There is so much conflicting information out there about "The Bubble."
Does it exist? Will it leak? Will it burst? The money men are busy analyzing the
effect on the GNP, consumer confidence, and other economic measures. Mortgage
lenders are concerned (although they continue to lend at record levels and with
little apparent worry about some of their riskier credit policies) about eventual
losses if homeowners are forced to default on their debt.
But should the housing bubble burst and prices actually begin to decline
what will be the effect on how homes are marketed and the way that buyers and
sellers approach the transaction? Hard to tell and the best we can offer are
guesses, not answers. But here are some scenarios.
Let's say that house prices drop by 10 or 20 percent in most areas of
the country (doomsayers are predicting much greater declines as we will talk
about in the future) and average days on the market increase from less than
30 or 60 to 180 or 270 or more. What will sellers do? How will buyers behave?
We can see a host of realistic market responses.
1. Sellers will abandon attempts to sell properties themselves
(FSBO) or the use of reduced commission alternatives such as limited service
agents and will return to traditional real estate agents who devote themselves
to full time marketing of the property.
2. Or, conversely, sellers will turn in greater numbers to these lower cost
marketing options in order to maximize the now greatly reduced return on their
3. If they are in a position to do so, sellers will sit tight and hold off
putting houses on the market until conditions improve. This will not be an option
for those where illness, death, loss of employment or a change in marital status
are forcing a sale.
Buyers will behave in even less predictable ways.
1. Some will leap into the market at the first sign of price declines. Or they
will sit on the sidelines and wait for further price decreases.
2. Buyers will increasingly seek out FSBOs who they expect may be desperate
but in any case have a five to seven percent margin in play without the burden
of a real estate commission.
3. Or, buyers will decide that, since they are in the catbird seat in the new
market and are not actually paying the commission themselves, an agent makes
even more sense rather than spending their own energies on a housing search
and the multitude of tasks that lead to the closing..
And agents? They have few options open to them when such a
switch happens in the market:
1. Agents will become more aggressive about cutting commissions and increasing
low or no cost services in order to maintain or regain market share.
2. Or, agents will turn from their emphasis on obtaining listings to a concentration
on buyers as they will be driving the market.
Now, if that sounds like a complete line of mess, let us redeem ourselves.
We do have an opinion on what will really happen; that was just an outline of
Based on what we saw happen in the early 1990s when the market crashed in New
England and to a lesser extent in 1979-1983 when interest rates pretty much
ended real estate activity in most of the country, here are our predictions:
Limited service real estate companies may be the real losers. This will be
a buyer driven situation because, all things being equal, a buyer will opt for
the security of a professional to manage the transaction, especially if it doesn't
cost them money. A more subtle factor will be that, where agents, and many resent
the limited service agencies in the first place, have buyers, they will tend
to return to the model with which they are most comfortable, working with a
full service listing agent. Yes, they are required by their Code of Ethics to
show every home regardless of the listing situation, but try and prove they
Sellers will sit out the market in proportion to the profit they can realize
by selling. A homeowner who bought a home in 1990 will probably still realize
a decent profit even in the face of a 20 percent dive in sales price. If retirement
beckons or a new job on the left coast is waiting, he will still list the house
and follow the dream. Others will have no choice and will swallow hard and take
the hit, even if it means bringing cash to the closing to cover the mortgage
balance. Those who don't need or desperately want to sell will postpone
plans and it is all of these decisions that will return the market to equilibrium
and thus normalcy.
Buyers will suddenly become as greedy as sellers have been. Most real estate
agents have a list of buyers who are "waiting for prices to come down."
That these buyers have been waiting since 1997 seems not to have lessened their
conviction that they will be in the right place at the right time when it finally
happens. Chances are, however, that these buyers will continue to wait out 20
and 30 percent price declines and their numbers will increase as many other
formerly desperate buyers move to the sidelines, sure in their own hearts that
the market will ultimately decline even further. Once the market turns upward,
of course, the more rational of these buyers will finally act and this will
accelerate the recovery.
And how will real estate agents respond to the new reality? This is more familiar
1. Many will leave the industry either by choice or necessity, especially early
in the game. Those without the resources to tough it out and those are principally
those who are recent entrants to the profession will find it impossible to carry
the high expenses of being an agent without regular sales activity. Others will
just become discouraged by a sudden fall off in income or because their income
was never what they imagined.
2. Agents who do stick it out will become less focused on listings (who needs
them, they are everywhere and cost a lot of money to maintain) and more interested
in cultivating buyers.
3. As office managers measure advertising bills against revenues, costly services
such as classified ads and streaming videos will suffer cutbacks. This will
not have the impact it had in previous market downturns as the Internet makes
non-print advertising, the less techie versions at least, less costly to maintain
at existing levels. In a worse-case scenario, sellers may find, as happened
to sellers in some areas in 1989, few agents who are willing to list difficult
These are all guesses, of course, but not uneducated ones. How do you
see a bursting bubble affecting the way homes are bought and sold?
Please share your thoughts and opinions about the
housing bubble. We will publish some of the best answers.