The housing market is ever-changing; sellers are consistently proud of their apartments; buyer psychology is continually irrational and fickle; and yet buyers always want a good deal. As I lay out my thoughts for these blog posts month-to-month, I often will find myself trying to give my readers a good visual image or a metaphor to latch onto to help them understand whatever I’m trying to explain about the present state of the market.
It’s not helpful when the metaphors I think of are either ridiculous or just wrong. I’m not sure where I first heard “like shooting ducks in a barrel,” but I wish I could find that person and at the very least laugh with them before I tried to wring their neck!
Yes, these oddities have stuck in my head, but I also have absorbed a few metaphors from the financial markets and beyond that seem apt- and I don’t think I’ve heard these incorrectly.
I want to think about buyer psychology in this post, as I think about whether buyers are too cautious right now. My view is that there are some really great opportunities for buyers, with a couple of caveats.
Trying to Catch A Falling Knife
The first metaphor is the fear of trying to “catch a falling knife.” The notion here is that the market could have further to fall- the danger is obvious in trying to catch a knife in mid-air before it finally sticks in a board, etc.
People Prefer Picking Up, Not Catching, Knives
Buyers seems to think right now that, despite softness in the market for about 18 months at the high end, that there is more room to fall. While I feel for buyers and their desire to get the best deal possible, the biggest issue that’s persisted through 2017 is a seller reluctance to adjust pricing, not some dramatic problem in the market. Once sellers have adjusted prices (willingly or reluctantly), buyer demand has been there (to big fanfare in some cases). It’s a different vibe that the market slowdown of 2008 through 2009, when the entire real estate market was simply on pause.
Right now, as I’ve said, I believe the market is structurally sound. While some of these stories in the press focus on high-profile units that have sold well below their 2014/2015 prices, these are simply salacious tales; in reality, they are of course not reflective of every property in New York City having lost money from their 2015 values. They are mostly stories of buyers who were in some kind of distress and needed to sell. Or sellers who started at ridiculous asking prices and finally sought wise(r) counsel.
Let’s not ignore that prices for one- and two-bedroom apartments have continued to move up, in most cases, across the marketplace. Nor that the amount of time (aka “days on the market”) before units have gone into contract has actually gone down across the board, showing increased demand.
In many cases, buyers have put a lot of facts out of their minds and struggle with fear over reality, or perhaps fear of simply making offers (aka “lowball offers”) where they feel the value is. Those buyers in the market are in many cases buying at great prices.
Standing on the Sidelines
As we head into the endless College Football Bowl Season and soon-to-be NFL Playoff Season, I am thinking of those buyers who are “standing on the sidelines.” Perhaps this isn’t any more apt than “getting off the fence,” but it does seem to me to be a much more painful way to wait around. The assumption here is that buyers want to play (aka buy), but the coach hasn’t told them to get to get in the game. With getting off the fence, the notion is that the decision is going one way or another. In this case, it’s about playing the game- with the outcome being a purchase at a better price- a win.
You don’t want to be on the JV squad.
What is the signal for getting into the game? I wish I could say that I thought that buyers, or humans for that matter, were that rational. But my sense of the market right now is that buyers are not trying to time the market so perfectly. They are not carefully watching the screen for that combination of mortgage rates, abundance of inventory, and pricing to push a button. More to the point, there is simply a lot of, probably too much, information to process.
Distractions abound, from Washington DC, from Twitter, from mixed market signals, from the fear that the stock market with either go up or down- both being reasons not to buy real estate?- from tax regulation. There is definitely not one clear signal. In the absence of information, plenty of buyers just freeze up.
Negotiation 101- aka The Caveat
Let’s talk about tax policy for a minute, first because it’s probably necessary, and because it helps me cover our last metaphor, that of the Freshman class in college, whether it’s “Negotiation 101” or “Economics 101.” Clearly there’s a strong opinion that whoever people disagree with need to return to remedial study in math, finance, or economics.
Let’s look at the tax reform bill that recently passed the House less than two weeks ago. First, there is no reason to believe that this reform will have any more success than any of the other bills that have flopped around and failed in the Senate. But, because the ramifications are pocketbook-based, and less abstract than, say, recent attempts at reforming healthcare, this feels more real.
In this case, the bill itself would halve the mortgage interest deduction. The bill would eliminate State and Local Tax (SALT) deductions, impacting the amount of tax that high-tax states (New York, New Jersey, Illinois and California) and their high-earners (otherwise known as all of my clients) have to pay. Without getting into too many more details, the impact would be severe.
what people say, think and do are not always related in negotiations.
And yet, before any of us jumps off a cliff, it might pay to remember how these negotiations in Congress often go. The deliberation in the Senate tends to moderate a lot of the nuts and bolts of the House version of the bill. In this case, it could very well be the case that the current mortgage interest deductions stay in place. Or, without thinking through every permutation, that the final product, if one even passes, looks remotely similar to the bill currently being discussed.
So I refer to Negotiation 101. In a very simplified version of a negotiation, one side takes a very strong position to start, knowing full well that they will eventually back down a bit, or a lot. It’s such a common tactic that it would be taught in the first class, as it were. Buyers certainly could be understandably hesitant about the unknown to do with this tax bill. If it passes, even in a watered-down version of the current version, it could take some time for buyers to really comprehend how it impacts them personally. So there is that one caveat to the current real estate market. Concerns that could possibly be resolved by Christmas, if the current administration has its way.
A Wrap Up
Nothing happening in the market strikes me as so life-threatening, or job-threatening to most New Yorkers that would keep them firmly out of the market, provided that sellers continue to adjust to reality. But, in the short-term, the continued uncertainty plays the biggest role. Put another way, the higher volume from your social media channels is causing a lower volume level of transactions in the market. I guess that’s another metaphor. Have a great month. -Scott