I meet many buyers excited to buy but reluctant to move forward. Often buyers claim “I’m not in a hurry. Just keep me posted when the right deal comes up.” In the buyer’s mind, the right deal might be a nice property that sold 6 months ago at a then favorable price. Regretfully that property already sold! And in a rising market the price from 6 months ago might no longer be realistic.
Maybe the buyer is financially or mentally not ready to make a purchase. But it could also be the buyer is delaying based on misinterpreting the evidence of today’s market. Here are 3 things to remember when waiting for the right deal:
1. Just because the market seems expensive does not mean prices will drop
Hawaii real estate buyers have difficulty comprehending why values are high compared to their budget limitations. During the 2008 – 2010 financial crisis and great recession several Open House visitors from California would make bold predictions about a supposedly imminent 40% – 60% price collapse of Hawaii’s real property values. This was based on what they saw happening in many California markets. The actual drop in Hawaii ended up being only a meager 10% of Oahu’s median sales price for homes and condos. In spite of the greatest recession in recent history, Oahu’s market held up remarkably well. With a steadily improving economy and a sustainable 3.5% personal income growth projection, I expect Oahu real estate values to continue moving up at a similar rate. Don’t fall victim to wishful thinking bias. The median Oahu sale price appears poised to move higher. Besides local demand continuing, foreign demand might increase as well. Hawaii real estate is a global commodity with buyers coming from all corners of the world.
Historical data can help us, a.) get a more objective picture of Oahu’s affordability, and b.) identify possible price trend changes.
a.) Affordability for the local buyer is defined by the cost of the average mortgage payment for Oahu’s median home price vs Oahu’s median family income. Since 1976 there have only been two time periods where Oahu’s affordability has been more favorable than today: 1976-1977 and 1998-2004. In fact, Oahu’s affordability today is a lot closer to the lower end of the range and nowhere close to its historical top range.
b.) Supply and demand changes precede price changes. The graph below shows how demand, as defined by the number of closed unit sales, has been steadily increasing since 2009. Prices eventually followed inching up a couple years later. Unless a pattern emerges of seasonal lower lows and lower highs in the number of unit sales, we expect the upward price trend to continue. Look for closed unit sales to soften before any change in the prevailing price trend. For now, the uptrend continues. No bubble here.
2. The market does not wait for us
– Recently a buyer was submitting offers on a Waikiki condo at price levels consistent with where the market had been 6 months ago. The issue was that the inventory in this particular building had diminished to only 2 units vs 8 units 6 months earlier. The buyer submitted two offers which were outbid by three other buyers competing for the same two properties. The evidence showed reduced inventory levels and a continued upward trend in the overall market. The drop in inventory levels in just a few months had resulted in the values to jump by $50K. The buyer was not willing to adjust his offer price to today’s market reality and regretfully ended up with no property.
– Earlier this year I met a buyer that decided to postpone his Kakaako condo purchase until next year. Instead, he signed a one year lease and cited his perception of uncertainty in the market as the reason why. We shall see how waiting pans out this time. Sometimes waiting for the market to drop can result in eventually being priced out of the market.
– Back in 2002, a buyer was ready to buy a Honolulu home but established a self-imposed rule not to pay more than the property’s tax assessed value. The issue is that the tax assessed value lags behind the true market value by 1 to 2 years. This is like steering your car forward by only looking in your rearview mirror. In a rising market like 2002, the true market value was significantly higher than what the tax assessed value showed.
I regret, I was unable to assist the client and don’t know if he ever bought in Hawaii. If he waited until 2009, the first time when property values were lower compared to the tax assessed value, he would have paid double the price compared to 2002 with an additional 7 years of rent money thrown out the window.
3. Always seek and have a Plan B
Buyers sometimes fall in love with a home that goes into escrow just before they are ready to make an offer. The buyers’ disappointment about having missed out can have a paralyzing effect on deciding the next step. Because someone else got the property does not mean this was the only property that might fit the buyer’s needs and wants. Regretfully, the home that sold is no longer available. What happened can’t be undone.
If this happens to you, quickly shift your focus forward towards seeking the next suitable opportunity and carefully analyze how any available property might represent a possible fit. Use market knowledge and skillful negotiation and secure the next property before someone else does. You do not want to miss out twice. There is little benefit in lamenting lost past opportunities with ‘should have, could have’ thinking. Always have a Plan B and move forward, otherwise, you end up stuck in the past.
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