We anticipated a 90-to-120-day adjustment period in the emotion of buyers, sellers and industry professionals to the new conditions of the real estate market. Increased interest rates, longer marketing time, and fewer showings would all lead to at least short-term market impact.
Typical human behavior is to have a strong immediate reaction, complain about change, wish it were different, then on both a macro and micro scale, accept the new conditions, set aside the drama and get back to life.
After 10 straights weeks of average sales price decline (starting in week 22 of this year) from $726,853 to $642,672, the last 4 weeks have seen a modest increase in average sales price to $667,939.
What is likely shocking to many, the year 2021 or also known as the hottest real estate market in history, saw the same pattern over the exact same period. In week 22 of 2021 the average sales price was $646,061. 10 weeks later, the average sales price was $599,686. Sure enough, 4 weeks later the average sale price was up to $613,442.
Statistically significant? Probably not. 2 data points (or two years) do not make a pattern.
However, 2012 through 2019 was virtually identical (2020 was our pandemic year and an outlier). So, 11 years of data show a pattern of appreciation for the first 22-24 weeks of each year (approximately mid-June) followed by a period of decline.
Does this mean the Colorado real estate market isn’t experiencing prolific shifts in 2022 and just following a normal pattern? No.
Since week 22 of this year:
- Weekly showings have been below 20,000 in 15 of the last 16 weeks. Over the same period in 2021, the market saw showing activity below 20,000 only 1 time.
- Weekly showings per listing has dropped from 5.1/week to 2.48/week. 2021 dropped from 9.8/week to 5.7/week.
- Showings per contract has moved from a low of 15.25 since week 22, to a 5 year high of 21.41.
- In week 22 of this year, 65.5% of all properties were selling for above the asking price and 20.3% below. Now, 19% are selling above the asking price and 68.8% are selling for below.
- Week 22, only 11% of all listings experienced a price reduction. Today, 46.9% of all listings are reducing price.
- Week 17 of this year saw an impossibly low 6.84 average days on market (week 23, 10.94). Today, average days on market is 31.59 and is trending higher.
Buyer and Seller Activity Decline
The primary and immediate impact on the real estate market has been the prolific rise of interest rates. As previously shared, this has slowed buyer activity markedly and is impacting seller and listing agent experience by the market being “quiet.” I.E., it gets uncomfortable when you’ve worked hard to prepare your property, worked hard to listing and market the property perfectly and…there is nothing to report. Sellers start to wonder what the agent should be doing differently and agents start experiencing blame.
Just over two showings per week causes anxiety, especially when the number of showings needed to get under contract is now over 21. This is pushing a trend of average days on market toward just over 2.5 months.
This slowdown of buyer activity can now be seen in the lag indicators of seller activity and market performance.
Since sellers have begun to understand the shift in the market, fewer sellers have been listing their home for sale. No doubt the reduced listing activity has been impacted by sellers who thought they wanted to move but are not only impacted by a reduction in demand and rise of interest rates, but are considering macro factors like recession, jobs markets, national inflation and monetary policy and geopolitical issues. Families saying, “let’s just stay put for a minute and see what happens”.
New Listings hitting the market has been about 15-30% below the last 3 year average for the last 8-10 weeks.
The combination of fewer listings, but even slower buyer activity has resulted in three things:
- 1) A significant slowdown in the number of properties going under contract
- 2) A significant slowdown in the number of properties selling each week
- 3) A rise in inventory to the highest level in 3 years
This causes the pressure on price to change. Below are two charts that show the short term (2022 only) and long term patterns of buyer behavior. The green line is the percentage of properties selling above the asking price. The red line percentage of properties selling below the asking price and yellow at the asking price.
Week 16 of this year, 81% of all properties were selling about the asking price. Today, that number is 18.8% with 70% selling below.
Remember that 2019 was still a strong market even though in the height of the spring selling season only 31% of properties were selling above the asking price. In September of 2019 only 17% of properties were selling above the asking price. What we’ll watch is the speed of any continued decline.
All of this then leads to price reductions
When agents don’t know how to read the market, price homes, prepare properties or set expectations; days on market grow longer and sellers begin to get anxious.
