DEEDED INTEREST
Tooth Fairies and Donuts
Aspen Times | July 28, 2024
My son lost a tooth last month. This first-time dad thought that phase was over, but my nurse-practitioner wife told to expect another round or two of playing tooth fairy. He’s eleven, so you might think he’s figured out by now that it’s dad who’s been the one tiptoeing into his room at night and putting a couple bucks or gift card under his pillow.
The ritual remains a delightful reminder of his lingering innocence. But so, too, a soon-to-be remnant of his imaginary world that will soon fade and be forgotten. So, we’re happy to continue the charade, but he’s no dummy. He likely knows how it works — along with Santa Claus, the Easter bunny, the whole gig. But clearly, he’s not yet ready to let go of the fantasy, the fun, and of course the treasure. Wisely, he’s decided to run out the clock.
I suggest the same can be said of the real-estate market this summer. Most sellers are beginning to see the writing on the wall but are stubbornly ignoring the obvious, hoping the party that started in June of 2020 isn’t quite over. They’re wishing there’s time for one more drink or another lap around the dance floor before the lights come up and the bouncer shows them the door. But at this point, there’s clear evidence of a significant shift.
Here and in other national markets that saw exponential increases, inventory is higher than it was this time last year, and the number of sales is down. I read this week that more than 50,000 deals fell out of contract last month. And yet, in all but a few of those markets, we’re still seeing prices increase and interest rates doggedly holding like a dog with a bone. The result is a widening gap between buyers cautiously calculating what they can afford or are willing to pay and sellers reluctant to give up their cherry interest rate, wanting more proceeds before jumping to the next thing or facing sizable taxes from capital gains.
Here in our valley, that log jam is what I’ve termed “the donut.” For the last year, homes between $2-3M have sat unsold. The reason? Homes in that range represent existing inventory between 10-20 years old. For upper-middle class, middle-aged locals, anything over $2M is a stretch. They don’t want to be house poor as they actively save for college and retirement. And second homeowners may start their search in this range but end up turned off by the required remodel or future maintenance. Time and again, we’ve seen those buyers up their budget and buy new, modern turn-key homes above $3M.
That said, activity outside this dough hole remains healthy. If you’ve got an older but well-cared for home under $2M, you’ll likely find a qualified buyer rather quickly as choices remain limited. Above $3M, developers and spec-builders are working overtime to bring new inventory on-line. There seems no end to demand for housing from out-of-town buyers — be they full or part time.
Climate change and higher temperatures are increasingly one significant driver. Higher taxes, traffic, crime, homelessness in the inner cities, and the ability for many to work remotely are yet others. It may be for that reason, national markets that saw extraordinary increases just after the pandemic (like Austin and Manhattan) are now experiencing significant downturns. An abundance of inventory in those spots is also an issue.
But interestingly, other large metros (like Las Vegas and Nashville), where asking prices and the cost of living is lower, luxury deal making jumped by more than 20%. The wealthy are still in acquisition mode thanks to a healthy stock market and more cash on hand. And in our valley because the max size of new homes is now capped under 10,000 square feet, anything bigger — even the older stuff — is flying off the shelf.
With all that differing data from sector to sector, it’s no doubt we find ourselves a bit confused this summer and experiencing a disconnect. When sellers aren’t sure what to ask for and buyers don’t want to get caught at the top of the market, we see stagnation.
At the end of the day, it’s guys like me who inform clients of this new dynamic and to work to bridge the gap to close deals. The only way to do that is by encouraging seller price reductions and convincing buyers that offers less than asking price are not a waste of time.
The deals are there for those willing to acknowledge the new state of play and come to the middle rather than digging in or not making the attempt. Not doing so is the same as believing in fairies, elves, and bunnies who lay eggs.