There’s lots of focus on how home prices have changed since the previous “bubble”, but let’s talk about how buyers have changed. Here’s some observations. What else have you noticed?
1) More picky: During the previous housing “bubble” buyers seemed so desperate to purchase that they pulled the trigger on about anything, but they’re much more discerning these days. Of course let’s remember underwriting has changed dramatically though too. In the past many properties flew through the loan process without hardly any scrutiny, but lenders today are incredibly strict, which has certainly propelled a more picky feeling in the market.
2) More patient: Despite a housing shortage buyers aren’t willing to pull the trigger on junk. They’re simply more patient for the right house and they want to make an informed purchase (and even feel like they’re getting a good deal where possible too).
3) More informed: Just as the “bubble” began to pop we had companies like Zillow and Redfin coming to the forefront. Well, now they are household names and buyers are basically obsessed. Seriously, buyers scour these sites day and night, and they know about every single new listing, price reduction, and sale. This doesn’t mean buyers don’t make value mistakes still, but it does mean they are more informed than EVER about prices. At the same time, guess who is not looking at Zillow as much? Sellers. This is a huge issue because it means sellers are not as in tune with the market these days, which means they’re prone to overprice.
4) Financial mistakes: Buyers remember the pain of financial turmoil in the past, so they’re sensitive to repeating mistakes. For instance, I talked with a buyer considering purchasing the highest-priced listing in a neighborhood, but he’s concerned we’re at the top of the market. This buyer asked, “If a buy right now and the market turns, would it be possible I’d have to hold on to the house for 10 years before values come back?”
5) Higher expectations about condition: These days buyers have higher expectations about homes being in good condition. In other words they are much more picky about properties that are not in “move-in” shape or upgraded. Wait, there aren’t granite counters? What the? There could be many reasons for this, but I think heightened investor flipping activity played a huge role. In a fairly short period of time investors had a gluttonous real estate feast by purchasing an avalanche of bank-owned homes, rehabbing them, and selling them. This helped quickly upgrade the housing stock, and also widen the price gap in some areas. What I mean is values used to be very tight together as you can see in the graph below, but now the price spectrum is simply wider since buyers are willing to pay more for rehabbed homes in today’s market. I’m not saying this dynamic is in every neighborhood, but I definitely see it in quite a few areas.
6) Less cash-out refinances: Everyone and their Mom had a boat before the “bubble” burst because people were using their house like an ATM to buy toys. Well, today we don’t have that dynamic (image from Leonard Kiefer). Home owners are clearly cashing out less, which makes them sound financially wise, but let’s realize lending guidelines have changed to make it more difficult to ATM your house. Moreover, many owners are sitting on 3% interest rates, so why the heck would they trade pulling out cash for a much higher rate?
NOTE: I updated this post with “more informed” above after Peter left a stellar comment (thanks). This is such a big point. I can’t believe I didn’t mention it while writing this, but it didn’t come to mind at the moment. The irony is I’ve been talking about this in other posts and in person so much lately. Ha. Well, it’s fixed now.
I hope that was interesting or helpful.
MARKET UPDATE VIDEO: A few days back I did a screencast to talk through trends. Lots of people are wondering if the market is tanking or softening, so I wanted to pitch in two cents. Well, the video is actually 20 minutes (there’s lots to say). Anyway, give it a view if you’d like here (or below).
SPEAKING GIGS: If you’re around, I’m doing a blogging class on October 11th at SAR. I’ll be speaking at the AI’s 2018 Fall Conference in San Francisco on October 19th and AppraiserFest in San Antonio on Nov 1-3.
Questions: What else do you think has changed about buyers since the “bubble” burst? Any stories to share? I’d love to hear your take.
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If you didn’t know, sales volume last month was the strongest May we’ve seen over the past 4 years. But don’t get too excited because sales volume for the entire year is about the same as last year. No matter how we look at it, price metrics are up 7-9% from 2016 and they increased by 2-4% last month. One of the themes that won’t go away is we have a shortage of housing. In fact, housing supply is 22% lower right now compared to last year, and it’s been putting pressure on values to increase – particularly at entry-level price ranges. The tricky part lately is many contracts are getting bid up due to multiple offers (even beyond a reasonable appraised value). This can favor sellers accepting offers from buyers who have more cash to make up the difference between the appraised value and the contract price, though FHA sales stats show first-time buyers are still finding ways to close deals. In higher price ranges the market feels much softer, though we are still seeing multiple offers when properties are priced correctly. This is a good reminder that it’s possible for the market to feel more aggressive than actual value increases. In other words, having multiple offers doesn’t mean values are increasing rapidly or at all. Lastly, we are starting to hear more about lenders rolling out 100% financing to help buyers artificially afford higher prices (sounds healthy, right?). I could go on and on with words, but let me share some graphs to show the market visually.
