At first, there was plenty of traffic. “Everyone loved our house, at least to our face,” says Bruce Rutsky, who pitched a for-sale sign in his 2,700-square-foot Solon property in late February. The family was set to move into their new home in April, but they quickly learned who’s the boss in today’s real estate market.
“There are more houses for sale than there are serious buyers,” Rustky points out. “They say for every house there is a buyer, and unfortunately for us, we haven’t found that person.”
The Rutskys aren’t the only ones complaining about their stale listing. Sellers in Northeast Ohio can’t price their homes the same way their neighbors did a few years ago, when buyers scrambled to close deals while interest rates were below 5 percent. Interest rates are still desirable, hovering around 6 percent. But buyers aren’t hip to the incline, and they’re holding out for lower rates. Meanwhile, sellers aren’t willing to budge on price. Many of them do not position their listings to attract buyers in a saturated market.
“This is a time of a stand-off,” relates Carl DeMusz, president and CEO of Northern Ohio Regional Multiple Listing Service (NORMLS). “Buyers say if rates are going up, sellers should drop their prices. Sellers say their houses are still appreciating, so they dig in their heels.”
Better Off Without a Bubble
The result of a buyer-seller tug-of-war is national headlines that scream, “bust!” and warn of a “down market.” Sellers in hot spots such as Florida, California and Arizona are watching their 25 percent appreciation rates dive. Here in Northeast Ohio, we maintained a steady 3 percent to 5 percent appreciation rate, DeMusz says.
Still, a flood of housing inventory and an increase in “expired listings,” or those on the market for more than three to six months, are tugging at home values. They are down 2 percent to 3 percent compared to last year, according to NORMLS statistics.
“It’s no secret that in Northeast Ohio, we are cooling off like everyone else, just not as much,” DeMusz notes, adding that last year the National Association of Realtors predicted a slight reduction in home values for this market.
They were right. A 3.4 percent decrease in average sale price in January through April 2006 compared to the same period in 2005 indicates that sellers who close on their homes get less than sellers two years ago, DeMusz confirms. Meanwhile, market listings are up by 19.6 percent for this same period in 2006, and number of sold homes increased by 3.4 percent. Yes, both listings and sales are increasing, but the numbers gap concerns sellers. “You have stagnation happening there,” DeMusz says.
Compared to January through April 2005, homes took three more days on average to sell during the same time period in 2006. At 84 days on the market, DeMusz says this number is still not so bad. “It was low for a while, averaging 60 or 70 days,” he says. “We’ve gotten spoiled.”
The profit sellers realize on their homes in Northeast Ohio maintains a steady 3 percent to 5 percent increase per year on average. “In fat times, that may seem not good,” DeMusz says. “But in lean times, it’s really good.”
The fact is, Cleveland never boomed like other places. “We never had a bubble — there was never such a thing,” says Jolyn Brown, chairman of the board of the Cleveland Area Board of Realtors and a Realtor with Prudential Select Properties in Strongsville.
And many Northeast Ohio communities are far from the “bust” some markets face on the coasts. Brown says her office had its best month ever in May. “It’s hard for me to say the market is slow,” she says, noting average appreciation rates of 3 percent to 6 percent in her suburban area.
Actually, Northeast Ohio’s proverbial bubble was more like a bump — and now rather than bursting, the market is settling and shifting from “a moderately pro-seller market to clearly a buyer’s market,” describes Mark Schweitzer, assistant vice president and economist for the Federal Reserve of Cleveland.
The Price is Wrong
When buyers rule the market, listings that aren’t priced competitively will not win offers. Forget the price your neighbor got in 2003. That was then.
“There is more product on the market, but sellers still have price expectations,” says Robert Simons, professor of urban planning and real estate at the Maxine Goodman Levin College of Urban Affairs at Cleveland State University. “They hope they can get values from past years.”
Simons’ Cleveland Heights home is for sale, too. And after 11 weeks on the market and three serious lookers, he and his family eventually moved into their new place. “We had an offer, which we didn’t take,” he says. “If we could take it back, we would in a second.”
Now the home is vacant. “How long can you be in limbo?” Simons asks.
