Q3-Market Report on the homes sales in the Northern Virginia Counties
A Failure to Communicate
By Ken Fears -Manager of Regional Economics
Over the last five years, the median home price has grown tremendously. Nationally, the median price rose 25% over this period, but some markets grew in excess of 200%. This run up in prices was precipitated by the sharp fall in mortgage rates from 2000 through 2005, which improved affordability. But over time, prices were bid up to the point that affordability fell to its long term trend. In some markets, however, the feeding frenzy caused affordability to fall below the long term average.
Today, affordability is squeezed and home buyers are focused, more than ever, on the bottom line; the monthly mortgage payment. While prices have reached dizzying heights, what matters to buyers is this simple actuarial accounting.
Currently monthly payments are too far out of bounds for many first time and trade up buyers.
Sellers should be keen to note this trend, but as of yet they have resisted. While non-price concessions are on the rise (it is hard to quantify this as there is no data to track, but regular discussions with brokers and agents supports the claim that this trend is widespread), price concessions have been few and far between. Sellers, who’ve seen their neighbors make tremendous profits over the last 6 years expect to reap the same reward. In fact, they often come into the process with a figure in their head of what they expect to make. This seller psychology makes it hard to convince them of alternative pricing strategies that could save them money and consternation in the long term.
Currently, about 70% of the markets around the U.S. are experiencing declining sales, while 30% are still growing. Astonishingly, while sales have fallen, in most markets prices continue to rise! How can this happen? By refusing to take
concessions, sellers are driving buyers to the sidelines. The best properties are moved at the higher prices, while the rest sit.
Truthfully, some sellers, particularly trade up buyers, are in a bind where they have purchased their trade up property expecting to be able to use the proceeds from their home on the market. With affordability stretched, they are likely to take a loss if they don’t realize all of the gains from their first property. Consequently, they face an immediate bite to equity and may choose to cling to a high asking price. But this is a special case and hardly typical of all sellers.
Vs. Q3 2006 Percent Gain
If sellers are forced to take a mild concession, how much would that mean? The strong price appreciation over the last five years in the area covered by MRIS has created lots of equity for homeowners. For example, if you had bought your home 5 years ago and sold it at the current median home price of $323,583, you would have realized an appreciation of $114,285, or a gain of 54.6% from your purchase. However, if prices were to fall 5% to $307,404, then the equity gain would still be $98,106, or an appreciation of 46.9% on your investment.
For those few buyers who are using new equity in their current home to trade up, a concession may be painful. But, the majority of buyers still hold large equity gains in their homes to use as a buffer. Taking a small concession now will save sellers the consternation of longer days on the market and a potentially larger concession down the road. Currently, demand has been driven to the side lines as buyers wait for mortgage rates or prices to moderate and bring monthly payments in line with what they can afford. But with interest rates high, 6.41% in September of 2006, and unlikely to fall further, prices must come down further to entice buyers back to the market. If this stalemate between buyers and sellers takes too long, buyers could leave the market all together, which would require further concessions by sellers to corner the remaining buyers. In short, a small pin *** now is better than worse later.
Attached is a zip file for individual county information.
For any questions please feel free to email me at Info@eNOVAHomes.com