Price Elasticity of Real Estate

Volume 5 Number 6 February 24, 2007
Price Elasticity of Real Estate
Last week I attended, along with a few thousand other folk, Market Watch (See the News Press coverage) . Frank D’Alessandro and Denny Grimes enticed us all with their take on the local market. The highlight of the evening for me was meeting the other people that were there to meet the other people that were there (In other words, the networking). I got to talk with pros like Kemp Demming (Northstar) Jim Puccio (Lennar), and other large developers, brokers, bankers, and brokers.
The presentations offered no surprises for most of us. Frank gave us all some anecdotal reviews of commercial transactions that happened last year and concluded that he does not think that the commercial market is over heated but is “worried” that too much may be in the pipeline. His advice is to go slowly with new commercial development projects. Going slowly is sound advice, but in a conversation with Gary Tasman of the new local Cushman Wakefield office later on, we both felt that there is lots of room for office growth and commercial development in many sectors. I took Frank’s presentation to be more self serving than informative.
Denny Grimes, on the other hand, gave a very impassioned appeal for everyone to lower their prices. (I almost felt privileged that we were hearing his private presentation to those customers who have given Denny Grimes and Company their listings) I never saw Denny more animated. He was “on” and fully immersed in his message. His message was, over and over again, “all real estate is priced too high”.
He also gave some time to talking about the problems with taxes, insurance, and maintenance costs. However, in his conclusion he actually said, “we know what the problem is – it’s price”.
I do not believe that this is what the problem is.
I agree that lowering the price of a given property, in a given market, at a given time will more often than not help move it in a slow market. I do not believe, however, that there is great elasticity of demand in the price of real estate; and this is NOT the plea to make of the entire market.
(If I remember back to Economics 101 – price elasticity of demand tells us that as we decrease price demand will increase) This simply is not generally the case in real estate. If we all decreased our prices, demand would not increase, we would all just have our properties on the market at a lower price. Buyers will not, for example buy more than one vacation home because there is a “two for one” sale. We are not selling something like, say, high priced sneakers.
You can help sell YOUR property with price, however. Put simply, if you have a property to sell, make sure it is priced lower that any other property in its class and neighborhood. If there are 40 condos for sale in your complex, make sure yours is the lowest price. When the buyers come back, your will be the first to sell, pretty simple.
When we took over Parkside at Rivers IV, I told John Sullivan of BBL Development we need to be the lowest price waterfront condos in our class. We also need to sell condos, not promises. Savvy buyers are tired of, “Someday this will be a great neighborhood”. Just look at downtown condos as an example of selling promises.
In the end, John agreed, and adjusted prices drastically RELATIVE TO THE MARKET AND OTHER LIKE KIND PRODUCT, and activity and sales will come (as they are).
My “condos versus promises” concept is covered pretty well in my last column (Click here).
There are only two times price matters. The day you buy and the day you sell. What happens in between those times is smoke, mirrors, and wishful thinking. Today too many sellers think their property went up 100% in value and then dropped 50%.. In fact it did neither, and until they sell it they will not know what the heck the value is. Denny made some “right on” comments about sellers and buyers expectations being out of whack. It’s true. For example, I know you may have told your spouse you were going to make, say $50,000 on your recent purchase. But deal with it. You are not going to do it. Have a professional evaluate your property. And get a professional that will not be afraid to tell you not to sell, and to hold. Get a pro who is not afraid to tell you what is in YOUR best interest and not his.
By the way, there is not only “one cause” for our slump and it is certainly not just price.. (Read the Snowflake that Caused the Avalanche)
By the way, my faith in the return in this market is powerful. I sit here in my bathing suit, by the pool, overlooking the river, sipping a Captain Morgan Private Stock on the rocks, while a light breeze keeps me cool. This is indeed what Southwest Florida is all about. The water. The View. The Weather. (Can you say 15 degrees below and 49 inches of snow?)
The fifteen to twenty couples a day we are touring though our new project know that. But these are smart buyers now, not just buying in a frenzy. They want value, location, and above all, they want to know that they are buying at the bottom of the price cycle.
I am doing my best to tell them, and you, that I believe, at least in some areas, we ARE AT THE BOTTOM. Now is indeed the time to buy. Yes, some prices need to come down. But just as assuredly, there are wonderful deals out there.
This morning before gong to Parkside, I went to my grandson Jacob’s basketball game. I sat next to Steve Beach. I as in my habit, I struck up a conversation about real estate (surprise, surprise). He told me he and his wife Betty are now buying everything they can get a mortgage on that makes sense. Steve and Betty are now adding to their rental inventory. Steve and Betty are true “insiders” by the way. Betty has been an agent in town for many years and Steve is a retired banker. They are not just operating from “their gut”. Their experience tells them, like it tells me, that we are at the bottom – or can be with the correct offers and the proper professional guidance.
Let me help you get back in to this market before you say to me, heck, I missed it.
By the way, we lowered the prices at four units at Citadel – another one of our favorite projects – by $45,000. (We are now as low as $178,000 – in BONITA!) Now Citadel is lowest in its class. These are wise buys now – even for the investor – and certainly for the end user. We will not sell many at that low of a price – I expect to be back in the 220’s after these four are gone.
Let me know your thoughts and concerns, and how our team of professionals can work for you.
As I always say: we are it the real estate customer business, not the real estate agent business.
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Gregg Fous
Gregg@ma-realty.com
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