He notices that sellers are getting 70 percent of their asking price rather than 85 percent. Some ask too much in the beginning and lose buyer interest once they adjust the price.
Many times, sellers place disproportionate value on their home when it comes time to sell. When the market was in their favor, they got their wish. “A seller’s final asking price is generally 7 [percent] to 10 percent less than what they initially ask,” estimates Brian Salem, a Realtor with Realty One/Real Living in Lakewood. He tells sellers they can close on their home in three months, if they cooperate and price their home accordingly.
Then there are sellers who casually list their homes to see if a buyer will bite. “They tend to overprice their home because they don’t have to sell,” DeMusz says. “That adds to the inventory, which makes the market look bad.”
DeMusz figures 10 percent to 15 percent of sellers are not seriously negotiating. Add those to sellers who do not conduct a comparative market analysis, an assessment of how much similar homes have sold for in the last six months, before pricing. Rather than pricing based on the market, they price based on cost — and we all “appreciate” our homes.
DeMusz could have fallen into the same trap, asking for $50,000 more for his house when he sold it to move into his dream home in Hinckley. “But at the end of the day, a buyer doesn’t care, and that is a hard reality,” he says simply. “They know what they see homes go for in your market.
“It’s not your kid,” he adds. “You’re selling a house.”
The number of expired listings indicates that sellers are not pricing their houses for the buyer’s market, Simons explains. In Cleveland Heights from January through April 2006, there were 183 closed deals and 286 expired listings, according to NORMLS records. In 2003, there were 516 closed deals and 373 expired listings.
“It is the opposite of what it was a couple of years ago,” Simons says. “In Ohio City and Lakewood, basically for every two houses sold you have one unsold house.”
When sellers don’t price their homes properly, buyers are less likely to return for a second look — even after the listing is repositioned, Brown points out. So listings stay on the market longer. Some of them expire and sellers relist.
Another sign of sellers not pricing appropriately is the variance between the listing and selling price. When sellers shoot for the moon and get real after months without an offer, they increase their variance beyond the 5 percent level DeMusz likes to see. “A 10 [percent] to 15 percent variance means the seller is not seriously negotiating,” he says. “If you see someone list at $500,000 and sell for $425,000, that means they weren’t realistic.”
And what do sellers who hold out for too long really gain?
“Buyers can walk away and say, ‘Fine — there are three others down the street,’ ” Brown says.
Selling an empty house is even more difficult, Brown notes. “A vacant home deteriorates more quickly than any other home,” she says. “You are still paying taxes and for services like grass clipping or snow removal.”
The best way to get a true idea of your home’s value is to get a comparative market analysis from a Realtor. These are free and require no commitment to work with an agent. Even if the result is lower than you expect, it pays to price to sell, Brown adds.
“The advantage to sellers who set a competitive price is that more buyers will be introduced to their homes,” she says. “You get the best buyers without a negative [negotiating] environment. And also, you’ll have a faster close, which saves on carrying costs. I tell sellers, you can move on with your life — and that has value.”
Still a Sturdy Market
Climbing interest rates turn tides against sellers who took advantage of the buying frenzy a couple of years ago, when rates sunk as low as 4.5 percent. “When you go through a period where there is buyer interest motivated by low interest rates, you have a lot of activity from the buyer side and that pushes up prices,” the Federal Reserve’s Schweitzer explains.
A lower interest rate environment doesn’t breed more sellers. But the added demand usually drives up prices. And it did for a while, though buyers didn’t feel the pain because they could finance their homes for next to nothing, he adds.
“As you exit that time, you have fewer buyers per seller and you are likely to see prices go down in the market,” Schweitzer notes. “The seller-to-buyer shift makes sense given the change in the interest rates.”
Brown says minor interest rate hikes can encourage buyers to pull the trigger on a home they’ve been eyeing before rates go up again. But this hasn’t happened. “Buyers have held off, thinking they will go lower.”
Nevertheless, Simons reminds that interest rates are still near 40-year lows. He remembers financing his first home at 14 percent interest rates. “At 6.5 [percent] we were thrilled, but now our expectations have changed,” he says.
