Let’s pretend we’re in the business of selling used cars. In order for this pretend situation to barely hold up to my intended comparison, we’ll need to assume the used car market is not a nationwide market, but rather, a market where our cars appeal only to those in our geography, and that our specific variety of used cars are proprietary to our small dealership. If you’re in our area and you want one of these sorts of cars, you have to come to us. Now, let’s assume it’s November and we have two cars for sale. One car is quite remarkable. It can make 500 horsepower and propel you from zero to sixty in just under 3.8 seconds. But it can also transport you and your kids to school in the morning and looks suitable both in the forest, perhaps on a trail made of mulched bark, and also in front of your favorite trendy restaurant. We’re asking $139,900 for the car, which is a considerable discount, believe it or not, because the original MSRP was nearly $180,550. What a car. It’s been for sale since November and we’re given out many test drives. We receive email inquiries daily on the car and it’s well known in our small town to be one of the nicest cars available. In fact, kids will ride their bikes over just to take photos in front of this car and hold their cupped hands over their brow while pressing their faces against the glass for a glimpse of the leather interior, even though we discourage some of this activity because we hate to wash its special metallic paint any more than is necessary.
The other car, which we park slightly behind the nicer car, is more practical than cool. It’s a four door sedan that makes just 178 horsepower and has a paint that I would describe as being more of a dull burnt rust, though the manufacturer calls it rose-tip-red. The interior is made of cloth, with a few worn spots that our guy Fred thinks he can repair, just as soon as he gets a replacement fabric sample from the manufacturer. He’s blaming tariffs for the delay in sourcing, which I understand but don’t believe. The car is suitable for a family, but only if you have two kids or fewer, and if those kids are not particularly large. A woman with two children who both star on the local high school football team stopped for a test drive but after her boys loaded into the backseat we decided against the drive as the rear springs appeared to be at, or near, full capacity. The car is listed for sale for $28,750, which is down from its prior asking price of $29,998. We ended in eight originally because Walmart does this and we figured if it worked for them, why not also for us? The car has been on our lot since mid December, but it’s now mid February and it has yet to sell.
These are, as you remember, the only two cars for sale in our market. If you want a used car of this variety, these are your two options. Why haven’t the cars sold? The last two cars that were similar sold five and a half months ago and those both sold for prices that somewhat reflect our current asking prices, so we know the cars are well priced. But someone came in and asked us what their black spider Ferrari was worth, and we haven’t sold one of those for over a year now, and another lady stopped over yesterday with her one month old SUV that had so many bells and whistles I’m still hearing the ringing. The last one of those we sold was five months ago, and the CPI was hot but what will the PPI say? She wanted to know how much the car was worth, and the best I could do was suggest that we might be able to put it on the lot and see if someone who stops to look at our nicer car might want to also see hers.
This terribly constructed post is an awkward way of telling you that without volume, price discovery is difficult. Without supply, it is, in fact, impossible. The market at the lake is locked up more tightly than I’ve ever seen in nearly 29 years of doing this every single day. Sellers are scarce and buyers are ornery. Where is the inventory? I should know, but I don’t. I think it’s coming, maybe, but it’s going to come in sips and whispers and when it does, I think the pricing has a serious risk of being archaic and disconnected. For sellers, this looks like a screaming opportunity, and it is. For buyers, this should be worrisome, and it is. What happens in the absence of monthly sales in particular market segments is agents grow desperate for inventory, and in that pursuit of something, of anything, they tend to bid up the list prices in an attempt to secure the listing. If a house should be worth $4.8M because the last comparable sold for $4.55M last year, will the seller let an agent list it if the promised price is in line with that last comp? Maybe, but what if the agent says we could get $6M right now because inventory is nonexistent? That sounds a lot better to the seller, so the property lists at the wrong price and the market reacts. Or does it? Buyers either jump or recoil, and the issue with price discovery is we could have 28 buyers for any specific lakefront house and 27 of them can agree that this new $6M listing is overpriced. If the one buyer has a unique level of motivation and decides that $6M is a reasonable ask, the market has spoken and 27 buyers are still buyers while one buyer has become an owner. It’s a complicated game, far more nuanced than “there’s nothing for sale”.
I think what happens next is going to be very telling for the way our spring and summer market play out. I suspect pricing going into the season will be aggressive for new inventory, and as a note of bad news for buyers, sellers have certainly found more market control today than they had last year at this time. If you’re a buyer, it’s imperative you remember that not every property is the right property for you, no matter the scarcity of inventory. If you want to know which property makes sense and why it does or doesn’t, we should talk soon. If you’re a seller, it’s imperative you remember that if you’re thinking of selling and aren’t quite sure what to do next, just call me. I’ll help.