Are most homes STILL underwater?

Despite all the positive news we've been hearing about real estate and despite the definite rebound that has happened over the past three to four years, I still find myself sitting at a lot of kitchen tables delivering disappointing news to our clients about their home's value.

The Chicagoland real estate market overall hit bottom sometime in 2012 and bounced up after that - but the bounce has been in s-l-o-w m-o-t-i-o-n. While other markets across the country saw an enthusiastic rebound, with inventory levels dipping to as little as one or two months of housing supply and holding there for years, our market has simply returned to a sustainable, balanced state, without ever seeing supply levels significantly lower than normal. As such, our recovery has been a barbecue compared to other metro areas' sear - and by that I mean low and slow.

The Case-Shiller Home Price Index, the most reliable macro-level housing data available, gives us the sobering statistics:
- While many other metro areas have seen prices skyrocket to double-digit percentage gains OVER their pre-recession levels, single family home prices in Chicagoland are still about 14% UNDER their pre-recession peak. Only 19 of 163 ZIP codes tracked in Chicagoland are above their pre-recession peak, and most of them are on the near North side of the city.
- Zero ZIP codes in the South and Southwest suburbs have reached their pre-recession peak. None. That means if you bought a home around the peak of the market or during the downfall, anytime from approximately 2005 through 2010, your home value is likely equal to or less than what you paid unless you've made value-add improvements to the home.

Take a look at the graph below, and click on this tool courtesy of Crain's Chicago Business to look up the graph for your ZIP code:



I tend to focus on the positive in most of what I write and talk about with our clients, and the news isn't ALL bad. We do have sustainable inventory levels, modest price appreciation, rejuvenated new construction activity, and the benefit of mortgage interest rates that are still unbelievably low. I just know there are so many people in our market area who are out there thinking, "Why does it seem like all the good real estate news doesn't apply to me?" and I want to assure you that you're not alone, and it's not you, it's the market.

Tips for Selling Your Home Yourself

You might be a little surprised to see a real estate broker post a blog with that headline. It's not a trick, though: There is an article that ran in the Chicago Tribune on Sunday bearing that title, so of course I read it to see what the author had to say, and I can't say I really disagree with any of it.

In fact, by spelling out many of the costs (in time and money) of selling a home yourself, I think the author has inadvertently made a great case for why sellers SHOULD hire a real estate broker. As a FSBO (For Sale By Owner), the author explains that you'll need to:

- Price the home accurately by "visiting comparable homes, pulling public records on recent sales and doing research on the Internet."
- Hire a professional photographer.
- Design and print brochures that "look professional. Make sure all of your copy is clear, accurate, and lists all features of the house." She also references hiring a graphic artist to do some of this work.
- Post information about the house to Pinterest, Instagram, Facebook, and Twitter, including paid advertising on Facebook.
- List the house on major websites such as Zillow, Trulia, and Realtor.com.
- Set up "a simple website for about $500."
- Create and upload a video to YouTube, and/or hire a company to create a professional video tour, then link the video to social media and any other websites where you're advertising.

Take a second to go back over that list and add up the cost in time and the cost in money of researching, selecting, planning, designing, and advertising. Also consider whether you've done a professional-quality job at each of these tasks, and how quickly you've executed each of them. Let's assume that you did all of this quickly, accurately, and with ease, quality, and affordability. I know, it's a bold assumption, but just play along.

So all of the above is done, and now you're home free, right?? Wait, just a few more things:
- Since you've done a great job so far, your phone is now ringing for showings. In fact, it's a little obnoxious that you're a busy enough person and are now trying to manage, accommodate, and keep track of showings during weekdays, evenings, and weekends. A little piece of you wonders who all these people are that you're going to let into your home, whether any of them are thieves, creeps, psychopaths, or bonafide qualified buyers.
- Unless you want to eliminate 88% of potential buyers (that's the percentage of buyers who bought a home in 2013 who were represented by a real estate broker), you'll probably want to offer a commission to a buyer's agent, typically 2.5% of the sale price.
- Once you've received an offer, assuming it came from a buyer who is represented by an agent, you get to negotiate the terms of a 12-page contract against a professional negotiator who knows that contract inside and out. If the buyer DOESN'T have an agent, then you'll be deciding with the buyer on such terms as tax prorations, financing timelines, inspection contingencies, post-closing possession terms, closing cost credits, two pages of sale-of-home contingency terms, and maybe whether the FHA UMIP will be financed or not. All common knowledge, right?

