Last year I wrote a post titled A Very Dark Shadow predicating luxury real estate sellers should expect a 20% to 30% decrease in prices in 2010 and 2011. Unfortunately, the prediction was accurate and the root causes behind the price decreases remain ever-present.
Specifically, a recent report from Standard and Poor’s highlighted that 1/3 of all nonagency mortgages are more than 90 days delinquent and that there is a 49-month supply of distressed homes nationally. The inventory levels represent a 40% increase over the same period in 2009 and an 11% increase over Q3 2010.
Given that short sales and foreclosures currently represent 30% to 50% of luxury market transactions, they can no longer be considered anomalies. Non-distressed sellers need to be making more realistic decisions about whether or not to actively list properties for sale in light of this reality.
Every active and potential seller must run a net present value calculation to determine whether or not they should list, come off the market, adjust the asking price their property or explore accelerated sales solutions like an auction. The NPV should include the annual cost of holding the property including taxes, insurance, maintenance and an interest factor. Once the annual cost of ownership is determined, the comparable local supply should be divided by comparable annual absorption to determine how long a property will likely be for sale.
For example, the NPV of a property listed for $5,000,000 that costs $500,000 per year to own in a market with 24 homes for sale and eight comparable sales in the last 12 months (3 year supply) is $3,500,000. With a NPV calculation in hand, seller’s can make more realistic assumptions about time frames and list prices.
