The recession is here… Six costly mistakes home sellers make during a recession and how to avoid them

The US is officially in a recession. What is a recession? A recession is a contraction in the business cycle or general economic decline due to a significant drop in spending and other commercial activity. Most pundits and politicians will blame the recession on the Covid-19 crisis, but even before Covid-19 the proverbial writing was on the wall.

The US had over 120 months of economic growth, the longest expansion in modern history. Other indicators, such as negative government bond yield spreads (long-dated bonds with lower interest rates than short-term T-Notes), pointed to an imminent change in economic cycle and recession. The only real question was: when and how bad?

Then came Covid-19… If the cycle was going to change anyway, Covid-19 acted as a huge and unexpected accelerator to make the recession much more immediate and severe.

All classes of real estate, including homes and condominiums, are inevitably negatively affected during recessions as lower consumer spending and higher unemployment rates impact house prices and market times.

Here are the six costly mistakes home and other real estate sellers make during recessions and how to avoid them:

Mistake #1: This will pass and the real estate market will soon be hot again

The first thing to remember is that real estate cycles are much longer than general business cycles. Even when the general economy recovers, which it always does eventually, a typical real estate cycle lasts 10 to 15 years. The cycle has four main phases: Top, Decline, Bottom and Rise.

Let’s look at the last real estate cycle, which lasted about 14 years:

  • 2006 – Prices peak

  • 2006 to 2012 – prices drop

  • 2012 – Prices hit rock bottom (valley)

  • 2012 to 2019 – Prices increase*

  • 2020 – Prices reach the top

  • 2020 to? – Prices go down

*NOTE: In 2016, the national home price index reached its pre-recession peak of 2006. It took the housing market 10 years to recover.

To avoid this mistake, you need to recognize that real estate cycles last for years and plan accordingly. Also, no one knows exactly when prices will top or bottom until the fact is established.

Mistake #2: Low interest rates will help the economy and housing market recover

Between 2006 and 2011, interest rates (Fed Funds) were cut steadily by the Federal Reserve Board, falling from a low 5% to almost 0%. However, this did not stop the housing recession and property depreciation.

No doubt low interest rates made the economic and housing recession less severe and saved some properties from foreclosures, but it still took six painful years for the housing market to bottom and then four more years for prices to return to their pre-season levels Recession.

Some markets never fully recovered. For example, home prices in some parts of California, Arizona and Nevada are still below their 2006 highs.

To avoid this mistake, one must be aware that low interest rates stimulate the economy and the housing market, but they do not cure them.

Mistake #3: I don’t need to sell now, so I don’t care

If you don’t have to sell until the cycle is over, which typically lasts 10+ years, you won’t be affected as badly, especially if you have a strong stock position, limited mortgage debt, and solid cash.

However, it is good to keep in mind that “life happens” and either professional or personal circumstances can change and we may need to sell properties before the downturn takes hold.

When a property has mortgages and its value falls to the point where it is “upside down,” meaning that the mortgage loan balance exceeds the value of the property, then the options of selling, refinancing, or even obtaining one become one equity line to be significantly restricted.

That doesn’t mean that everyone should rush to sell their property if it doesn’t have to. Just remember that circumstances can and often do change and affect real estate options. So plan ahead. As a wise saying goes, “Dig your well before you thirst.”

Mistake #4: I’m selling, but I’m not selling below my final price

This is a common and potentially very costly mistake. In general, every seller wants to sell at the highest price and every buyer wants to pay the lowest price. This is nothing new. When selling real estate, most sellers want to achieve a specific price and/or have a bottom line.

However, it is important to understand that the market does not care what the seller or their agent thinks the property should be worth. Market value is a price a willing and able buyer will pay if a property is offered on the open market for a reasonable period of time.

Overvaluing real estate based on the seller’s subjective value, or what is sometimes referred to as the “target price,” especially in a declining market, is a surefire first step to losing money. If a property sits on the market for an extended period of time, inventory costs will continue to accumulate and the property value will depreciate in line with market conditions.

Additionally, properties with extended marketing periods tend to become “stale” and attract fewer buyers. The solution is to honestly assess your sales goals, including the desired time frame, assess your property’s characteristics and physical condition, analyze comparable sales and market conditions, and then decide on market-based pricing and marketing strategies.

Mistake #5: I will only list my property for sale with an agent who promises the highest price

Real estate is a competitive business and real estate agents compete to have properties for sale that generate their income from sales commissions. It is not uncommon for the seller to consult several agents before signing an exclusive listing agreement, and approach the agent who will agree to list the property at the highest price, often regardless of whether that price is market based.

Similar to Mistake #4, this mistake can be very detrimental to sellers as overpriced homes stay on the market for a long time costing the seller expenses like mortgage payments, property taxes, insurance, utilities and maintenance.

Added to this are the “opportunity costs” since the equity is “frozen” and cannot be used for anything else until the property is sold. However, the most expensive cost is the depreciation of the property as the real estate market deteriorates.

During the last recession we have seen several instances where overpriced properties stayed on the market for years and ended up selling 25% to 40% below their original market value.

The solution is to ensure your pricing strategy is based on the market and not on empty promises or wishful thinking.

Mistake #6: I will only list my property with the agent who charges the lowest commission

Real estate commission rates are negotiable and not fixed by law. A commission usually represents the highest transaction cost when selling real estate and is usually split between brokers and agents working on the transaction

Some real estate agents offer discounted commissions to induce sellers to list their properties with them. But does paying a discounted commission ensure savings for the seller? Not necessarily.

For example, if the final selling price is 5% to 10% below the highest market value of the property, which is not uncommon due to poor marketing, poor pricing strategy and/or poor negotiation skills, commission savings are easily wiped out and actually cost the seller tens of thousands of dollars in lost revenue .

The solution is to hire an agent who is a “trusted advisor” and not just a “salesman”. A trusted advisor will take the time and effort to do the following: 1) Conduct a needs analysis: listen and understand your real estate needs and concerns; 2) Prepare Property Analysis: Thoroughly evaluate your property and market conditions; 3) Execute Sales and Marketing Plan: Create and implement a custom sales and marketing plan for your property; and 4) Achieve Optimal Outcomes: Be your trusted advocate throughout the process and achieve the best possible outcome.

Finding such a real estate professional may not always be easy, but it is definitely worth it and will pay off in the end.

In summary, this article has outlined six costly mistakes home sellers make during recessions and how to avoid them. The first mistake is not understanding that real estate cycles are long and last for years. The second mistake is a misconception that low interest rates alone will drive a recovery. Another mistake is not recognizing that circumstances can change and not planning ahead. Mistakes number four, five, and six relate to understanding market value, getting the price right, and choosing the right real estate professional.

By understanding and avoiding these mistakes, real estate sellers stand a much better chance of minimizing the negative effects of a recession when selling their properties.