Buyer Strategy Just Did a Total 180

As a real estate agent, beginning a working relationship with a buyer in 2021 was akin to a hazing. They began their home searches with Pinterest-inspired visions of beautifully curated midcentury living rooms, tastefully wallpapered nurseries, and serene home offices. The home buying fever had descended upon them, and it was my job to cut through the glittering fantasy and disabuse them of any notions of ease before armoring them for the battle ahead.

To land that just-right home in 2021 meant competing against hordes of other buyers with the exact same mood boards. It was fiercely competitive in most of Philadelphia’s submarkets, but unlike in some other US cities, it was possible for listings to sit and grow stale, even at the height of the buying frenzy. Condos, homes requiring some TLC, and poorly staged and marketed listings were frequently overlooked for the same handful of homes that had also captured everyone else’s attention. Pile-ons ensued, with sellers all too happy to be at the bottom of them.

The 2020 and 2021 buyer was easily wooed. What 90% of them wanted was a home in a “nice” neighborhood with the quirk and charm that Philly’s historic buildings are known for, yet tastefully updated in all the ways that matter and furnished to match their most aspirational domestic fantasies. Some buyers were tuned into a home’s deeper quality and condition, but many more assessed listings at surface level. Staging was paramount, and could transform a cookie-cutter rehab or lazily maintained home into a drool-worthy option for which buyers would be willing to go above and beyond.

A photo from one of my listings in summer 2021. The home was a middling, recently rehabbed entry level twin, but my sellers did all the right things to prepare it for sale. It sold for $100k more than my clients had purchased it for one year prior. Nine months later, it sold again, for another $45k more.

When I began working with a buyer during this time, I would provide them with a menu of devices they could employ to beat out the competition: inspection deductibles, hefty deposits, appraisal gap coverage, escalation clauses, free leasebacks, and so on. I went into depth on each of these devices in my October 7th feature on QTR’s Fringe Finance. The principal question that buyers had to ask themselves between the summers of 2020 and 2022 was how much they were willing to sacrifice before beginning to feel ill-at-ease. These self-imposed limits often shifted, as they tend to do when we’re in love.

Flash forward to October 2022: 30 year fixed mortgage interest rates are now solidly upwards of 7% and unlikely to go down any time soon; the Fed is clearly expressing their intent to stay the course “until the job is done”, in the words of Chairman Jerome Powell. Buyers have officially woken up from their fever dreams. Many have fled the market, and those who remain are battle weary and newly devoid of any trace of opportunism. All of the buyers I’m working with at the moment are very blasé about the home buying process; sure, they’d like to buy, but only if the perfect home comes along at the right price. The “right price” takes into consideration the affordability strain that today’s interest rates have created. It is lower than comparable sales, and certainly lower than the asking price. If a buyer knows that their interest is a hot commodity, why would they be motivated to offer more?

What I’m seeing is sellers entering the market with too much optimism. They doubt that things could have changed so dramatically in only a few weeks. They might start by listing their home at a price that is reflective of comparable sales, with plans to reduce if need be. And very frequently, need do be. So a few weeks later, say, they do a price reduction and showing requests start to trickle in- perhaps a few each week. If a buyer then comes along with an offer that is 5% below the already reduced price, today’s seller is going to think long and hard about accepting it. And thus tomorrow’s comps are born.

Let us now consider today’s market from the viewpoint of the buyer. Say they’ve been touring homes for some time and finally become interested in one that has been on the market for 35 days. Their agent reaches out to the listing agent to suss out interest: no offers received, and nothing on the table. Unlike these last two years, the buyer doesn’t usually need to act quickly. They mull it over for a week. The seller and his agent grow anxious, and soon the buyer’s agent is getting a phone call from the listing agent, inquiring as to what the seller can to do “sweeten the deal”. They have a conversation about temporary rate buydowns, seller flexibility on price, and so forth. In particularly desperate situations, there may even be talk of extra perks for the buyer: furnishings, for example, or a pre-paid parking spot for one year, courtesy of the seller. Yes, I’ve heard both of these offered within the last few weeks in order to entice tentative buyers.

This seller is just where the buyer needs them to be. They’ve shown their hand, and it’s not good. Any buyer in this position will be placing an offer using the opposite strategy to what they would have employed just a couple of months ago. No longer is the question one of how much they’re willing to stretch, but rather of how little they can get away with giving. Buyers simply aren’t very motivated, so they’re willing to take risks in their offer strategies. If a seller doesn’t play ball, they’ll just move onto a more desperate one. And if this whole home search business doesn’t work out as planned, no big deal- there’s always renting.

It’s important to emphasize that the above doesn’t represent every buyer and seller. It’s a trend that I’ve observed and it doesn’t seem to be doing anything but intensifying, but there are still certainly listings that garner small bidding wars in highly desirable neighborhoods at prices that make sense by today’s standards. I don’t work in the suburbs, but I hear that competition out there is still high relative to most of Philadelphia. I’m only speaking to my little corner of the market. It’s a snapshot, and agents who work in other areas or with different kinds of clients could very well be having a different experience. From my vantage point, however, buyers are growing mighty powerful.

With buyers and sellers behaving as they are, it’s impossible for me to imagine that we won’t witness a fairly significant median price decline once today’s pending transactions close. Twitter is full of comments about low inventory keeping prices stable, and of course that is true to some extent. But even with today’s low inventory, I’m seeing desperate sellers willing to accept less for their homes, and buyers poised to take maximum advantage. What can we expect to see once today’s record number of homes under construction hit the market? Or if the layoffs the Fed is aiming towards put sellers in a position in which they’re forced to begin selling assets? The fact that I’m already seeing what I’m seeing with inventory still at historically low levels is a rather bad omen for the housing market of 2023. I truly hope to be proven wrong.