Warren Buffett famously said (and I am paraphrasing here) that he likes buying when people are nervous, but that he gets nervous when people are buying. Whether it’s stock or real estate, most consumers tend to freeze when the numbers descend instead of ascending. We all know it happens, but that doesn’t change our reaction WHEN it happens. That explains why both buyers and sellers feel comfortable when markets are going up. Sellers recognize an opportunity; even if they price a bit ahead of the market, they feel confident the market will catch up. Similarly, buyers will reach in a rising market because they believe that if they do not grab this one, the next one will only cost more.
In a declining market exactly the opposite happens. Buyers retreat to the sidelines, fearful of the implications communicated by a loss in value, while sellers hold on to the hope, logic thrust aside, that there is still ONE buyer out there who will pay what he might have at the peak. That’s why I say to my agents that buyers adjust quickly in a rising market, but sellers adjust slowly in a falling market.
Today’s market spans a range of conditions. While there is still competitive bidding in Brooklyn, we don’t see much of it in Manhattan these days. Values are down anywhere from 5% to about 12%, depending on where and what the offering is. True to form, sellers are adjusting slowly, and painfully, to the change.
The price reduction conversation between an agent and a seller is never an easy one. Sellers tend to have many reasons for not wanting to consider a reduction: their friends love the apartment and tell them it’s worth more, someone at a dinner party only last year told the seller that she would buy it at a higher price, the apartment across the street (or across the hall) may have sold for that but this one is clearly so much bigger, nicer, better renovated, brighter. All this rationalizing covers up a simple reality: it is painful to have YOUR home (or your child, or your job) undervalued in the eyes of the world. No matter what people say about how rational they are, accepting a lesser value for a home disappoints and hurts them. It’s personal (even though of course it’s not.)
Buyers often act surprisingly in a declining market. These days, with our economic news fundamentally good, I don’t see much evidence that the market will continue to drop in any meaningful way. But most buyers who claim they have been waiting for prices to fall off a little tend to act paralyzed when it actually happens. While they may claim to be waiting to see if the market declines further, in my experience that’s not really what it is about. Most of us fear going against the prevailing wind. That’s why Warren Buffett is Warren Buffett and we’re not! People simply lack the courage to act when values decline, even if they insist it is just the opportunity they have been waiting for.
It remains surprisingly tough to put deals together when the real estate market has lost some value. But it’s a genuine buyer opportunity. There are great values to be had all over the city, but you can only enjoy the benefit if you step into the game!