The U.S. is officially in a recession. What is a recession? A recession is a business cycle contraction or general economic decline due to meaningful drop in spending and other commercial activities. Most pundits and politicians will blame Covid-19 crisis for the recession, but already pre-Covid-19 the proverbial writing was on the wall.
The U.S. had over 120 months of economic growth, which was the longest expansion in the modern history. Other indicators, such as negative provide spread on treasuries (long term bonds having lower interest rates than short term T-notes), were pointing to an imminent change of the economic cycle and an impending recession. The only real question was: when and how bad?
Then Covid-19 came… If the cycle was going to change anyway, Covid-19 acted as a huge and unexpected accelerant to make the recession much more immediate and harsh.
Inevitably during recessions all classes of real estate, including residential homes and condominiums, will be negatively impacted as lower consumer spending and higher unemployment rates affect real estate prices and marketing times.
Here are the six costly mistakes home and other real character sellers make during recessions and how to avoid them:
Mistake #1: This will pass and real estate market will be hot again soon
First thing to remember is that real estate cycles are much longer than general economic cycles. already if the general economy recovers, which ultimately it always does, a typical real estate cycle takes as long as 10 to 15 years. The cycle has four meaningful stages: Top, Decline, Bottom and Rise.
Let us consider the last real estate cycle, which lasted approximately 14 years:
- 2006 – Prices hit the Top
- 2006 to 2012 – Prices Decline
- 2012 – Prices hit the Bottom (Trough)
- 2012 to 2019 – Prices Rise*
- 2020 – Prices hit the Top
- 2020 to? – Prices Decline
*observe: In 2016 the national residential real estate price index reached its pre-recession 2006 peak levels. It took 10 years for the real estate market to retrieve.
The way to avoid this mistake is to recognize that real estate cycles take years to run and plan consequently. Additionally, nobody knows for sure when the prices will hit the top or bottom until after the fact.
Mistake #2: Low interest rates will make the economy and real estate market rebound
Between 2006 and 2011 the interest rates (Fed Funds) were continuously cut by the Federal save Board and went from low 5% to almost 0%. However, that did not stop the real estate recession and depreciation of character values.
Undoubtedly, low interest rates made the economic decline and real estate recession less harsh and saved some similarities from foreclosures, but it nevertheless took six painful years for the real estate market to hit the bottom and then four more years for the prices to go back to their pre-recession levels.
Some markets had never fully recovered. For example, residential home prices in some parts of California, Arizona and Nevada are nevertheless below their 2006 highs.
To avoid this mistake, one needs to realize that although low interest rates help stimulate the economy and the real estate market, they do not cure them.
Mistake #3: I don’t need to sell now, so I don’t care
If you do not need to sell until the cycle plays out, which typically is over ten years, then you will not be as affected, especially if you have a strong equity position, limited mortgage debt, and substantial liquid assets.
However, it is good to keep in mind that “life happens” and either specialized or personal circumstances can change and we may need to sell character before the downturn runs its course.
Furthermore, if a character has a mortgages and its value declines to the point being “upside down,” meaning the mortgage loan balance exceeds the value of the character, then the options of selling, refinancing or already obtaining an equity line of credit, will be considerably limited.
This does not average that everybody should be rushing into selling their real estate if there is no need to do so, just keep in mind that circumstances may and often do change and character options will be affected, so plan in improvement. As one wise proverb says: “Dig your well before your thirst.”
Mistake #4: I’m selling, but I won’t sell below my “bottom line” price
This is a shared and potentially very costly mistake. Generally speaking, 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 unprotected to a certain price point 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, think the character value should be at. The market value is a price a willing and able buyer will pay, when a character is offered on an open market for a reasonable amount of time.
Overpricing character based on Seller’s subjective value or what is sometimes called an “aspirational price,” especially in a declining market, is a sure first step to losing money. When a character lingers on the market for an extended period of time, carrying costs will continue to build up and character value will depreciate in line with the market conditions.
Additionally, similarities with prolonged marketing times tend to get “stale” and attract fewer buyers. The solution is to honestly estimate your selling objectives, including the desired time-frame, estimate your character’s attributes and physical condition, analyze comparable sales and market conditions, and then decide on market-based pricing and marketing strategies.
Mistake #5: I will list my character for sale only with Agent who promises the highest price
Real estate is a competitive business and real estate agents compete to list similarities for sale which generate their sales commission incomes. It is not uncommon that Seller will interview several agents before signing an exclusive listing agreement and go with the agent who agrees to list the character at the highest price, often in spite of if such price is market-based.
Similarly to Mistake #4, this mistake can be very damaging to Sellers, as overpriced similarities stay on the market for extended periods of time costing Sellers carrying expenses such as mortgage payments, character taxes, insurance, utilities and maintenance.
Furthermore, there is the “opportunity cost” since the equity is “frozen,” and it cannot be deployed in other places till the character is sold. However, the most expensive cost is the loss of character value while the real estate market deteriorates.
During the last recession, we have seen multiple situations where overpriced similarities stayed on the market for years and ended up selling for 25% to 40% below their initial fair market values.
The solution is to make sure that your pricing strategy is based on the market, not empty promises or wishful thinking.
Mistake #6: I will list my character only with Agent who charges the lowest commission
Real estate commission rates are negotiable and not set by law. A commission usually represents the highest transactional expense in selling real similarities and is typically divided between Brokers and Agents who work on the transaction
Some real estate agents offer discounted commissions, in order to generate Sellers to list their similarities with them. But does paying a discounted commission ensure savings for the Seller? Not necessarily.
For example, if the final sales price is 5% to 10% below character’s highest market value, which is not that uncommon, due to inadequate marketing, bad pricing strategy, and/or poor negotiation skills, it will easily wipe out any commission savings and truly cost the Seller tens of thousands of dollars in lost revenues.
The solution is to include an agent who is a “Trusted Advisor,” not just a “Salesperson.” A Trusted Advisor will take his/her time and effort to do the following: 1) Perform Needs examination: listen and understand your character needs and concerns; 2) Prepare character examination: thoroughly estimate your character and market conditions; 3) Execute Sales and Marketing Plan: prepare and implement custom sales and marketing plan for your character; and 4) acquire Optimal Results: be your trusted advocate throughout the time of action and unprotected to the best possible outcome.
Finding such a real estate specialized may not be always easy, but it certainly is worth the effort and will pay off at the end.
In conclusion, this article has outlined six costly mistakes real estate Sellers 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 low interest rates alone will create a recovery. Another mistake is not realizing that circumstances may change and not planning in improvement. Mistakes number four, five and six pertain to understanding the market value, proper pricing and selecting the right real estate specialized.
By understanding and avoiding these mistakes, real estate Sellers have considerably better chances of minimizing the negative impact of a recession while selling their similarities.