Regardless, the Cleveland market is more stable than other regions where second homes pumped up sales. Baby boomers invested in real estate in seasonable climates, driving appreciation rates in those cities.
Real estate is also the first luxury to go when disposable income dwindles. “Cleveland is a year-round housing market,” DeMusz points out. “We don’t have the influx of people buying secondary homes, so our housing economy stayed steady.”
No matter if home value drops a couple of points, living in Cleveland is still a value. “Look at how much house you can get for your money in the Cleveland area,” Schweitzer points out. “That is certainly one of the things Clevelanders should be happy about.”
You don’t have to tell DeMusz. He figures the same sized home he paid $289,000 for in the Cleveland suburbs would cost between $589,000 to $789,000 in Cape May, N.J., where he lived before he transferred here. “If you plan on leaving Northeast Ohio, you are not happy because you will not get as much for your house here as you will pay for a like kind,” he says.
And as long as there is room to grow in Cleveland, home prices will maintain a slow-and-steady appreciation and remain affordable. “Markets where you see a lot more appreciation tend to be markets where there is a limit in the ability to produce more houses,” Schweitzer points out. “We don’t have that problem in Cleveland.”
No buyer wants to invest in a home that will be a problem to sell down the road. Generally, communities with strong school systems, low crime rates and vital recreation departments lure in lookers. Then there are added bonuses that many Northeast Ohio cities offer: Lake Erie views, cultural activities, highway access or a fine spread of retail.
Areas such as Shaker Heights and Gates Mills tend to retain home values, DeMusz says. Listings move in places with high-volume sales, including Parma and Parma Heights, where “lots of good-priced homes mean people price them right to sell them,” he adds.
“You’ll always find your $250,000-and-less market is hot,” DeMusz adds. The upper-medium range, $300,000 to $600,000, is a tougher market. This explains why Rocky River’s home sales are slower than neighboring suburbs, though lately, this market is picking up, he notes. “The high end was in the doldrums for a while, and that $700,000-plus market has improved,” he says.
Simons sees sales in growth areas such as Westlake, Twinsburg, Solon and Aurora, as well.Meanwhile, new construction is tough competition for sellers in communities where there is still room to build. Take Avon. “People who have lived in their homes for two to three years want to sell them, and they are finding it difficult because builders are still constructing homes,” Brown says. “For the same price, you can get exactly what you want if you have the time to build.”
Brian Salem’s sales are up, and he attributes this to the attractive price range he shows in Fairview Park, West Park, Lakewood, Rocky River and, occasionally, Bay Village. His niche is single-family homes in the $90,000 to $200,000 range, and he expects to sell about 70 of them this year.
So what’s the secret to clinching the sale — or at least collecting as many offers as possible? Besides price, the home’s upkeep and curb appeal rule, DeMusz emphasizes. “If someone is in that price range, they want that home to be impeccable. If your bathrooms and kitchens aren’t in good shape, you won’t sell your home for top dollar.”
Salem adds, “Sellers can’t get away with not doing repairs and have the home show well.”
Buyers and sellers can expect sales to continue at healthy levels and price appreciation to return to normal patterns across much of the country for the rest of the year, according to a June release from the National Association of Realtors (NAR). David Lereah, NAR chief economist, notes that 2006 is expected to be the third strongest year on record.
“Slowing from a hot market is a good thing,” Lereah reports. A solid housing sector provides an underlying base to the economy, and slower appreciation will help to preserve long-term affordability, he adds.
Existing home sales are expected to drop 6.8 percent this year after a record 2005, and new home sales are forecast to fall 13.4 percent. According to NAR, the 30-year fixed-rate mortgage should average 6.9 percent during the second half of the year, and the unemployment rate is expected to average 4.8 percent in 2006.
Schweitzer bases Cleveland’s market forecast on the region’s population and income.
“While population and growth are low in the Cleveland area, we have actually seen pretty reasonable income growth,” Schweitzer says. “There are two parts to the ability to buy: How many buyers do you have and how much income do they have? We have part of this thing working reasonably well and the other part tends to be slow, but it all aligns.”
And because Cleveland is an affordable market, buyers get a break. “When you sell, you will take a hit,” says DeMusz, “but that means you are a buyer, so you will get it back.”