Is the sticky price phenomenon holding sales volume down in your local market? Tell us about your experience below in the comments section.
- Yes (71%, 12 Votes)
- No (29%, 5 Votes)
Total Voters: 17
This article examines the myriad causes and consequences of the current sticky pricing situation in this Lesser Depression.
The buy-sell divide
Although buyers and seller’s markets never occur simultaneously, the buy-sell divide is greater than ever, according to a recent study by the Research Institute for Housing America. [Click here for the full report from the Research Institute for Housing America.]
After the recession of the early 1990s, 40% to 60% of homeowners were optimistic about the prospect of selling their home in a recovering real estate market. Today, in the wake of the Great Recession and the midst of the jobless Lesser Depression, 92% of homeowners believe that it is not a good time to sell. [For more information on homeowner sentiment, see the December 2011 first tuesday article, The homeownership confidence shift.]
On the flip side of the buy-sell coin, nearly 80% of potential homebuyers believe it is a fantastic time to buy. The buyer optimism of late is undoubtedly due to the rare confluence of low interest rates and low prices that most real estate markets are experiencing around the nation, especially in California.
A sticky recovery
Prices, however, are not as low as they could (or should be) since many sellers in this dismal economic climate for real estate sales still refuse to adjust their prices to what a buyer will readily pay – fair market value (FMV) — a phenomenon known as sticky pricing. In point of fact, homeowners who purchased their home in 2007 or later believed their property was worth 14% more than the actual FMV, according to Zillow. [For California-specific home sales pricing, see the December 2011 first tuesday market chart, California tiered home pricing.]
It is difficult to gauge exactly what effect sticky pricing has had on the real estate market recovery. Many agents believe it is contributing to poor sales volume as intractable sellers refuse to price their homes fairly — accept reasonable offers — and bargain-hungry buyers have no reason to compromise on their first offer, which usually proves to be the seller’s best or only offer in today’s buyer’s market. [For more information on the effect of sticky pricing on the real estate market, see the September 2009 first tuesday article, Price persistence and market illiquidity.]
Sellers waiting for prices to rebound to pre-2007 levels will be waiting a long time — a very long time. first tuesday anticipates a real estate boom-let occurring near 2018. This mini-boom will be sparked first by resurgence in California-based employment, and then a substantial increase in gross domestic product (GDP). Yet real estate prices will most likely be inhibited by a modicum of consumer inflation, insufficient to excite speculators this time around.
Of course, the wildcard in this whole scenario is Generation Y (GenY), whom everyone is counting on to drive the economy for the next 20 to 30 years as the boomers retire, dissave and eventually pass into economic history.
Although recent employment numbers in California provide encouragement that the economy will continue to grow and not slip back into a technical recession (read: double-dip), given the austerity-hungry House of Representatives and other global economic pressures (read: the Euro and the Renminbi), any near-term gains in GDP are nowhere in sight. When the boom-let does occur, it will be kicked-off by low prices — prices in inflation-adjusted dollar amounts that are likely to be lower than today’s market prices.
Money illusions and market realities
Sticky pricing is typically born out of a conflict between the price sellers believe their home is worth (sometimes known as the seller’s money illusion) and the actual fair market value of their home based on an appraisal that takes comparable properties (comps) and market conditions into consideration.
However, there are a number of market factors in the real estate landscape of the Lesser Depression that are contributing to the sticky pricing environment.
One substantial factor to consider when critiquing a seller’s money illusion is the issue of the loan-to-value ratio (LTV) of the home in a shortsale situation. Many sellers and their lenders today remain wedded to an unrealistic price because they are conscribed by the outstanding debt owed on their mortgage, which for most want-to-be sellers exceeds the current fair market value (FMV) of their home — a pricing scenario very familiar to all California agents in today’s market.
Unsustainable mortgage debts created by the boom, and intractable sellers who have been inculcated with the idea that they are duty-bound to repay those debts rather than default is likely near the heart of this sticky situation. Even in the event a seller finds a buyer willing to agree to his sticky price, there remain the formidable barriers of appraisers and lender scrutiny that all too often kill the deal before closing.
Thus, while sticky prices are usually an issue of a seller’s money illusion, the realities of overhanging debt and gun-shy real estate professionals (price opinion fraud claims pressed by REO and shortsale lenders) in today’s market stand as real counterpoints to the otherwise illusory issue of sticky prices.
Loosening-up the illusion
Interest rates have nowhere to go but up. When interest rates rise, real estate prices are driven down, all else being equal. A glance at the historical equilibrium trendline reveals that prices have yet to bottom out, despite the “jobs recovery” that is underway. [For more information on historical trends in real estate pricing, see the October 2011 first tuesday article, The equilibrium trendline: the mean-price anchor.]
You may debate whether or not prices will fall further or if inflation will catch up and eat away price increases, but one thing is for sure: sticky pricing sellers can’t stay stuck forever. When priced correctly, a deal is typically struck within 30 days (okay, 60 days) of marketing the property for sale — a timeline agents have begun to push full-force on their illusion-stricken sellers.
Perhaps the only pressure needed to jar stubborn sellers from their impractical prices and back to reality is an increase in long-term mortgage interest rates. This should happen roughly 24 months from now, likely in late 2013 just as the sticky seller’s illusions are wearing thin. [For a detailed analysis of the future of rising interest rates and their effect on the real estate market, see the December 2011 first tuesday article, The due-on time bomb.]