What is going on with the real estate market? I meet with clients regularly over coffee or lunch to answer their questions about the real estate market, and I thought this would be a good opportunity to share my analysis with the rest of my clients who read this real estate blog. Let’s pretend, you and I, that we are sitting down at Starbucks over a coffee right now and chatting about the state of the market.
I’ll start with the obvious. We’re living in a unique time right now unlike anything we’ve experienced in this generation of retirees (or soon to be retirees). Many of my buyers have been diligently searching online to find their ideal retirement location. Once that is narrowed down, it’s time to begin looking at homes seriously.
If you have a good buyer’s agent, and you are not yet living here, you can even view homes virtually and walk through homes as though you were actually here. That’s an incredibly efficient way to filter through homes in the inventory if you live thousands of miles away, as many do who plan to retire in Sequim, Washington.
In past decades, you would walk through homes in the inventory, look at six to 12 homes, make an offer and close in a month. Then you moved in and lived happily forever after. End of story, and that would be the end of this conversation, but . . .
Somewhere along the timeline of life, a lot of things changed. Life is no longer so simple. The decisions to sell your existing home, move to a new community and buy your final retirement home has become increasingly complicated. Here is my perspective on what these new challenges are for retirees. These are hurdles our parents’ generation did not have when they retired.
First, there is historic uncertainty with retirement accounts. Wall Street and gigantic retirement funds are under the threat of a massive crash, long overdue considering the teetering nature of their International investment schemes and unsustainable debt levels. California and Illinois have massive unfunded retirement funds that will go bust in a crash, which could be the end of millions of monthly retirement checks. I’m sorry to open that can of worms.
Second, there is political instability on the world scene and in America that we have not witnessed since WWII. Nations are imploding before our eyes, and many are at war. Some are suggesting America is headed toward its own civil war.
Third, the world has not been this close to nuclear war since the Cuba incident during JFK’s presidency. Putin swears he is not bluffing on using nuclear weapons, and oddly enough in what can only be described as a twilight zone of bizarre behavior, our own country, Europe and the UN are all conducting their military and political theater as if they are fully on board with a nuclear war, or a war of any color.
Fourth, we are currently in a major nationwide decline in real estate prices. Having just come through an explosive three year massive upswing in home prices, we are now in a questionable period of uncertainty. I think the uncertainty will resolve itself with a continuation in the decline. Of course, I could be wrong.
Fifth, we are on economic thin ice with multiple industries and cumulative business failures that threaten to crash the American economy with a vengeance for violating fundamental laissez faire principles. And the list of business failures, bankruptcies, cities that are crumbling, the hidden high unemployment rate, the soaring crime rates, the instability of central banks and International currencies, all add to the weight of an overburdened sled crossing a deep raging river on a treacherous ice bridge.
In all of this uncertainty, retirees must make the biggest decisions of their lives. If you’re struggling to make big retirement decisions, you’re not alone. There has never been a time more complicated for retirees than there is today.
What does all this mean if you’re ready to buy a home now? Certainly, it means you have a lot on your plate, and may I say the obvious? This is not a time to make a bad decision, at least not a major one that could set you back financially for years.
It may sound like I’m discouraging you from buying a home now, but that’s not the full story. For some of my buyers, now is the right time to buy. They sold at the top of the market in California, and they need a place to live. Buying now might be a wash with respect to what they sold their home for and what they have to pay now.
I’ve learned that when uncertainty looms, the default position for all of us is to not do anything. Some buyers have decided to wait for a period of months to see if prices come down further. Others are watching the online MLS every day, and if the right home in the right location at the right price comes on the market, they’ll make an offer. But even then, buyers are not inclined to make the ridiculously high offers they were making en masse in 2021. None of my clients were ever foolish enough to buy a home for $200,000 or $300,000 more than it was worth, even in a hot market, but many people did, and that drove prices into the ionosphere.
