I think I can remember the days when pricing real estate was fun. Back then, I could wow and thrill potential customers with the promise of immediate and tangible real estate generated wealth. Back then, I could find my way to some neglected little house somewhere, and find an owner who had some idea that their home was worth a lot of money, and then tell them that their idea and my idea were a long ways off. Their idea would mean they could pocket a significant amount of money if they were to sell, whereas my idea would make that wealth 30% heavier. Numbers were subjective, and sellers could, many times, place a value on a property that had no basis in fact and often times they could achieve that. This is how bubbles behave, and the good news today is that we should be able to remember these things and apply them to real estate scenarios for the remainder of our days.
Pricing real estate now is not quite as much fun. If you bought a home in 2010, and you bought the right property at the right price, you are now entitled to some form of return. That return, as I see it today, should be around 10%. I think we’ve now added that back on for a majority of properties here, but before everyone gets super excited, consider that a 10% gain on real estate over a couple of years is what we used to consider rather normal. While pricing trends and formulas vary from town to town, association to association, and indeed house to house, there are several things we need to remember when pricing real estate for the 2014 season.
I find it interesting that agents have a difficult time agreeing on pricing. If I disagree with an agent on price, you will not find it interesting that I always think my opinion of price is right. Today, I find myself disagreeing with pricing more and more, as prices seem to be made up out of some formula that starts with “Dear seller”, and ends with “how much money would you like for this home? xoxoxoxoxoxo (smiley face emoticon/ heart emoticon)” There’s some serious price pandering underway at Lake Geneva, and I don’t like it one bit. That’s why we need to remember our formulas, and consider them again as a rock solid path that will invariably lead us to a correct price range.
The first indicator for current value is to consider peak value. If you bought a home in 2006, 2007, or 2008, and you paid a lofty market price at the time, we can apply a consensus discount that that price to give us some direction on current value. I have been a part of many documented cases where an owner who bought in 2007 has lost 40% of his value from that time to this current time. The idea that we’re off 40% from peak values is somewhat understood now, but there are times when current value is only 25% off peak value. Some lakefronts are off 40%, some lakefront condominiums are off just 20%, and some condos in Geneva National are off at least 50%. A fine average for these is 30% off peak. Examples?
An average two bedroom condo at Bay Colony sold for around $600k at the peak. I sold a unit there last fall for $450k, give or take, representing a 25% discount from peak value. I sold a lakefront on Oak Birch this January for $1.81MM. The seller of that home had purchased it in 2008 for $2.85MM, showing a 36% loss from peak to 2014. There are occasions where sellers have lost less, and others have lost more, but again, we’re hunting for direction here so that we can get on the same page as current value, not the exact paragraph and line.
Another way to find value direction is to line up current market conditions with those from a prior year. 2014 prices should, in fact, look quite similar to 2004 prices. For a while, we were at 2003 price levels, but I’m bumping us up to 2004 prices, as I see that gain of around 10% from our recent lows for the broad vacation home market. If you bought a house here in 2004, there’s a strong chance that current value is similar to what you paid then. Again, this is not always the case, but we’re trying to establish a price range that some how reflects current reality, and the best way to do that is to look to our past.
If these last few models will get our prices close to accurate, the last factor is current market conditions. If you currently own a lakefront house valued in the $2MM to $2.5MM price range, there’s a great chance that this low inventory, high buyer environment will let you cheat your price to the top end of that range. If inventory swells this year, and buyers fail to keep up, then your number will skew downward within that range. Market conditions can swing value 10% or more, depending on the exact sentiment and inventory available when you list. This is the subjective part of the process, and this is the part that requires input from an active, aware, and intelligent agent. Note the adjectives.
Today, I see some new prices that have no basis on current realities. If a price today is a price that is higher than the peak value, and it’s higher by a large percentage, you can bet that property does not represent value. It seems absurd to think prices today could represent significant appreciation over prior peak values, but it’s happening around the lake. There are properties coming to market at prices that would have looked out of place on the sunniest August of 2007 afternoon. Buyers and sellers alike are hearing the repetitive refrain that this market is on fire, and like any tune, it can be quite catchy if played again and again. Until we start seeing printed prices that reflect some form of new reality, let’s assume the broad market is still off around 20% from the peak. We’re going to assume that because we’re the smart ones, remember?