Back in Balance

Home buyers and sellers gearing up for high season are encountering a swing in the balance of power: more parity between supply and demand, sellers and buyers. Last year, home sellers worried about missing out on thousands of dollars in profit if they sold too soon. This year's class frets about how long it will take to get their price. Last year, buyers feared that if they didn't jump into the market, they would miss their chance. Now they wonder how long they should watch prices fall before they make their move.

Higher mortgage rates, especially for popular adjustable-rate loans, and sky-high prices are finally taking their toll. Sales volume has slipped and the supply of existing homes by late fall had risen to its highest level since June 2003. In some cities, including San Diego and Washington, D.C., condo prices are dropping, and buyers are even walking away from their contracts. Homebuilders report that demand is tapering off.

Nationwide, the National Association of Realtors has forecast a 5% price rise for existing homes in 2006. That's less than half of last year's rise of 13%. In some of the hottest markets, the froth in prices will evaporate. Buyers will have more homes to choose from and more bargaining clout -- that is, a return to contracts with contingencies and without escalation clauses. The NAR also expects the number of existing home sales to fall 4% or 5% in 2006 (although that would still make it the second-best year on record).

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What this means is that sellers need to lower their expectations. The days are over when you can slap any home on the market and sell it for more than asking price. Now you have to find the pricing sweet spot and work harder to reel in a buyer.

Sellers: Price it right

Judging by stories we've heard from recent sellers in Las Vegas and northern New Jersey, lowering your expectations can be painfully difficult. Many sellers are initially rejecting agents' advice to price their homes lower and finding that their homes are taking longer than expected to sell. They're enduring open houses to which few or no potential buyers come and cutting the price more than once before finally getting an offer.

Among them are the Olivers of Las Vegas. Erik, 32, is a fireman for Clark County, and Crystal, 31, is a metro police dispatcher. Their Vegas roots are strong enough to defy the general trend that their agent, Eileen Engel, describes this way:"People come, people go, but people don't move up in Las Vegas." The Olivers have traded up twice over the past several years.

Their second home sold in just one week in 2004, but their third -- a 1,900-square-foot home on a 4,500-square-foot lot -- took three months to sell last summer. They bought it for $260,000 and wanted to list it for $350,000. Engel told them that was unrealistic because of competition from new homes being built in a nearby master-planned community. So the couple started at $330,000 but ended up dropping the price by a couple of thousand dollars every few weeks as the deadline approached to close on the purchase of their next home. At $318,000, they found the right buyers, who liked the location and didn't want to wait for new construction.

Pricing was also a challenge for Jeff and Jackie Wides of Florham Park, N.J. When they decided to"pre-retire" to Florida, they expected a quick sale on their home of 22 years. Preparation for the sale was simple: painting, neatening up and restoring a closet in a den converted from a bedroom. Against their agent's advice, the couple listed their 2,500-square-foot house on an acre of land for $650,000. Nearly five months and three price reductions later, it sold in November 2005 for $580,000."It turned out the agent knew more about it than we initially thought," says Jeff, 63. He and Jackie, 57, expect to move into their new home in North Port, Fla., 35 miles south of Sarasota, this summer. Until then, they're renting there.

It can be difficult to price a property when recent comparable sales are higher than you can reasonably expect to get for your home. Roberta Murphy, a real estate agent in San Diego, says you have to look not only at how much comparable homes sold for but also at how much time they spent on the market. In Murphy's market, homes that are priced right sell within 30 days. Keep in mind, too, that houses on the market for"too long" can develop a bad reputation, and today's buyers are more clued in to time on the market than in the past."Buyers often ask about it and construct their offers accordingly," says Murphy.

Murphy also uses"value range" pricing. Say you have sellers who think their home is worth $600,000. In reality, it might be worth $575,000. Murphy would list the price at $550,000 to $600,000."It's a soft way to introduce sellers to a reduction, and it gives buyers a range where the offer should come in," she says. Actually, Murphy always uses a number ending in 9's for the low end of the range -- $549,999, not $550,000 -- to improve the chances that the property will be captured by Internet searches.

Stay flexible. A more balanced market means you'll probably be negotiating with the buyers. That was true for the Olivers in Las Vegas, who went back and forth on the terms a couple of times. Finally, the buyers offered $317,000 but said they wanted the appliances. The Olivers didn't want to give up their washer and dryer, but for $1,000 more they were willing to leave the fridge.

