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Don’t Shoot the Messenger

courtesy of mignatti.com

David Ramsey, the noted financial author, radio host and TV personality who guests on such programs as The Oprah Winfrey Show, 60 Minutes and The Early Show believes that a good broker or financial advisor must possess the heart of an educator. Not a salesman.

That sentiment applies to real estate agents as well. For ours is the moral and fiduciary obligation to keep our clients and customers as well-informed as possible regarding trends in the market that will likely impact their decision to buy, sell or wait.

We were reminded of our role as educators recently when a local debate broke out involving the frustratingly slow market for properties priced above $1 million. Does the upper tier need a downward price correction like the one that helped re-ignite sales of properties priced below $300,000? Or is the luxury market, as the other side contends, largely immune to the depth of correction that was needed to breathe new life into the lower tiers of the market.

The best way to settle this argument is by referencing Trendgraphix, whose unbiased reports reveal actual market trends based on actual market sales. Among other useful data, each new Trendgraphix report furnishes the most up-to-date snapshot we have of exactly what is selling in our market; and how much buyers are willing to pay relative to what sellers are hoping to net.

Typically, what buyers will pay at any given time tends to hearken back to the basic law of supply and demand. Simply put, too many homes for sale favor buyers paying less; while too few favor sellers netting more. A balanced market—promoting equality between buyer and seller—exists when a five to six month supply of homes is available.

In the under $300,000 price range, there is now a 5.3 month supply; which means that the price correction of the past few years has had its intended affect. That market has finally achieved balance.

National real estate expert, author, trainer and motivational speaker, Steve Harney, uses a fairly straightforward formula as a guide for pricing properties accurately in any type of market. That formula, shown below, relates pricing to months of supply:

Months of Supply:                                                               Pricing adjustment:
1-2                                                                                     Double digit appreciation
3-4                                                                                     Single digit appreciation
5-6                                                                                     The norm
7-8                                                                                     Single digit depreciation
9 +                                                                                      Double digit depreciation

The supply of $1 million-plus properties in Sarasota County is currently at 26.3 months—or more than four times the norm. Homes that recently sold in this price range did so, according to Trendgraphix, at an average of 22% below their original list price; an amount not only consistent with our own experience at Michael Saunders & Company, but with Harney’s formula as well.

Agents of Michael Saunders & Company presently account for nearly 45% of the dollar volume of homes sold in the $1 million-plus price range in Sarasota County. So it comes as no surprise that the properties we sold in the first quarter of 2010 also closed at an average of 22% below their original list price—further confirming the validity of Trendgraphix’s findings. One or two sales may have defied this average. In fact, some properties have closed for as much as 49%—or as little as 7%—below their original list prices. But major pricing decisions must be made based on a preponderance of the evidence. Moreover, as we remain in close contact with affiliated brokers across the nation and around the world, the same average depth of price depreciation is being noticed in many markets that bubbled-up like ours.

In a blog posting last Tuesday, Harney could almost be describing our market:

“In the horserace to a more normalized housing market, there seems to be only one constant. The luxury market has been the horse bringing up the rear. We have been experiencing some stability in the lower price points in almost every geographic market. However, the upper tier price points have had an overabundance of inventory for more than three years, and financing has been difficult. This had led to a nearly non-existent market for luxury properties. However, it now seems that upper end properties are again becoming popular with the high worth purchaser.”

To which he adds a very important caveat:

“Upper end properties will be no different than any other housing segment. The price will have to reflect accurate value in today’s highly competitive market. We have already seen deep discounts at the higher end, and that will continue to be the case for the foreseeable future. The pricing dynamic which is playing out in the upper end is no different than the dynamic which has determined price in the lower and mid-tier markets. Supply is very high and there is a wave of distressed properties (foreclosures and short sales) coming to even the best of zip codes.”

Sarasota’s luxury market has proven it is not immune to the price adjustments affecting all other segments. It just showed up late to the correction. If you must sell in today’s luxury market, an agent from Michael Saunders & Company will be happy to walk you through the steps it takes to price your home correctly. Or if it has already been on the market for some time with scant activity, we can tell you by how much you need to lower your price to attract today’s value-obsessed buyers. If your hard and fast goal is to net more proceeds from the sale than today’s market will support, then stay put and enjoy your home until the market catches up. Just don’t shoot the messenger.

  • User Gravatar Ron Struthers
    April 30th, 2010

    Re “Do not shoot the messenger”
    Unfortunately, numerous uninformed buyers purchased commercial real estate, anticipating price inflation similar to the housing market with out realizing that the NOI and the investors required opportunity rate (CAP) is what dictates the price of the commercial property. Maybe this time around the real estate practitioner will explain the dynamics of a good commercial real estate strategy and if they do not understand it then refer it to some one that does.

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