How consumer - and agent - anxiety is playing a role.
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The latest market numbers are showing that low-rise home prices in the Toronto area are down a surprising 9%, roughly $150K, in two months since February.
This is surprising given what housing economists normally expect to see once an accelerated period of price growth, particularly those thought to have reached ‘bubble’ territory, starts to subside.
“This is the way the bubble ends: not with a pop, but with a hiss. Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.”
- Paul Krugman, "That Hissing Sound", The New York Times
The prominent economist Paul Krugman is right that house prices are usually “sticky” on the way down, meaning that they fall more slowly than stock prices. This ‘lag’ in adjusting to market conditions is believed to happen for a number of reasons. Firstly, most investors are prone to a phenomena known as “loss aversion” and home sellers are no exception. When a homeowner sees a neighbour selling for $900K, they want to achieve the same and see anything less than this as a financial loss. These sellers tend to stick to their desired price even if it takes them a lot longer to sell in a slowing market. This in turn results in an increase in the number of homes available for sale on the market. As this inventory of homes for sale increases, getting the price that sellers initially expect becomes more difficult and eventually the sellers who are most motivated to sell will start adjusting their price expectations downwards.
So why have some Toronto home prices started to fall so quickly already?
A large reason is a behavioural change amongst consumers due to a change in Toronto real estate market conditions. Given how competitive the market normally is for buyers, most choose to buy first and then list their current home for sale. But when the market starts to slow down, this behaviour becomes less of a default.
When my agents and I first started noting signs of a market slowdown back in February (as discussed above), we were seeing that homes were getting fewer showings (i.e., buyer viewings) and fewer to no offers on their set offer nights. And with each week that passed, there were fewer buyers in the market, fewer showings and fewer offers.
We then started to see some homes selling in their first week on the market for around $100K less than what it likely would have sold for only weeks earlier.
So why the panic?
First, sellers who had already bought their next home and needed to sell their current home to make the move, started to panic when they were only getting 10 to 20 showings their first week on the market (down from the 50+ showings being seen in the market only weeks before). Those who had agreed to a relatively short closing date of 45 to 60 days for their new home, assuming their current home would quickly sell in a hot market, faced even more pressure. In a slowing market, home sales — particularly those that need to achieve a particular price in order to make another home purchase viable — take longer.
In addition to these sellers panicking, many of their agents only added to their panic.
In the Toronto area, there are a very high number of part time agents who sell fewer than four homes per year; these agents tend to rush into the profession during the boom times that have recently characterised the Toronto market for a rather long run. If these agents have been in the business for less than five years, they only know what it’s like to work in a seller’s market in which homes are getting multiple offers and selling for well over asking price very quickly.
In private Facebook groups for realtors, these listing agents shared their sense of panic and asked their fellow realtors what to do when getting very few to no offers on their offer night.
Needless to say, when a seller is already nervous and their agent is too, it increases the chances of them accepting the first low-ball offer they get — something that runs counter to the “sticky” price phenomena we normally see in the market.
The agent’s job is to stay calm when the market is uncertain and to try to balance their client’s need to sell while mitigating the downside risks in the market.
In a post next week, I'll share a number of examples of how our agents helped their clients manage these risks when they found themselves needing to sell in a slow market.
Top Image Credit: Getty/iStock
The Move Smartly monthly report is powered Realosophy Realty Inc. Brokerage, an innovative residential real estate brokerage in Toronto. A leader in real estate analytics, Realosophy educates consumers at Realosophy.com and MoveSmartly.com and helps clients make better decisions when buying and selling a home.
Email report author John Pasalis, Realosophy President
May 24, 2022Market | Video | Toronto and GTA | Report |