August 2010

It has come to this: time again to roll out the message that the excess inventory of Santa Fe residential real estate for sale is slowing the recovery of our market. The familiar phrase that all real estate is local is still true. Yet we have fallen into a sluggish real estate recovery here just because the national picture looks so morose, but wait; we don’t have to follow the national trends. Santa Fe has never been about being in lockstep with the other 250 plus million that live in this fine country. We have continually and consistently forged our own economy, culture and direction here. And now it is time to renew that effort to get us out of the stuck position we are in related to real estate. You have the right to be skeptical. Yet it would be “easy” to change the course of our local real estate market.  The primary actors will be home Sellers and their Realtors. Not all Sellers should be targeted for such counseling. Many have figured out what it takes to sell their homes and they should be rewarded with a ready, willing and able Buyer. And not all Realtors will be brave enough to resign from listings and respectfully decline those new “opportunities” that come in the disguise of overpriced listings. For that is the exact issue here: overpriced homes listed for sale in the Santa Fe real estate market. Identifying those homes is not going to be simple. But they are out there.

Assuming you the reader would also like to see strong improvement in our real estate market, we will have to be ruthless in our categorization of homes and their asking prices. The typical example would look something like this:  a home is 2000 square feet (sf) in size and is fairly typical with a 2 car garage and a 1/5 acre lot. The condition of the home is good to better with some updating in some rooms; yet it is not in the condition of a “model home” and could actually use more updating. This example has the home listed for anywhere from $300,000 to $500,000. The key stat here is that means asking price ranges from $150 to $250 per square foot. Let us presume there are 15 homes in the neighborhood of our sample also for sale. They are all approximately the same size and in approximately the same condition. 5 are listed for sale at $300,000 (which is $150 per sf), while another 5 are listed at $400,000 ($200 per sf). And the last 5 are in the group listed at $500,000 ($250 per sf).

The next step is to look at sales of homes in this area of this size and in this condition. We have 6 sales to study: average sales price of the 6 was $320,000 (which is $160 per sf). One sold for as low as $260,000, but was in rough condition and had problems. Another sold for the high price, $420,000, which pulled up the average. But it stood out for its immaculate condition and it was completely remodeled a couple years ago, with an insulated garage, a completely landscaped lot with drip irrigation, new roof with transferable warranty and new fancy kitchen appliances  in place. Window coverings were included as was a built in patio fire pit with bancos plus a deep portal. This home was clearly at the upper end of the range for appearance and quality. Yet  it sold for $420,000 and similar homes are priced at $500,000. Now what should the Sellers of the higher priced homes do? There are two things to talk about with those Sellers: reducing the price to get into the range of what is selling (success stories) OR take the home off the market (because Seller is unwilling to sell the home for that low of a price).  If those homes stay on the market and stay overpriced, they create an excuse for buyers to wait for further market corrections.

Enter the brave and possibly wise Realtor to counsel with our Sellers. All sold home data is reviewed, along with a summary of what is currently for sale. Seller is then counseled to lower the price to at least $350,000. If Seller declines, Realtor informs Seller that they must resign the listing and cease marketing efforts as they can no longer professionally and successfully represent that Seller. Does Seller have to agree? No, but if Realtor is going to stop all marketing, what good is continuing the contractual relationship? Are there other Realtors out there? Of course; last count 800+ in Santa Fe and surrounding areas. The Realtor has asked the Seller to position the home with a price below 9 of the 15 total homes for sale in the area. That’s a good start. Will the lower price bring a Buyer? Possibly, but first the home has to get closer to the lowest priced homes in the area. Yes, the Seller has some other options. One would be to spend $50,000 to do all the things necessary to make that home equal to the one that sold for $420,000. Seller might be unable or unwilling to do that. Seller might have to sell. Therefore, Seller needs to lower the price to the range at which it will be considered by qualified Buyers. Maybe the Seller could even count on it selling if they were willing to lower the price all the way down to say $310,000. Ouch, you say? Yes, there is no question that this Seller is about to experience a tremendous amount of financial pain.

And we have not spoken a word about what our Seller paid for the home, or how large the mortgage is. So many factors affect whether any Seller can get to the finish line in this race to sell, or possibly would be well advised to just get out of the market for the time being. Seller financing could be considered. Some bonus commissions might be offered. But if statistics tell you that five or six homes out of the 15 now for sale will sell in the next 12 months, this Seller can either get into position to become one of those successful Sellers, or they can decide not to. And that decision not to lower the price means they are ripe for discussion about Plan B; taking the home off the market. I am afraid many Sellers still struggle with the fact that their home might be worth less than what they paid for it.

Analysis of our recent situation (as of June 30, 2010) shows that there are 1213 homes for sale in the price range of $500,000 and below. In the most recent 12 months, 1001 homes sold in that price range. Let us assume that trend line continues. 17.5 % of those listed will not sell in the next year, but 82.5 % of them will sell, under our assumptions. Now that seems almost too easy, to get into the group that is going to sell; except the cast of characters keeps changing. Homes in the lowest range of prices (using our standard example – 2000 sf) are going to sell, starting with the lowest priced homes. But as they sell, others will replace them and prices will continue to get reduced by other Sellers with similar homes; they want to show up in the sold column too. So while 82.5 % of homes selling in a year sounds pretty positive, you could still be left out if your home is not in that lower price range. If our Seller will not agree to the lower price, another one will.

The accomplishment of our goal (improvement in our real estate market) is highly dependent on also getting Buyers into the habit of buying again. As long as they see 14.5 months of inventory available (as of June 30), they feel no urgency or motivation to make their buying decision now. They fear they will spend too much and expect that by waiting they will be able to buy the same home for substantially less in 3 or 9 or 15 months. So they wait. They do nothing – well, nothing more than just look at homes. In order for the group of Buyers out there looking at homes to start writing earnest money checks and going forward with plans to buy, they need to feel as if the home they really want may not be available in the future; that they would miss out if they wait. Simple supply and demand is at work and we have way too much supply. Therefore demand is soft at best. Supply has to come down before demand will go up.

Let us take a look at some actual numbers. If 1213 homes are for sale, let’s measure what it would mean to take 10, 20 and 30% of those off the market. 10% is 121 homes. 20% is 242 homes and 30% is 363 homes. If a lofty goal is to remove 30% of the current inventory, the number remaining for sale would be 850 homes. And with a current annual rate of sale of 1001 homes, the entire inventory would be gone in slightly over 10 months. That compares to the 15 months in our current status. Would that make any difference to a Buyer? I submit that it  absolutely would change the way Buyers are acting. They would see fewer homes for sale; those available would be aggressively priced and marketed. Those Buyers would feel a sense of urgency and might feel as if they should make their decision soon rather than missing out on the home they want to buy. Plus they would not be as likely to think the home they purchase might go down in value in the short run. Not that it should matter to them if they plan to stay for 7 to 10 years, but let’s be honest; Buyers are afraid their purchase will decrease in value within a year or two of their purchase. With uncertainly in money markets and jobs scarce, Buyers are afraid to act.

So in our previous paragraph, we magically removed 30% of the homes from the market and it meant that the absorption rate of inventory went down from 14.5 months to about 10 months. And this is in the under $500,000 range (it is worse in higher price ranges). That 30% would do the job, I think. You may have another plan.  I would like to hear yours too. For now, why don’t we talk to Sellers we know and ask them why they have their home for sale.

This may sound too simple, but if we are going to see improvement in our market, some  will have to take the burden. Sellers are in the line of fire; either they lower their prices or they take their home off the market. Then Buyers just might return in large numbers and then we can see the improvement we so dearly want to see.


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