This post is a further continuation of the “Saga of Sonnypage”, an Atlanta area real estate broker who posts on my investment board the Motley FOOL.
Previous Sonnypage highlights include:
Sonnypage has this update to share, about “Scared in Atlanta”.
Sonypage – 2006-08-06
All of the regulars here know by now that my wife and I are Realtors, a husband and wife team, associated with one of the major national franchises. We live north of Atlanta out in Roswell. The managing broker of the large mega office we work from holds an office business meeting every first and third Tuesday of the month. This past Tuesday performance awards were announced and handed out for July. The good news was that my wife and I won listing agents of the month with four new listings. The bad news was that we also lost two listings in July, but thankfully, that was not announced. Unbelievably, we lost one of those listings in a record 21 days!
Duke and Miriam called us on June 30th. They live in Sandy Springs, which is to the south of Roswell, across the river. Their friend Fran, who also lived in Sandy Springs, had told them that we had listed and sold her home this spring in only 40 days. We sounded like just the kind of Realtors they needed. Would we come and list their home? They were in a hurry to get started, they told us, so we went down that very day to preview, went back to our office to put together our proposal, and then met again that night. Based on comparables from last year but also taking into account a slow market, we recommended listing somewhere between $500,000-$525,000. But Duke had other ideas. When they refinanced last year, his mortgage lender appraised the home at $550,000. Duke wanted to start there, but at the same time explained they were closing in a few days on a new home up in the mountains where they planned to retire. They wanted top dollar, in a hurry, in a slow market. That’s a tall order. I diplomatically suggested we start at $550,000, but reevaluate in 30 days after seeing how the market responded.
A couple of posts ago I introduced you to Sonnypage’s Third Rule of Real Estate. Do you remember?
“In a soft market, marginal listings become flotsam and debris.”
In a strong market, everything sells. Buyers understand that if they don’t buy that house they are looking at quickly, someone else will. Never mind the lousy back yard or the poor floor plan. Buy it, wait a few years, sell it for a profit and buy something better. In a soft market, of course, that does not work. Buyers have plenty of time and plenty of listings from which to choose. There are just not enough buyers to go around so the left over marginal listings do indeed become “flotsam and debris”.
The four listings we have closed this year, including Fran’s, were perfect houses on perfect lots. But of the eight listings we currently have, six have been on the market over four months, which in a normal year would be quite unusual.
Duke and Miriam’s home was far from being a perfect listing. There were several problems, but at the top of the list would be a very steep wooded ravine in the front that scared away families with kids. That first Sunday, we held an open house. I watched from the window as a van pulled up to the front. As the wife struggled to get the kids out of car seats, the husband walked over and took a look down the “ravine”. Then I watched as he motioned to his wife to hook those seats back up. They drove off without ever coming inside. We had only two showings in three weeks. In the meantime, Duke and Miriam’s friends and neighbors were scaring them to death with stories of people they all knew who were unable to sell their homes after months of trying. Indeed, inventory levels all around town are way up, days on market, way up. Perfect houses in select neighborhoods are selling at full price or only small reductions, but for the vast majority of listings, those that are less than perfect homes, sellers are faced with either taking big reductions, or taking it off the market and hoping for better days.
Duke called us on day 21 and said he wanted to switch to a different Realtor, someone who lived close by, and might “understand” their neighborhood better. My wife reminded him that their friend Fran, who also had lived in Sandy Springs, had recommended us. We had sold her house. But no, he wanted to switch. Legally, a listing is a binding contract, but who wants a listing that does not want you? We agreed that if they would reimburse us our actual cash expenses, i.e., a virtual tour, a full page color spread in a real estate magazine, we would sign the transfer papers. When we stopped by to pick up our sign and lockbox, my wife told Duke that we were disappointed that we had not been given a fair opportunity to sell their home. Duke’s response took us by surprise. He simply said, “We are scared”. In a good year, Duke could get his $550,000, but I just don’t think that will happen this year.
I am hopeful that Bernanke and the Fed will pause on Tuesday. I believe that they will and that we can still, just maybe, avert a full blown real estate led recession in this country. The spring and summer markets are lost. Even if the Fed is done, I do not expect a pick up in housing until next year’s spring market if then.