Also, don't judge an offer on price alone because other factors may make it worthwhile. For example, an offer from buyers who will rent back the house to you until you're ready to move might be worth a lot. Or maybe you've found a buyer who can easily qualify for a mortgage at your price but will have difficulty coming up with the down payment or closing costs. In that case, a seller contribution in exchange for a higher price might make sense.

Make it stand out. At a minimum, make repairs, clean your house and get rid of clutter. To compete with new homes in their area, the Olivers landscaped their backyard and put in a sprinkler system. They cleaned the house thoroughly and had it staged to look more like a model home. To make the master bedroom look bigger, they put in a smaller bed and dressed it with a new comforter and linens to give it a sophisticated look. The couple even stayed with Crystal's mother for the duration, because Crystal was working the graveyard shift and they didn't want to put off any prospective buyers.

You'll also give buyers peace of mind if you're willing to share the cost of a current appraisal and any appropriate inspections, such as for termites.

Buyers: Don't wait

Is now a good time to buy? Re/Max's chairman, Dave Liniger, gave his four children some advice when they asked if they should buy or wait:"In every case, I advised that it's impossible to time the market -- no one can say accurately what will happen." He recommends that buyers go ahead and buy something they want to stay in for at least the next five to ten years."If prices go down, you're not hurt -- you're in the house you want to live in."

That was the goal of Jeff Organ and his wife, Danielle Guildner: a home where they could have a yard, a dog and a family. Their two-bedroom condo in Carlsbad, Cal., didn't fit the bill -- and they didn't want to stay in California. They did some Internet research, then went to visit a friend in Austin, Tex., a city they found to be young, artsy and friendly."Strangers say ÔHi!' to you," says Organ."It's a different mentality." The couple set out on a tour with a real estate agent, who showed them spacious new homes that they could afford. They put down $8,000 on a house that cost $211,000 for 2,700 square feet, four bedrooms, 2.5 baths and a yard. Although they negotiated a bit on $30,000 worth of upgrades, they basically paid the asking price."The builder wasn't in a negotiating mood," says Organ, 30. And besides, he notes, it was half of what they would have had to spend in California.

Housing demand in Austin is rising with the recovery of the tech industry, and the city is attracting baby-boomers looking for affordable places to retire. In late 2005, the median home price was $170,000, up 15% from 2004. But price hikes have been subdued because builders are busy constructing new homes. That's one reason Guildner, 27, found it easy to transfer her job in new-construction lending with Wells Fargo Home Mortgage to Texas. Organ, a teacher, is still job hunting but expects to find plenty of openings. Except for the weather, he can't think of anything he'll miss about California.

Even in cities where prices have cooled, it's not totally a buyer's market -- just less of a seller's market. Competition for homes in some cities remains brisk. Short of moving to a lower-cost state, you're more likely to find a bargain if you're willing to make small compromises. In Las Vegas, for example, Eileen Engel says buyers who want a new property, especially one with a view or on the Strip, can expect to pay top dollar. But if you're willing to buy an existing home, you'll find more reasonable prices, especially on properties that are owned by investors eager to sell.

Target your offer. Start by finding out how motivated the sellers are, then target your offering price. Roberta Murphy, the San Diego agent, tells buyers that if a home is new to the market and priced very well, they should make an offer at the top of the range; if it has been on the market for six months, they might make an offer at the bottom of the range or even below.

Many builders have begun to offer concessions and upgrades as their new-home inventories grow fatter. If those aren't advertised, negotiate for them. You may find bargains on resale homes in developments where builders are still selling new properties. The owner of one slightly used property may have more freedom to reduce the price than the builder who has already sold 200 at the higher price.

Win the beauty contest. You may still find stiff competition for properties with the greatest discounts, so you'll want to look like a sure thing to sellers. Get preapproval for your financing and try to schedule any appraisals and inspections in advance to minimize the time those will take. You can even write a"love letter" to the seller, pleading your case."By putting a personal story to the offer, you stand out," says Murphy.

Protect yourself. In some of the hottest markets during the past few years, buyers have felt compelled to make "clean" offers. As sanity returns, get price and property protection by adding to the contract contingencies for a current appraisal, financing and a home inspection.