The result is, sellers need to drop the price that was too high in the first place, to get the property moving. 49% of all listings are experiencing a price decrease compared to just 4.8% of homes 15 weeks ago. Expect the yellow and red line to cross in the next 30 days.
Is this a sign of an unhealthy or tragic market? Maybe. It will have been 12 years since more homes were experiencing price reductions than not. In December 2010, arguably the worst market in the history of Colorado and the nation, 60% of homes were experiencing price reductions.
But, it’s likely valuable to consider some subjective factors comparing today to 2010.
In 2010, everyone knew we were in a housing crisis. We had already been in one for 2 years. Sellers knew they were losing equity and needed to get in front of the negative price curve with lower prices, and the agents on average I would argue, were also more sophisticated because most of the part timers and incompetent agents were driven out of the business at least 1 year before.
So, pricing was likely more accurate, the tendency to overprice was minimal, and the emotion of dropping the price was a resignation by the seller from the outset of putting the home on the market. And yes, I acknowledge that these were not always present.
Today, sellers have not accepted market conditions, emotions are high and, agents are allowing sellers to overprice homes because of their inability to actually read the market and have a truthful conversations.
So, might we see a slow down of price reductions due to increased understanding of market conditions and agent professionalism/skill? Maybe. Doesn’t really matter. You can use this information to at least educate and differentiate yourself.
Ultimately, this will lead to more expired listings, and agents who are not strong will get out of the business (I anticipate an exodus toward the end of 2022). Those who are consultants, true professionals may ultimately have more opportunity than ever.
And with all of this…prices are holding steady for now
All Property Types
Single Family Residence
Yes, we believe buyers, sellers and industry professionals are making the emotional adjustments.
But the necessary behavioral adjustments will be hard for many. Agents must remember the basics of good business professionals to survive this shift. The good news for the professionals is, many won’t make the adjustments and will be getting out of this business soon.
Do these basic things well in your transactions and you’ll be delivering a referrable experience to your clients.
- Pricing-reading the macro, micro and hyper local market trends, diligently looking at recent sales, under contract and currently active properties, assessing condition, features, location, age and all other salient features relative to client objectives, making the various value adjustments to arrive at a market value and provide a range of potential value based on current and predicted market direction. Agents got so lazy over the last few years in pricing homes and many never learned the skill. As the market becomes more competitive, this skill and the presentation of the data will once again become a differentiator.
- Preparation-lazy agents will get out of the business because they cannot manage expectations, define process or execute reliably. For a home to sell at its highest and best, it must be in its highest and best conditions, relative to a seller’s ability, desire and resources to do the work. A great agent will objectively help the seller understand how to help maximize the value of the home. Weak agents are not able to guide clients.
- Professionalism-simple things like answering your phone, writing a great contract, checking and returning emails and text messages timely. This is a full-time job to do it well and just being committed to doing it well requires active engagement. It also requires, like every profession, the commitment to increasing your knowledge and skill. Where do you need to become an expert in order to be a next level professional? Writing articles? Shooting videos? Pricing? Reading and sharing economic data? None of it is hard, it just requires discipline.
- Truth-this industry has been full of salespeople for over a decade. It’s time for the consultants to rise. Consultation means a deep commitment to honesty. Honesty isn’t just about not lying; honesty is about a full disclosure of the real conditions and your interpretation of the conditions relative to the client goals. It’s not a matter of not telling the client you love their 1978 orange shag carpeting, its telling them objectively that the carpet is a liability, reduces the value of the home and if they want top dollar they need to replace it. How deep is your commitment to truth?
- Proactive Communication-moving from 7 days marketing time to almost 32 days on market requires a totally different set of skills. And let’s be clear, the marketing time is most likely to get longer. Not only should your client relationship have started with truth, but you should also design your relationship with your client. How often will you talk? What will you talk about? How will you evaluate your performance? How will they evaluate your performance? How will you together evaluate the how the home is performing on the market? Is the client doing the work agreed upon as a buyer or seller? Set incredibly clear expectations with your client about communication and then surpass them.