The US is officially in recession. What is a Recession? A recession is a contraction in the business cycle or a general economic downturn resulting from a significant drop in spending and other commercial activities. Most pundits and politicians will blame the recession on the Covid-19 crisis, but even before Covid-19, the proverbial writing was on the wall.
The US experienced more than 120 months of economic growth, the longest expansion in modern history. Other indicators, such as a negative yield differential on government bonds (long-term bonds with a lower yield than short-term T-notes), pointed to an impending change in the economic cycle and an approaching recession. The only real question was: when and how bad?
Then came Covid-19… If the cycle did change, Covid-19 acted as a huge and unexpected accelerator to make the recession much more immediate and severe.
Inevitably, during recessions, all types of real estate, including residential homes and condominiums, are adversely affected as lower consumer spending and higher unemployment rates affect property prices and sales times.
Here are the six costly mistakes home and other real estate sellers make during recessions and how to avoid them:
Mistake #1: This will pass and the real estate market will be hot again soon
The first thing to remember is that real estate cycles are much longer than general economic cycles. Even if the general economy recovers, which it always does eventually, a typical real estate cycle lasts 10 to 15 years. The cycle has four main phases: Top, Decline, Bottom, and Rise.
Let’s take a look at the last real estate cycle, which lasted about 14 years:
2006 – Prices reach the top
2006 to 2012 – Prices fall
2012 – Prices hit rock bottom (trough)
2012 to 2019 – Prices rising*
2020 – Prices reach peak
2020 to? – Prices decline
*NOTE: In 2016, the national residential real estate price index reached its pre-recession peak in 2006. It took 10 years for the real estate market to recover.
The way to avoid this mistake is to recognize that real estate cycles take years to run and plan accordingly. Plus, no one knows for sure when prices will hit the top or bottom until after the fact.
Mistake #2: Low interest rates will rebound the economy and real estate market
Between 2006 and 2011, interest rates (Fed Funds) were continuously lowered by the Federal Reserve Board, going from a low 5% to almost 0%. However, that did not stop the real estate recession and real estate depreciation.
No doubt low interest rates eased the economic downturn and the real estate recession and saved some properties from bankruptcy, but it still took six agonizing years for the real estate market to bottom out and then another four years for prices to bottom out again. their pre-recession levels.
Some markets never fully recovered. For example, house prices in some parts of California, Arizona and Nevada are still below their 2006 highs.
To avoid this mistake, one must realize that while low interest rates help stimulate the economy and the real estate market, they do not cure it.
Mistake #3: I don’t have to sell right now, so I don’t care
If you don’t have to sell until the cycle is over, which is typically more than a decade, you’ll be less impacted, especially if you have a strong equity position, limited mortgage debt, and solid liquidity.
However, it is good to keep in mind that “life happens” and both professional and personal circumstances can change and we may have to sell real estate before the recession takes its course.
In addition, if a property is mortgaged and its value falls to the point of being “upside down”, meaning that the mortgage loan balance exceeds the value of the property, then the options of selling, refinancing or even obtaining its own credit line, are considerably limited.
This doesn’t mean everyone should rush to sell their properties if they don’t have to, but keep in mind that circumstances can and will often change and property options will be affected, so plan ahead. As a wise saying goes, “Dig your well before you are thirsty.”
Mistake #4: I’m selling, but I won’t sell below my “bottom line” price
This is a common and potentially very costly mistake. In general, every seller wants to sell for the highest price and every buyer wants to pay the lowest price. That’s nothing new. When selling real estate, most sellers want to reach a certain price level and/or have a bottom line.
However, it is important to understand that the market does not care what the seller, or his/her agent, thinks the value of the property should be. Market value is a price that a willing and able buyer will pay when a property is offered on an open market for a reasonable period of time.
Overpricing real estate based on the subjective value of the seller or what is sometimes referred to as an “ambition price”, especially in a declining market, is a first step to losing money. When a property remains on the market for an extended period of time, transportation costs will continue to increase and the value of the property will decrease in accordance with market conditions.
In addition, properties with a long sales period tend to become “obsolete” and attract fewer buyers. The solution is to honestly assess your sales goals, including the desired time frame, evaluate the characteristics and physical condition of your property, analyze comparable sales and market conditions, and then decide on market-based pricing and marketing strategies.
Mistake #5: I will only list my property for sale with a broker who promises the highest price
Real estate is a competitive business and real estate agents compete to list properties for sale that generate their income from sales commissions. It is not uncommon for the seller to interview several brokers before signing an exclusive listing agreement and pairing with the broker who agrees to list the property at the highest price, often regardless of whether or not this price is in line with the market.
Like error #4, this mistake can be very damaging to sellers, as overpriced properties stay on the market for extended periods of time, incurring seller costs such as mortgage payments, property taxes, insurance, utilities, and maintenance.
In addition, there is the “opportunity cost” since the equity is “frozen” and cannot be deployed elsewhere until the property is sold. However, the most costly expense is the loss of property value as the property market deteriorates.
During the last recession, we saw multiple cases where overpriced properties remained on the market for years and ended up selling for 25% to 40% below their initial fair market value.
The solution is to make sure your pricing strategy is based on the market, not empty promises or wishful thinking.
Mistake #6: I will only list my property with an agent who charges the lowest commission
Real estate commissions are negotiable and not legally fixed. A commission usually represents the highest transaction cost in real estate sales and is usually split between brokers and agents working on the transaction
Some real estate agents offer discounted commissions to get sellers to list their properties for sale with them. But does paying a reduced commission mean savings for the seller? Not necessary.
For example, if the final sale price is 5% to 10% below the highest market value of the property, which is not too unusual, due to inadequate marketing, poor pricing strategy and/or poor negotiating skills, this will easily negate any commission savings and cost the seller even tens of thousands of dollars in lost revenue.
The solution is to hire an agent who is a “Trusted Advisor”, not just a “Seller”. A Trusted Advisor will take his/her time and effort to do the following: 1) Perform Needs Analysis: Listen and understand your real estate needs and concerns; 2) Prepare property analysis: thoroughly evaluate your property and market conditions; 3) Execute sales and marketing plan: prepare and execute customized sales and marketing plan for your property; and 4) Achieve Optimal Results: Be your trusted advocate throughout the process and get the best possible outcome.
Finding such a real estate professional may not always be easy, but it is definitely worth the effort and will pay off in the end.
In conclusion, this article has outlined six costly mistakes real estate salespeople make during recessions and how to avoid them. The first mistake is not understanding that real estate cycles are long and take years. The second mistake is a misconception that only low interest rates will bring recovery. Another mistake is not realizing that circumstances can change and not planning ahead. Mistakes number four, five, and six relate to understanding market value, pricing correctly, and selecting the right real estate professional.
By understanding and avoiding these mistakes, real estate sellers have significantly better chances of minimizing the negative impact of a recession while selling their properties.