Understanding the dynamics of falling real estate prices and their Impact on offers

When real estate prices start to decline, the market undergoes a significant shift that affects both buyers and sellers in profound ways.

For sellers, falling prices can lead to tough decisions. For buyers, it may seem like an opportunity to score a deal. However, the dynamics at play are far more complex than they appear on the surface. Let’s explore what happens when prices drop and how it influences offers over time.

Why do real estate prices decline? There are lots of reasons, including:

• Economic factors: A slowing economy, rising unemployment, or declining consumer confidence that can cause prices to drop.

• Higher interest rates: When borrowing becomes more expensive due to increased mortgage rates, there can be fewer buyers, causing downward pressure on prices.

• Excess supply: From overbuilding or many sellers entering the market simultaneously, more sellers meaning fewer buyers per property.

• Seasonal trends and local factors: Prices dip due to seasonal slowdowns or changes in a specific area’s desirability.

These factors combined can create a buyer’s market, where supply exceeds demand and sellers are more likely to face challenges attracting strong offers.

How falling prices affect offers over time

As prices decrease, the behaviour of both buyers and sellers adjusts in response to the new reality. Here’s how the dynamic typically unfolds:

1. Increased buyer caution

When prices begin to fall, buyers think it may be cheaper tomorrow. Slowing down the market. Even serious buyers may take a “wait-and-see” approach, hoping prices will decline.

2. Lower initial offers

As buyers sense a shift in the market, they tend to make lower offers. Lowball offers become common, with buyers seeing properties that have had a price reduction and anticipating future reductions. Sellers may find themselves fielding offers significantly below their expectations.

3. Prolonged time on market

In a declining market, properties often take longer to sell. Buyers have many more options. Meanwhile, sellers are pressured to adjust their prices or accept offers they might have previously rejected.

4. Price reductions become common

If a seller is forced to sell because of personal or economic necessity, such as divorce, job relocation, mortgage payment increase, they will need to reduce their price to attract one of the few buyers out there. The sale price, added to a few more sales, will show up in the data and real estate agents will show their clients that offers should be based on recent sales numbers, causing lower offers.

When dealing with sellers, valuations are based on many factors. A big one is recent sales. That can cause lower listing prices. This is especially true with commodity housing (properties that have many similar homes for sale in the area). This cycle may repeat until enough buyers enter the market looking to buy for the first time or upgrade.

With enough buyers, inventory shrinks, buyers may realize they need to act now before the deals are gone. Prices can begin to stabilize.

5. Buyer confidence grows over time

Once the market stabilizes at lower price levels, buyers may regain confidence and begin making more competitive offers. However, during the initial stages of a price decline, uncertainty often keeps offers low and negotiations tough.

The emotional toll on sellers

For sellers, a declining market can be challenging. A seller’s expectations, when prices go up, adjust quickly. However, when prices go down it is not so easy to simply expect less. Sellers who purchased at higher prices may also face the reality of selling at a loss, especially if they’re under financial pressure to move.

Unique properties are somewhat shielded from some of the market dynamics, but only to a point. There are usually fewer buyers looking for those places to start with. Waiting for that perfect buyer who wants your place because it has the perfect school nearby, its proximity to work, their bestie lives on the same street or is close to that great gym, can pay off but it can be a long wait.

In such a market, sellers must be flexible and realistic. Understanding the local market dynamics, working with an experienced real estate agent and pricing the property competitively from the outset are crucial steps to attract serious buyers and avoid prolonged time on the market.

Remember you might not feel the need to accept reality but you still need to live in it.

If you have suggestions for other real estate-related articles, please email me at [email protected].

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.