I do want to share this perspective about the Sequim real estate market, and this is really true about the entire state of Washington. Since I have boots on the ground every day here, I’ve recognized a pattern that I think will help you understand this market better.
The Key to Understanding This Market
We have entered a time in the real estate market in which there are really two markets, or as I like to say a “bifurcated market.” Let me unpack what this means for you.
Segment #1: About 95% of the current inventory in the MLS includes homes the vast majority of retirees would consider ordinary or average homes. Most are older homes (15 to 30 years old), built with average materials, and many have floor plans that are not entirely traditional or what retirees are used to living in their whole lives. There’s familiarity in that traditional floor plan of 1800 square feet, 3 bedrooms, 2 bath, a 2 car garage, and an open floor plan with the living room, dining room, and kitchen. This is what most retirees would prefer, but there are no homes like this in this segment of the inventory. Even a new listing can end up in this segment because of something unusual about the property, like a second mobile home on the lot that is quite ugly, or an adjacent property that is a disaster.
In this segment of the inventory, supply and demand are behaving as they would in a normal market, meaning homes go on the market, and it can take a while to get an offer and we don’t have multiple offers competing with each other. It’s no longer a seller’s market in this segment, and prices keep getting reduced like they do in any market, especially now with the market in decline. So in this market, supply and demand are regulating the inventory and prices almost totally normal, and this represents about 95% of the homes you see in the MLS.
Segment #2: In this second segment of the market, which I’m saying includes roughly 5% of the inventory, when the ideal home goes on the market in a great location, like one with a water view, and it is the kind of home the majority of retirees want with a great floor plan and high quality materials, it sells quickly. But note that there are virtually no homes like this listed in the MLS in this local market. If I had homes like my own home, which fits the description of the ideal retirement home, I could sell one every week, but there are none available. This small percentage of the market is creating what I would call “price chaos” for the entire market, because these are the homes that are selling quickly and for prices above true Fair Market Value (FMV), even in this declining market.
By the way, the buyers in this segment are pretty much all cash buyers. That’s also what makes it unique, because 95% of the buyers can’t compete with these buyers.
Supply and demand is still working as it should in this tiny segment of the market, but the rules of supply and demand function only for this small inventory, ignoring the greater market. This explains why the market as a whole has homes that are not selling, are having huge price reductions, and are no longer getting multiple offers. But then you hear about a particular home that came on the market, sold within a week for full listing price, which was well above FMV, and it seems like an anomaly. It’s not–it’s just in that second segment which has it’s own rules in this bifurcated market.
One of unfortunate implications of a bifurcated market like this one is that all sellers have a tendency to think they can price their homes excessively high, too. If they’re in the 95% segment, that won’t work, and they’ll find out the hard way after months of nothingness and price reductions. Listing agents fall for this trap, too, because they’ll tell their sellers, “Well, let’s price it [and they’ll go way over true FMV], and let’s see what happens. Maybe someone will come along and pay that. After all, you don’t want to leave any money on the table, right?” If that listing agent doesn’t identify which market segment that listing belongs to, they are likely to put it in the 5% segment, even if it belongs to the 95% segment.
If you would like to view closed sales of homes that are largely in this 5% segment of the market in the Sequim area, here’s a link to view those. You can open each listing and see the original listing price and the actual sales price and the closing date. You can adjust the search parameters if you like.
Of course, homes are going to continue to be bought and sold even through these difficult times, albeit at lower numbers than in our previous hot market. So this article is not laying out advice to buy or not to buy. What I am saying is that whether you buy now or wait depends on a dozen unique variables for you, and every buyer has different factors to evaluate their current realty and determine their own destiny. I do hope this concept of a bifurcated market helps you make sense out of what you are observing in the current market.
I recommend you do your homework and engage a buyer’s agent you can trust who has the kind of background that will facilitate your own decision making process. Now is a good time to buy for some, but definitely not for most.
Last Updated on October 5, 2022 by Chuck Marunde
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