Home Sellers Are Losing the Incentive to Negotiate

Given all of the negative statistics that still haunt the housing industry -- for instance, 25% of all homeowners are still underwater on their mortgages -- you may be surprised to learn who's gaining the upper hand in the negotiation between home buyers and sellers. If you guessed the latter, then you'd be right.

"If there was any doubt that New York City real estate has become a seller's market," The New York Times recently opined, "consider the following: open houses are packed to capacity, bidding wars and all-cash offers have almost become the norm, and some listing prices actually rise, not drop, after a home is listed."

Although the real-estate market in New York doesn't always play by the same rules as the rest of the country, in this instance it is. According to real-estate website Zillow (NASDAQ: Z  ) , homes are now selling for the smallest discount to listing price since the financial crisis. At the beginning of 2009, sellers took an average of 4.6% off the listing price. By April of this year, that discount had fallen to only 2.2%.

The explanation for this somewhat paradoxical trend is tied to housing supply. As my colleague Morgan Housel has discussed on multiple occasions, the quantity of for-sale homes is exceptionally low right now. Among other things, Morgan notes that "housing construction is still well below average, and short of what is needed to keep up with population growth."

For investors in stocks, the implications are twofold. First, there's reason to believe that businesses like Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) , both of which look to the housing market for the majority of their sales, continue to have significant upside. Home Depot CEO Frank Blake alluded to this on a recent conference call with analysts and investors:

We've been tracking the relative growth rates of our Pro and consumer segments as one indicator of the housing recovery. Since 2008, our Pro segment has underperformed our consumer segment. Last year, the relative growth rates grew closer, and in the fourth quarter of 2012, they grew at approximately the same pace. Our expectation was that the Pro business would accelerate during a housing recovery and so this quarter's outperformance from the Pro segment is a positive sign.

And second, the health and recovery of the housing market are vital to the underlying economy and thus the broader stock indexes such as the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and the S&P 500 (SNPINDEX: ^GSPC  ) . To refer again to one of Morgan's recent observations, "Housing caused the recession, and it will be responsible for our recovery."

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  • Report this Comment On June 06, 2013, at 5:07 PM, LenMontgomery wrote:

    As a North Carolina REALTOR, I have to say that this data is skewed, at least where housing data is concerned. The data the Zillow receives is typically stale by the time they receive it. It can be anywhere from 3 months to a year before they collect data from public records. Even then, the data does not contain pertinent information such as seller concessions and repairs.

    A seller who listed their property for $100,000, may have agreed to the $97,800 sales price that is part of public record. But the record does not reflect the additional $4,000 paid by the seller on behalf of the buyer's closing costs. Nor may if reflect the $1,500 remediation for radon or termites, etc... And nowhere would you find the fact that the seller had to leave behind the HDTV because it would damage the wall if it came down.

    You would also never find in public records that the property was originally listed for $110,000 18 months ago and the price dropped every 6-8 weeks until it reached the eventual list price at time of sale.

    I guess my biggest point is, it does not matter at all that a national average, arrived by any data or means, can be used as the true measure of the real estate market when you begin looking to buy or sale a property. You are not looking nationally, you are looking regionally. And to think you can depend on national averages on a small scale is foolish.

    When asked to explain this, it is very simple. When it rains in North Carolina, it may very well be sunny in Arizona and snowing in New York. Real estate as at least as regional as the weather, if not more so.

  • Report this Comment On June 07, 2013, at 6:21 PM, ScottAtlanta wrote:

    Good points Len.

    Zillow is more than stale. Burned out hulls are valued at twice what my home is estimated to be.

    What's bothersome is that "professionals" take reliance on Zillow for estimates & then find comps that match and justify those estimates.

    Rather than realizing that many of the "comps" are foreclosed homes or are 1/2 mile away....in a very, very different neighborhood, literally across the tracks,.....which happens in urban areas under revitalization.

    Zillow Zucks big time.

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