But I will leave you with this thought. What if this time next year we find ourselves in a deep recession, with housing, which has become so crucial to our economy and jobs, in a bigger mess than ever. Is there another rabbit in the hat that could be pulled out to save the day? Consider if you will that residential housing in this country is government subsidized. You are able to deduct mortgage interest paid on your home loan. What if our congress, in an effort to save our country in a national emergency, were to increase that deduction? Let’s say a homeowner paid $10,000 in mortgage interest. Why not let those homeowners take, say, a $15,000 deduction? Would a fat check in the mail on April 15th jump start the housing market? Call it a federal jobs program if you will but would it work? I think that it would and in an economic disaster something like it will be tried. Will it come to that, who knows?
I am very long gold.
Duke and Miriam have every right to be scared. Their house might not sell for a year. When it does it might be for $100,000 less than they expect, if that. Can they afford the carrying costs of two houses? The more scared they are the more I suspect the answer is no. They may end up losing both houses out of this if they are not careful. I suspect they are underwater now on their new home in addition to possibly being underwater on the home they want to sell. That latest refinancing is a clue. Why would they be refinancing now in the teeth of rising interest rates. Did they need cash out for a down payment or to buy furniture for their new place?
If they are not underwater, then perhaps they are scared by the fact that unless it sells for what they thought, they can not afford the monthly mortgage on their new house. There are all kinds of reasons to scared.
I also think Sonnypage made two mistakes.
The first mistake was taking the listing. Sonnypage had to know that that listing would not sell, at least at the price listed. In a slumping market, carrying two mortgages that person needed to get out right of one of them ASAP. It was not realistically going to happen and I propose that surprises will happen to downside in a soft market and surprises will be on the upside in a strong market. Perhaps a month was lost. That month might have hurt the client.
I think the second mistake was doing a virtual tour and taking out a full color ad. I am less certain about this mistake as perhaps it would be needed to get any kind of response.
Is there some sort of compromise? Yes I think so, and I propose the following. Agent’s should explain to their clients (in detail) Sonnypage’s Third Rule of Real Estate: “In a soft market, marginal listings become flotsam and debris.”
If the client refuses to budge on the price then I see four options.
- Take the listing at an unreasonable price but do not heavily promote it (Tell the client there will be minimal promotion and why). The client may refuse to sign if the agent will not promote it, but at least the agent is not out any money on a listing that won’t sell.
- Take the listing at an unreasonable price but only if the client covers promotion costs. I would expect clients to walk away from such a proposal but who knows? Perhaps the client appreciates honesty but still wants to try it their way first.
- Refuse the listing outright and explain why it is not in the client’s best interest or the agent’s best interest to take such a listing. Attempt one more time to explain “Rule 3”, as well as the strong potential of “walking down the market” if the client’s plan is to start high and reduce prices until it sells. Perhaps that will scare some sense into the client and the agent will get the listing at a price that will sell. Everyone then wins.
- Take the listing and promote it but only if you can get the listing for longer period of time with perhaps automatic price reductions down to some agreed upon rate.
Personally I think option #3 is in both the client’s and agent’s best interest. Option #4 also seems viable but in a rapidly sinking market runs the risk of “walking down the market”.
A Rabbit in the Hat?
An increase in the mortgage deduction by $5,000 would not put $5,000 in anyone’s pocket. A homeowner tax credit would put $5,000 into people’s pockets but it would probably not do a thing for home prices or home activity.
$5,000 is peanuts compared to the median price of a home in major metropolitan areas. Would the money be spent? How? Those out of work would use it to pay their mortgage bill and property taxes. That might keep the average Joe going for another few months but we should recognize the plane for what it would be: a bailout of the credit industry. In the long run, it is exactly the wrong thing to do. It would just encourage more speculative lending in the belief that someone will bail them out. More importantly it would only delay the inevitable while adding to debt levels we already can’t pay. The US dollars would sink and gold would likely soar on the news.
There are no more rabbits in the hat.
The mad hatter’s party is now officially over.
Mike Shedlock / Mish/