Assuming the contract goes smoothly (don't you just love my assumptions!) - meaning the inspection goes fine, the buyer has no problem obtaining a mortgage in the specified time frame and no problem selling their home, and everybody's happy - you get to the closing table. You take a look at your net proceeds and start to add up the costs - what you paid the buyer's agent, all the advertising, marketing, photos, brochures, websites, etc. - and the time you put into researching every decision every step of the way, showing people the house, and learning about legal concepts you'll probably never use again. And you realize that for little to no extra money, you could have done absolutely ZERO of all of that, and instead just dumped all of it onto a competent pro with a single swipe of a pen.

If you're aware of all this and still believe you're best served by going it alone, then by all means, have at it. Otherwise, just uncap your pen and we'll take care of the rest.

Pricing in a Declining Market

That's the title I give to a discussion I have with sellers before listing their home for sale. I long for the day when I can skip that discussion, but for the time being it is a crucial part of selling a home. Sellers commonly take the approach of, "Let's see how much I can get first, then we can drop the price." I can absolutely relate to the thought process that produces that statement as I have sold property myself and thought the same thing. As a real estate professional, however, I can tell you that statement is downright dangerous. There are three reasons sellers are hurting themselves by taking that approach, backed up by mountains of data.

Reason #1: The first three weeks on the market are the most precious. That's a known fact in the real estate community, and although it's founded in buyer psychology it's statistically proven. This is when all the buyers who have been searching for a home see your listing come on the market. If they look at the listing or perhaps schedule a showing and determine the home is overpriced, you've most likely lost that buyer for good. Because no matter how many times they see your listing pop up, such as with every price drop, they will always see it as that overpriced house they looked at awhile back. You remember that old adage about first impressions, right? If you lose the buyers who are already looking at the time you list, then you have to wait for new buyers to enter the market and hope one of them notices your listing. Would you guess there is a greater number of buyers currently searching for homes in your area than the number of new buyers who will enter the market in your area in the next month? If you guessed yes, you guessed right. Best to capitalize on that opportunity as a well-priced new listing.

Reason #2: As your market time ticks up and you repeatedly drop your price, your home becomes less appealing to buyers and you lose negotiating leverage. What do you think are two of the most common questions asked by buyers during a showing? How long has it been on the market, and how much have they dropped their price. In fact, buyers don't even need to ask anymore because that information is now visible to buyers on the MLS listing. Which of these two identical houses do you think generates more interest and urgency in a buyer:

• House A, which has been on the market 125 days and has dropped their price from $199,900 to $164,900, or... 
• House B, which just came on the market 8 days ago and is asking $164,900? 

The houses are identical and listed for exactly the same price, but House A looks like a desperate seller and House B looks like a listing that might get snatched up if the buyer doesn't make a move immediately. That also means House B is more likely to get a higher offer whereas House A will attract low-ball offers and have a difficult time negotiating them up. Ironically, the seller of House A has actually diminished the amount they can get for their home by trying to get more for it.

Reason #3: If you're not priced right when you list and the median value of homes in your area is still declining, you are faced with the challenge of dropping your price at a faster rate than the rate of market decline. The primary problem with that is that we don't know at any given point how quickly the market is declining. Contract prices are private until the sale closes, at which point 30 to 90 days have passed since the buyer made their buying decision. Since then, your toughest competition has lowered their asking prices. That means in a declining market, even if you price your home for exactly the amount the identical home next door just sold for, you are priced too high because you're at a "three months ago" price.

Consider the graph below. This shows a [hypothetical] listing that comes on the market for $149,900 at a time when it was actually worth $125,000. They drop their price $5,000 here, $10,000 here, wincing each time at the money they're losing. Meanwhile, the market has continued to decline. At the end of 12 months, there will be a very frustrated seller and an unsold house. They have dropped their asking price by 20% since they listed, but to no avail because the market value of the house has fallen by the same rate over the same time period and they started above the curve. Even with slightly more aggressive price drops they may not have caught up - they would have had to drop from $149,900 to $129,900 within 60 days of listing in order to have a shot at being "priced right," and I don't know too many people who are ready to stomach a perceived loss of that size, that quickly.

By contrast, consider the next graph as an example of how it SHOULD look:

Here, the seller actually gets more for their house than they would have in the first example - they sell for about $125,000 now, instead of being stuck with the house for a year until it's worth only $100,000. Just like with Reason #2, pricing too high will result in selling your home for less.

As I mentioned before, the primary problem with this whole scenario is that nobody knows exactly where that green curve is until three months later, at which point value has already been lost. We do have information about how declining markets work, though, so if we (seller + broker) take that information seriously and adopt an aggressive approach to pricing, you can beat your competition and sell your home for the highest possible price.