Homebuyers Will Regain Negotiating Edge: Zillow Economist

Written by: Steve Cook   Tue, October 13, 2009 Beyond Today's News, Consumer Report

Foreclosures and the demise of the first-time homebuyer tax credit will swing the negotiating advantage back to buyers and away from sellers, who have been enjoying an improved status in many markets as declining inventories discourage price reductions.

That’s the view of Stan Humphries, Zillow’s chief economist and author of Zillow’s latest market study, released today.

Buyers paid a median $6,525, or 3 percent, less than the last listing price on all homes bought in August, down from $7,018, or 3.3 percent, less for homes bought in July. In January 2009, buyers were paying 4.5 percent less than last listing price, a median of $10,096, according to the Zillow study.

As a rule of thumb, when months’ supply of homes in inventory drops below six months, sellers gain control.  Above six months, it’s buyers’ territory, Humphries said in an interview with Real Estate Economy Week.

Total national housing inventory of existing homes at the end of August fell 10.8 percent to 3.62 million homes available for sale, which represents an 8.5-month supply at the current sales pace, down from a 9.3-month supply in July. Unsold inventory totals are 16.4 percent lower than a year ago, according to NAR. 

In markets where demand has been strong and foreclosures uncommon, inventories have been significantly lower and prices higher.  In two California markets, the Zillow study found that buyers actually paid more than asking price during August. In the El Centro MSA, buyers paid 2.2 percent, or a median $2,479, more than asking price. In the Stockton MSA, buyers paid 1.3 percent, or $2,515, more.

With the threat of significant numbers of new foreclosures caused by unemployment and the pending recasting of hundreds of thousands of Option ARM, alt A and interest-only loans and the prospective fall in demand resulting from the expiration of the first-time homebuyer credit December 1, inventories are likely to grow again.  Humphries sees prices declining again through the second quarter of 2010.

Humphries has tracked the close relationship between inventories, sellers’ confidence in the market and price discounts over the past two years.  Recently the gap between what sellers think their homes are worth and their actual value as measured by Zillow’s automated valuation model has lessened, suggesting that owners are wising up to marketplace reality.  Yet Humphries points out sellers still have an optimistic view of their property’s future value even if the present is not rosy.

But even if prices do improve for sellers, Humphries does not believe inventories won’t cooperate.  In fact, Humphries found that there is a huge “pent up supply” of homeowners who are awaiting better prices?29 percent in his survey in the second quarter?and when prices improve they will sell, flooding the market with new inventory.

“The pent up supply, combined with foreclosures, convince me we will have an L-shaped recovery,” he said.

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