Real estate statistics: Are we fishing in the wrong pond?

By your real estate dude

In a recent meeting at my office, the subject of “real estate market statistics” came up. What was said might surprise you. But, before I launch into the story, let me take a moment to establish the background.

San Diego County experienced a “seller’s” market for several years. There were a great many buyers (high demand) and very few available properties (low supply). This shift in the supply and demand ratio meant that seller’s had the advantage, and that buyers were forced to compete for the few homes that were available. Consequently, prices went up. Low interest rates, high consumer confidence and a desire on the part of many to move their money out of the sagging stock market accentuated the upward price trend, and the real estate market boomed. The key phrase here is: “buyers had to compete”. If there were concessions to be made, it would be the buyers who made them.

Since that time, the real estate “tide” has turned. Consequently, we find ourselves in the middle of a buyer’s market. There are very few buyers (low demand) and a zillion homes for sale (high supply). The buyers are now in the driver’s seat. It is now the buyers who have the advantage and the sellers must compete for the few buyers available. Thus, prices have stabilized and in many cases come down.

No doubt you have scoured the business news and knew all of this even before I got the bright idea to write about it. But, what you may not know is what Paul Harvey calls “the rest of the story”. Remember, statistics can be misleading. Quite often, they do not contain all of the information necessary to paint a complete picture. As a result, the potential for coming to an incorrect conclusion based upon them is quite real, which brings me back to the meeting at my office.

The subject at hand was the frustration felt by many agents as they have attempted to explain to “buyers” that this truly is the time to buy. In the face of the media barrage of “statistics”, buyers are often reluctant to accept this advice. I experienced this myself in a similar conversation with one of my clients just two days ago. We were having a cup of coffee and talking about this very subject when he said, “People are trying to time the market. They want to wait until prices come down.” He was right, but what he had forgotten was the key to the story. Remember earlier when I said, “The key phrase here is: buyers had to compete”? But the tide has turned, hasn’t it? In our current market, buyers have the upper hand. Today’s key phrase is: “sellers must compete for the few buyers available”. Unlike the previous market, if there are concessions to be made, it is the seller who is going to have to make them.

To drive home the point, we did a little “poll” during our office meeting. Here is what we found. The agents in the office reported that the average concessions given by sellers recently, ranged from $10,000 and $30,000. The vast majority of these concessions were given as “credits” back to the buyer through escrow. For example: the sellers may have agreed to pay the buyer’s closing costs, give the buyer a credit toward repairs or pay for the first year of home owner’s association dues. In each case, the money was paid by the seller out of the proceeds of the sale of the house, rather than simply reducing the price. So, if you buy a home for $500,000 and the seller agrees to give you $20,000 in concessions through escrow, you have really only paid $480,000 for that home. Since you rapped those concessions into the purchase price, the statistics do no report the concessions. Therefore, according to the statistics the home you purchased in this example would have sold for $500,000.

Let’s take it one step further and say that the home in question would have sold before the market changed for $550,000. But, the market has shifted. You paid $500,000. Statistically, we would conclude that the price of that home dropped 10%. But, remember, the seller gave you $20,000 in concessions. Even though you financed these costs by paying $500,000 for the home, the effective purchase price of the house was actually $480,000. That equates to an actual price reduction of 12.7%. So, if you’re sitting back waiting for prices to drop, which is more exciting to see: a ten percent price reduction or a drop of twelve percent or more?

The point is simple: statistics do not always represent reality. When you take seller concessions into consideration, it becomes clear that home “prices” have come down far more than the statistics and the news media report. If you’ve been waiting for home prices to drop before you buy, this is something to consider in your decision making process. When you do the math, you may find that the time to buy is now.