How real estate has changed in just a few months! For six years, real estate professionals have struggled to get buyers back into the market with advertising campaigns, incentives, and the willingness to suffer social abuse for proclaiming the housing depression to be a great time to buy a home.
Yet despite the lowest mortgage rates since the Jurassic Age, home values so low that one out of four owners went upside down on their mortgages and $27 billion worth of tax credits, most buyers still missed the price bottom.
Now, suddenly, it’s the seller’s turn. Every forecaster from Mark Zandi to Donald Trump says the worst is over and real estate markets will continue to heal and improve. Buyers’ markets are turning into seller’s markets this year, driven by inventories of homes for sale are at record lows. In fact, tight inventories are a problem. There are so few houses listed that in many markets sales falling short because there’s nothing to buy.
Yet something’s not working. Over the past two years, as mortgage rate dropped lower than they have been since the Depression, one of the great certainties of real estate has failed us. Mortgage rates by themselves cannot motivate enough buyers to enter the market if they are not already inclined to do so. Now we are learning another hard lesson. Improving prices will not move sellers off dead center unless they have other, more compelling reasons to sell.
Today the greatest challenge facing real estate is not foreclosures, subprime loans, access to financing, threats to the mortgage interest deduction or FSBOs. The greatest threat is inventory…we don’t have enough of it.
Dreams Delayed, Dreams Abandoned
From 2007 to 2012, potential sellers were held captive in their homes by low prices. For one of my clients, Realtor.com, we conducted a major national survey in the spring of 2009 to look at this situation. We found that nearly one out of five homeowners had delayed selling their home because of the real estate crash. Empty nesters rattled around the family home they couldn’t sell. Young families piled kids in bunk beds and finished the basement because they couldn’t move. Grandma and grandpa moved into the room above the garage.
Even though at that time about 30 percent of homeowners with a mortgage were underwater and could not move, about the same percentage of all homeowners, 31 percent said they’d be motivated to sell their home if prices would just rise by 5 percent. In other words, the combination of pent up demand plus a modest financial incentive would have jump started the housing markets.
The home buyer tax credit took effect in 2009 and 2010. The credit provided $8000 for first-time buyers and for 2010, $6500 for move up buyers. Yet despite the pent up demand among families anxious to move on with their lives, only 200,000 took advantage of the $6500 incentive from Uncle Sam during the program’s first four months compared to twice as many first-time buyers. At the time, the relatively small incentive was widely blamed for the lack of response.
The following year, in April of 2010, we conducted another survey and asked some of the same questions. This time, only 19.3 percent of all homeowners said they had delayed selling their homes because of conditions in their local real estate market, a decline of about one third but still a healthy slice of homeowners. Half as many as the year before said they would be motivated to sell if prices rose 5 percent or 10 percent. We speculated that some of the ones we talked to in 2009 had taken the tax credit, but many more had not even though they were motivated to move. And even though the tax credit temporarily boosted home values, owners were telling us one of two things: now that they had experienced incremental increases in values, they weren’t large enough to motivate them to move or something else was going on. Moving wasn’t just about money. Other factors were equally important or more important than values and prices.
Money Can’t Buy You Love…or Make You Move
Zillow’s “make me move” gadget, where owners whose homes are not for sale are asked to post the number for which they would is great example of how wrong the monetary motivators are. Owners either post ridiculous numbers or turn to Zillow’s estimate of their home’s value for more entertainment.
Money can’t do a lot of things in life, including making people move. People do not buy and sell homes the same way they buy and sell stocks, bonds, businesses, precious metals, commodities, tickets to the Super Bowl or baseballs autographed by Babe Ruth. That’s why tax credits, mortgage rates and modest improvements in real estate values don’t really work very well when it comes to something as complicated as a home.
So why DO people sell?
For the answer, just turn to the latest NAR Profile of Home Buyers and Sellers, it’s all very clearly explained. Here are the top five reasons that owners decide to sell:
1. Job relocation
2. Need larger home
3. Live closer to family or friends
4. Neighborhood has declined
5. Change in family situation
Here are the top five reasons repeat owners want to buy another home:
1. Need larger home
2. Job relocation
3. Live closer to family or friends
4. Change in family situation
Here’s what causes owners to buy sell and buy again: personal financial issues related to employment, quality of the neighborhood and family issues including growth, proximity and divorce. The forces that cause people to buy and sell homes are social, like household formation; job-related like relocation and retirement; and personal.
It’s time we stopped macroeconomic and political tinkering to tweak the real estate economy and focused on creating an economic and political environment that will empower owners, sellers and buyers to succeed.