Last week Zillow abandoned their iBuying program due extreme price volatility. As a result, their Zestimate can no longer accurately predict the future pricing of homes. If a multi-billion-dollar company like Zillow with all their data and technology can’t accurately predict prices, how can you possibly advise buyers and sellers about where prices are heading in your market?
The big picture: what’s ahead in 2022?
As I look at the numbers, the analytics certainly suggest prices will continue to increase in most markets throughout 2022. My gut, however, disagrees.
Today’s market feels eerily similar to the rapidly appreciating L.A. Westside market in the early 1990s. When that market crashed, homes lost 30 percent of their value in a little over six months. Putting it a little differently, a $500,000 property dropped in value to $350,000—that’s a rate of decline of $25,000 per month!
Where the market is “about to go ugly”
GOBankingRates has identified 50 markets that they believe are “about to go ugly.” This list illustrates the three types of markets you must track for your area in order to predict which way your market is heading.
- Seller’s markets: Low inventory (five months or less) coupled with increasing price appreciation as the inventory dwindles. (66 percent of this list.)
- Flat (or transitioning) markets with about six months of inventory, a balanced number of buyers and sellers, and little or no appreciation or depreciation. (14 percent of the list.)
- Buyer’s markets—high inventory (seven months or more) coupled with deeper price depreciation as the inventory climbs.
Of the cities “about to go ugly,” Peoria, Illinois, topped the list with a price decline of 15.9 percent over the last two years.
A proven approach to pricing that effectively persuades sellers AND buyers
The steps below will allow you to identify which way your market will be trending 6-12 months from now. They will also help you approximate the amount of increase or decrease a client may experience as buyers chase the market up in a seller’s market or sellers chase it down in a buyer’s market.
Because the strategies below are based on pricing data from recent sales, this approach works with traditional buyers as well as with CPAS, developers, business managers, attorneys, plus REO and foreclosure managers.
(Please note that as markets shift, you may have a “mixed” market where one part of the inventory (usually the entry level properties) remains in a seller’s market. At the same time, higher priced properties may have moved into a buyer’s market with declining prices.)
To overcome the Zillow objection and show your clients which way your market is currently trending, here are the steps to follow:
1. Educate your clients about AVMs (Automated Valuation Models)
The first step in helping buyers and sellers understand the challenges with using Automated Valuation Models like Zillow, Trulia, HomeSnap, and Realtor.com is to show them how much these price estimates vary.
Next, explain why this is the case. Algorithms cannot account for a wide variety of factors that are only apparent when you visit the property in person. As Greg Robertson tweeted, “Zillow can’t smell the cat.”
2. The best new script for overcoming the objection, “But Zillow says my house is worth more!”
Based upon Zillow’s admission about the inaccuracy of their Zestimates, Kimberly Doseth has an inspired script for overcoming this tough objection:
“If Zillow’s Zestimate did not work for Zillow, then it’s not going to work for you.” Mention this at all your future listing appointments.
3. Two early reliable indicators of where your prices are heading
Based upon the four previous downturns and recoveries I have experienced, “Months of Inventory” coupled with “Days on Market” are your two best early indicators of market shifts. These two numbers begin to shift at least 6-12 months before a market will see any significant change in prices. If you observe a consistent trend in one direction or the other, plan for it to show up in price shifts in about 6-12 months.
4. Chasing the market up and chasing it down
If you’re working in an area that has seen double digit price increases over the last several years, you have already experienced the challenges of coping with steep price increases. The good news for sellers is that even if you underprice a listing, in most cases buyers will bid it up to market value.
On the other hand, advising buyers is extraordinarily difficult because the longer it takes them to find a home, the more expensive properties become. Couple this with the likelihood of increasing interest rates, inflation, and low appraisals if they overbid the comparable sales and it becomes even more challenging.
In a declining market where sellers fail to get ahead of plunging prices, the scenario above is flipped. Sellers can face multiple price reductions before they finally sell at a price that is usually significantly less than their original asking price.
