The United States is officially in recession. What is a recession? A recession is a contraction of the business cycle or a general economic decline due to a significant drop in spending and other business activities. Most experts and politicians will blame the Covid-19 crisis for the recession, but even before Covid-19 the proverbial writing was on the wall.
The United States had more than 120 months of economic growth, which was the longest expansion in modern history. Other indicators, such as the negative yield spread on Treasuries (long-term bonds with lower interest rates than short-term Treasuries), pointed to an imminent change in the business cycle and an impending recession. The only real question was: when and how bad?
Then came Covid-19 … If the cycle was going to change anyway, Covid-19 acted as a huge and unexpected accelerator to make the recession much more immediate and severe.
Inevitably, during recessions, all classes of real estate, including residential homes and condos, will be adversely affected as lower consumer spending and higher unemployment rates affect home prices and time to market.
Here are the six costly mistakes sellers of homes and other real estate make during recessions and how to avoid them:
Error n. 1: this will pass and the real estate market will be back in fashion soon
The first thing to remember is that real estate cycles are much longer than general business cycles. Even if the overall economy recovers, which eventually always does, a typical housing cycle takes 10-15 years. The cycle has four key stages: top, decline, bottom, and rise.
Let’s consider the last real estate cycle, which lasted approximately 14 years:
2006 – Prices reach the highest
2006 to 2012 – Prices drop
2012 – Prices bottomed out (low)
2012 to 2019 – Prices go up *
2020 – Prices rise to the top
2020 to? – Prices drop
* NOTE: In 2016, the national residential real estate price index reached its pre-recession highs in 2006. It took 10 years for the housing market to recover.
The way to avoid this mistake is to recognize that real estate cycles take years to execute and plan accordingly. Also, no one knows for sure when prices will go up or down until after the fact.
Error n. 2: low interest rates will make the economy and housing market rebound
Between 2006 and 2011, the Federal Reserve Board continually cut interest rates (federal funds) from a low 5% to almost 0%. However, that didn’t stop the real estate recession and the depreciation of real estate values.
Low interest rates undoubtedly made the economic downturn and real estate recession less severe and saved some properties from foreclosure, but still it took the housing market six painful years to bottom out and then four more years to prices to rise again. its pre-recession levels.
Some markets had never fully recovered. For example, residential home prices in parts of California, Arizona, and Nevada are still below their 2006 highs.
To avoid this mistake, you need to realize that while low interest rates help stimulate the economy and the housing market, they do not cure them.
Mistake # 3: I don’t need to sell now, so I don’t care
If you don’t need to sell until the end of the cycle, which generally lasts more than ten years, then you won’t be as affected, especially if you have a strong equity position, limited mortgage debt, and solid liquid assets.
However, it is good to keep in mind that “life passes” and professional or personal circumstances can change and we may have to sell a property before the recession takes its course.
Also, if a property has a mortgage and its value decreases to the point of being “upside down,” which means that the balance of the mortgage loan exceeds the property’s value, then the options to put, refinance or even obtain a credit line on the capital stock will be reduced. be significantly limited.
This does not mean that everyone should rush to sell their real estate if there is no need to do so, just keep in mind that circumstances can and often do change and property options will suffer, so plan ahead. As a wise proverb says: “Dig your well before your thirst.”
Error n. # 4: I sell, but will not sell below my “final” price.
This is a common and potentially very costly mistake. Generally speaking, all sellers want to sell at the highest price and all buyers want to pay the lowest price. Thats nothing new. When selling real estate, most sellers want to reach a certain price and / or have a “bottom line.”
However, it is important to understand that the market does not care what the Seller or their Agent thinks the property’s value should be. Market value is a price that a willing and able buyer will pay when a property is offered on an open market for a reasonable period of time.
Overvaluing the property based on the Seller’s subjective value or what is sometimes called an “Aspiration Price,” especially in a declining market, is a sure first step to losing money. When a property remains on the market for an extended period of time, maintenance costs will continue to accumulate and the property’s value will depreciate based on market conditions.
Also, properties with long time to market tend to become “stale” and attract fewer buyers. The solution is to honestly assess your sales goals, including the desired time frame, assess the attributes and physical condition of your property, analyze sales and comparable market conditions, and then decide on marketing and pricing strategies based on the market.
Error n. 5: I will list my property for sale only with the agent who promises the highest price
The real estate industry is a competitive business and real estate agents compete to list the properties that generate their income from sales commissions. It is not unusual for the Seller to interview multiple agents before signing an exclusive listing agreement and going to the agent who agrees to list the property at the highest price, often regardless of whether that price is based on the market.
Similar to Error n. 4, this mistake can be very detrimental to Sellers as overvalued properties remain on the market for extended periods, costing Sellers expenses such as mortgage payments, property taxes, insurance, utilities and maintenance .
In addition, there is the “opportunity cost” as the capital is “frozen” and cannot be deployed elsewhere until the property is sold. However, the most expensive cost is the loss of property value as the housing market deteriorates.
During the last recession, we have seen several instances where overvalued properties stayed on the market for years and ended up selling 25% to 40% below their initial fair market values.
The solution is to make sure your pricing strategy is based on the market, not empty promises or wishful thinking.
Error n. # 6: I will list my property only with the agent who charges the lowest commission
Real estate commission rates are negotiable and not set by law. A commission generally represents the highest transactional expense in the sale of real estate and is generally divided between brokers and agents working on the transaction.
Some real estate agents offer discounted commissions to induce sellers to list their properties. But does paying a discounted commission guarantee savings for the seller? Not necessarily.
For example, if the final sale price is between 5% and 10% below the highest market value of the property, which is not that unusual, due to improper marketing, poor pricing strategy and / or poor negotiating skills, it will easily eliminate any commission savings. and it actually cost the Seller tens of thousands of dollars in lost revenue.
The solution is to hire an agent who is a “Trusted Advisor”, not just a “Salesperson”. A trusted advisor will take the time and effort to do the following: 1) Conduct a needs analysis: listen to and understand the needs and concerns of your property; 2) Prepare the property analysis: thoroughly evaluate your property and market conditions; 3) Execute the marketing and sales plan: prepare and implement a personalized marketing and sales plan for your property; and 4) Get optimal results – be their trusted advocate throughout the entire process and achieve the best possible outcome.
Finding such a real estate professional may not always be easy, but it is certainly worth the effort and will pay off in the end.
In conclusion, this article has outlined six costly mistakes real estate sellers make during recessions and how to avoid them. The first mistake is not understanding that real estate cycles are long and take years. The second mistake is a misconception that low interest rates alone will generate a recovery. Another mistake is not realizing that circumstances can change and not planning ahead. Mistakes number four, five, and six are related to understanding market value, the right price, and selecting the right real estate professional.
By understanding and avoiding these mistakes, Real Estate Sellers have a much better chance of minimizing the negative impact of a recession when selling their properties.