Housing: When greed meets demand

This article is reprinted from Wine Country Real Estate, a special advertising section of The Press Democrat.

There's no doubt about it…Sonoma County is experiencing a housing crunch of unprecedented proportion. Escalating rents have spurred local communities to consider imposing rent control, pitting affordable housing advocates against proponents of property rights. As a REALTOR® and a property owner, my initial reaction is against anything that would impede an owner's ability to freely manage their property. However, I also realize that short-term greed often overshadows long-term stability.

It's easy to point a finger at property owners and sellers and decry them as greedy, taking advantage of the market by gouging innocent renters and picking the pockets of desperate buyers. Some even blame the agents for driving up values by encouraging sellers and landlords to increase their prices. However, no seller or agent can force a buyer or renter to pay a certain price for a property. Either a buyer agrees with the price or they don't. In a very sinister twist of responsibility, it's actually the buyers and renters themselves who are responsible for this meteoric upswing in values. As cryptic and counterintuitive as that may sound, let me illustrate.

You're Willing to Pay How Much?

A few months ago I co-listed a modest home in Northeast Santa Rosa. The house, which was a standard tract house built in the 1970's, had been tastefully updated by the owners with a modern-Euro flare. Based on its location and size, the comps (comparable sales in the immediate area) suggested a value around $390,000. But, with its nice updates, larger lot, and well-appointed yard we decided to set the listing price at $429,000, knowing buyers were hungry for this type of property.

In all honesty, I felt we were pushing the price envelope; I also knew that the market (i.e. the buyers actively looking for this type of property) would soon enough tell us if we'd overshot the mark or not. They told us, all right, and they told us loudly—not only did we miss the mark, we missed it by a long shot!

Nineteen offers later the house closed escrow with a final sales price of $480,000—12% above asking. Reason said the house was worth $390,000; Reason said it was a stretch to go to 429,000; Reason said we'd be lucky to sell at full price. But the buying public isn't bound by Reason. Since the Buyer of the house had a large down payment it didn't matter to them that their bank only appraised the property for the asking price of $429,000. They ignored Reason and, in so doing, pushed the values of an entire neighborhood higher overnight. In the end, it wasn't the seller, the agent, or the appraiser who changed the market…it was the buyer willing to out bid their competition.

Landing on Boardwalk

As a child I played the game Monopoly

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with my older sisters and they always seemed to end up owning Boardwalk and Park Avenue with multiple hotels while I ended up broke and going directly to jail. That's what the current market feels like to many buyers and renters. As players with more money willingly spend extra to purchase or rent a home, market prices escalate forcing those with fewer resources to either match the new price (which many cannot do) or be left without a place to call home.

Since Monopoly

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was a board game, I could simply stop playing when I didn't like the way the dice were rolled. Unfortunately, it's not quite that simple in real life. Buyers and renters are faced with a real dilemma…how to keep pace with rising prices while holding on long enough for this ride to stop.

While I'll leave the debate of affordable housing solutions to our local politicians and social advocates, there's one thing I know for certain: the only real solution will come when there is enough supply to satisfy demand. That little house that sold for $480,000 never would have sold for that much had there had been 3 or 4 other ones like it on the market. And a 1-bedroom apartment that last year rented for $900 wouldn't now command $1,275 if there were 10 other apartments sitting empty.

Living in a Supply and Demand Economy

A combination of factors converged to create this shortage, not the least of which was the Great Recession. The economic downturn did two things: it forced builders out of business, eliminating the steady stream of new construction the market is accustomed to absorbing, and it eroded homeowner confidence preventing many owners from moving, keeping needed inventory off the market. Fortunately, builders are now re-entering the market and homeowners are finally starting to entertain their next move, which bodes well for inventory in the long term.

There's another, more elusive element affecting availability: vacation rentals. Some property owners are renting out their houses and granny units on sites like VRBO

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and AirBNB

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instead of selling or offering them as full-time rentals. This further contributes to the dearth of available living space. As Sonoma County's desirability as a vacation destination continues, more property owners will cash in on this phenomenon making this, in my opinion, one of the most significant factors affecting housing availability in our community.

The law of Supply & Demand will continue to reign supreme in real estate and until demand softens or supply improves it's unlikely we'll see much change in market dynamics. Some will be greedy and some will give in—hopefully most will maintain perspective. As Abraham Lincoln is often quoted as saying, 'This too shall pass.'