5. Select the appropriate comparable sales using the Ten Percent Rule
If possible, select comparable sales specific to niche market you serve. If you have trouble finding comparable sales due to a lack of inventory, you can expand your selection to a broader area such as a zip code or town.
The most important rule to follow when selecting comparable sales is to make sure that the square footage of both the lot and the improvements you select are within 10 percent of those of the property you are pricing.
For example, for a 2,000 square foot house on a 5,000 square foot lot, you would select houses where the improvements were between 1,800-2,200 square feet. The lot sizes should be between 4,500-5,500 square feet.
Warning: Failure to follow this rule distorts your results and gives you an inaccurate picture of values.
6. Determine the time periods you will compare
In a normal market, compare the most recent six-month-period with the previous six months. For example, January-June 2021 compared to July-December 2021.
In rapidly appreciating or declining markets, it’s smart to use comparable sales from the last 60-90 days. Assuming a 60-day scenario that would be comparing September-October 2021 with July-August 2021.
7. Calculate the average rate of increase or decrease
This calculation is based upon the “average price per square foot.” Remember to follow the Ten Percent Rule.
- Most MLSs provide you with the price per square foot each listing when it sells. If your MLS doesn’t provide this information for you, the formula is simple:
Sales Price/Square Footage = Price per Square Foot
- Add together the price per square foot for each property that has closed in the last two months (e.g., September-October) and then divide by the number of properties you included. This equals the average price per square foot. Repeat the process for the properties that closed in the preceding two months (e.g., July-August).
Average price/sq foot from most recent two months (e.g., September-October)
Average price/sq foot for the two preceding months (e.g., July-August)
Interpreting the results:
Chasing the market up (seller’s market) values are greater than 1.0):
Assume that the average price per square foot for properties in your market area is
$200 per square foot for September-October 2021, vs. $196 per square foot for July-August 2021. Divide:
$200 = 1.02 (a two percent increase)
Prices are increasing on average at a rate of two percent every two months (i.e., one percent per month from June-July to August-September).
Applying this information:
Assume you were in a multiple offer on a property listed at $400,000. Persuading your buyer to write an offer over asking can be challenging. However, when you show the buyer prices are increasing one percent per month, i.e., $4,000 per month and this trend continues for the next 12 months, the cost of purchasing this property a year from now would be approximately $448,000.
Showing the buyers these numbers can make it easier for you to persuade them to make a higher offering price. You can also remind them that every month they wait to purchase, the homes in their price range continue to increase $1,000 per month.
Chasing the market down (buyer’s market) values are less than 1.0:
Using the Peoria, Illinois, example cited above, t
$69.13 (current average price per sq. foot) = .84 (decline of 16 percent)
$82.28 (value two years ago per sq. foot
When values are less than 1.0, market values are decreasing. In this case the median priced home in Peoria is decreasing at a rate of approximately 8 percent annually (16 percent over two years) or $985 per month.
Applying this information:
If you were representing a seller in this market and they selected their list price based upon the comparable sales, they would already be overpriced. Furthermore, in a steeply declining market like the one described for Peoria, Illinois, it can take an average of 8 months or more for a property to sell.
Since property values are decreasing at $985 per month, that $124,450 median priced home would be worth $116,570 eight months from now, provided it sells that quickly.
Instead of pricing this property at $124,450, the effective listing agent will show the sellers what is happening and encourage them to price the property UNDER the current comparable sales. If not, the sellers will end up chasing the market down until their asking price is finally less than the rate properties have been declining in value.
The bottom line
As an agent, you don’t have to accurately predict the exact amount of increase or decline in market values. Using the tried-and-true techniques above, however, helps you to illustrate to both sellers and buyers, the cost of transacting now vs. waiting.
For buyers in a seller’s market, it pays to transact as soon as possible. For sellers in a buyer’s market, it pays to slash their asking prices before they go even lower than they are currently.
As we move into 2022, many parts of the country will be experiencing mixed markets where prices may be appreciating in one price range and declining in another. Tracking these numbers helps you to understand exactly what is happening in your local market and to help your clients make the best possible decision about their sale or purchase.