for investors.
As foreclosed homes became the investment of choice for buyers, the available supply dwindled and theses homes became more difficult for buyers to secure. Short sales became a popular, responsible alternative for homeowners, compared to letting their homes go back to the bank through foreclosure. When a buyer purchases a short sale, the standard practice is to only submit one offer to the bank for approval. If a buyer was willing to wait out the long process of the short sale they had a better chance of getting their offer accepted at this time. When short sales began, there were many agents and buyers who did not want to get involved due to the fact that the banks were not competent at processing them. While they were not attractive to agents and buyers at one time, they were now becoming the only homes available for buyers because the availability of foreclosed homes on the market was rapidly decreasing. Since the length of the process for a short sale was initially very long, the fallout rate was high. By the time most short sales were approved by the bank, the buyer who originally submitted the offer had given up and moved on. This left a great opportunity for buyers to write backup offers on short sales and successfully secure them while in a back up position. The banks began to realize the opportunity to do short sales as a better alternative for them and the homeowner thus made a commitment to do more short sales and fewer foreclosures. This further lowered the number of foreclosed homes available on the market.
The process of foreclosure involves the bank taking a home where the owner is delinquent in making their payments to a trustee sale. A trustee sale is required by law and the lender must offer these homes for auction at the trustee’s office or the court house steps. Initially the banks began the bidding at the amount that was owed by the delinquent homeowner. Since this amount was substantially above the market value, most of the homes offered at trustee sale went back to the bank and became available to the public to buy. (The high demand by buyers in the market wanting to purchase real estate in the Valley along with the decrease in the number of foreclosures and homes selling at the trustee sale and not going on the market helped to contribute to the historically low inventory we have available now for buyers.)
When the market began the decline after it peaked in the mid 2000s, listing agents counseled their sellers to drop the price to get their home sold. They were advised to drop their home prices to where the market will be and not to chase it down. Many sellers of these listings did not price their homes aggressively enough to sell them in a declining market quickly. Unfortunately, many of these sales turned into short sale listings as the market continued to drop and the amount the home was worth less than the amount the homeowner owed. On the flip side, in today’s market, we have homes that were initially listed as short sales turning into equity or traditional sales as home prices begin to appreciate.
There are still buyers in the market waiting for it to hit bottom. The problem with that is that once it has shifted the bottom has already hit and you don’t know it until prices begin to rise. It is still a great time to buy a home in our market and becoming better every day to sell with our supply continuing to go down and prices continuing to recover. It is important to keep a close eye on the important numbers and move aggressively when markets are shifting because it does not happen gradually.
Written by Carlie Back