We usually write about short-term rentals, but it's sometimes helpful to talk about the broader real estate market for our investors. Good news for investors is that the domino effect of appraisal contingency is coming (soon).

Since the beginning of the summer, most sellers have been stubbornly holding on to inventory in hopes of getting a buyer willing to pay price equivalent to March to June prices (I am sure agents have heard this line enough: "My neighbor sold for XYZ, and I want the same"). Other sellers have been converting homes to rentals in hopes of selling next year at a higher price. This has led to a sharp drop in listed inventory

Additionally, for the homes that went pending so far, their appraisals have been riding a sugar high from March prices, giving buyers false sense of security that they have a lot of equity in the homes if their home prices have  "$20-50K" excess equity compared to March comps. That has led to prices not falling as fast, and we are still only at March 2022 levels, and considerably higher than 2020-21 levels high interest rates. But that is going to change (soon), thanks to some help from financing contingencies and desperate builders/flippers looking to offload inventory.

What's happening now: Some sellers are finally relenting and slashing prices heavily due to high holding costs, particularly on the larger/more expensive home side where rents don't cover mortgages (in case of Seattle region, it's East side). This is causing prices to drop down to below $500/sqft in Seattle and East side slowly, from highs of $650-750/sqft we saw before. Currently there's only a handful of newer construction homes listed in that price range as builders lead the charge in price drops due to high holding costs and are typically more rational sellers than the average home seller.

Once these homes finally go into sale, that will cause a downward pressure on nearby older home prices (priced at $650/sqft currently) as appraisals will be in a downward spiral for the next lot of homes that get sold. The next set of buyers will balk that their appraisals are lower than their contract price, which will lead to contracts getting renegotiated to match appraisal, and a downward trend.

Similarly for Eastside and other areas of Seattle, examples of the attached homes will push price comps to $500/sqft, thus putting downward pressure in prices of roughly 15% over next few months.

The next cohort of homes will get pushed even lower as more desperate sellers who can't hold inventory list and slash prices to sell inventory, till market reaches an equilibrium over the next year. This change won't happen overnight  For reference,  it took the market two years to ride the sugar high of fed monetary policy to record high prices , and it will be a slow painful grind down.

What this means for you:

1. If you are a seller, particularly a flipper or builder: sell now than stubbornly waiting as your nicely negotiated contract price over the course of  next 3 months while your house is stuck on market won't mean anything if the buyer has an appraisal contingency and surrounding comps keep getting pushed lower below $500/sqft
2. If you are a buyer, waiting is a good strategy as price points will decelerate due to appraisal comps. Do not waive your appraisal contigency. Do not be suckered by a $10K or even a $50K negotiated price compared to list as that equity will be eroded in a few months when appraisals trend lower. Focus on cash flow properties where rents will cover mortgage, do not play appreciation games, lest you want to get burned.
3. If you are a selling agent: focus on using data to convince your sellers on why it's in their best interest to sell now and help them understand how financing contingencies and comps will affect the final contract price.
4. If you are a buying agent: Focus on selling cash flow properties. Those will hold value as rents can cover the mortgage. If you are a seller that markets appreciation ARV, good luck! Market is rough and it's not fun convincing buyers to buy non-cashflow homes when it's not their best interest given that their equity will drop. You may find a few folks who are desperately looking to buy a primary home at egregious prices every now and then and don't care about their home equity, but don't count on them as a consistent source. Worst part as an agent is if your buyers think they got sold a lemon when they realize their neighbors home sold for a $100K lower 3-4 months down.

Where will market equilibrium end at?

Market prices are dependent on buyer affordability, which is at an all time low and 40% worse than beginning of the year. With high interest rates, tech stock crash of 30% , both buyers affordability and downpayment is severely crimped.

With layoffs from from Stripe, Microsoft, and recent hiring freeze from Amazon announced yesterday has given uncertainty in their finances. Buyers are not in a mood to splurge on real estate and that situation will not change till something in the economic environment changes.  Typically, we see higher volatility in luxury homes and higher end of the market first, so expect those to drop first and fastest, with median priced homes trailing after. (Conversely, you would have seen luxury homes picked up the most in past 2 years)

We expect a decline of 15-20% over the next few months, and a gradual descent post that as we follow a downward appraisal trend. If you are interested in learning more on how the Nicasa team can help you find the right investment with using our data driven methodology, please reach out to us here.