Rehavia - Archive: Tess Scheflan / Jini - 14112011
Jerusalem’s Rehavia neighborhood: High demand in the city. Photo by Archive: Tess Scheflan / Jini
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Negotiations in the housing market follow a set script: The seller knows more or less how much he wants to get, and the buyer pretty much knows what he can afford and is willing to pay.

Before getting down to the nitty-gritty, the two sides lay down their opening bargaining positions. Then, they gradually work to narrow the gap, trying to arrive at the magical figure each can be comfortable with. The big question is how far afield they can go in their opening positions without scaring off the other side.

With builders, the situation is quite simple: "In the market for new homes, I don't think you'll find prices that are significantly higher than the value of the homes because ultimately it is highly competitive, and hardly anywhere does a builder have the market to himself," says Ronny Cohen, CEO of Eldar Projects Marketing. "True, there is differentiation and sometimes brand appeal, but only in rare cases can this lead to too high a price differential."

In most cases, the give-and-take between builders and buyers is very brief: If sales agents see that buyers aren't agreeing to the builder's minimum price, they'll break off negotiations; and if a builder realizes that prices are dropping, he'll lower his initial price or announce a sale. But even then, buyers can't haggle too much unless the builder is really desperate.

So how much is the builder ready to come down from his opening price?

Cohen says it depends on the project: "In some projects, the starting price is also the final price; whereas for others, there is a 4% to 8% difference - depending on the area."

In contrast to the rigid bargaining conditions for new homes, the market for second-hand homes shows more flexibility.

"There are often distortions in the range, sometimes due to emotional factors," Cohen admits. "People tend to think their home is worth more. There are also those who want to make a killing by offering their home for an exorbitant price."

Broker Chaim Kaufman knows people who do this but says they are the minority: "While there are some who try, these are people who don't need to sell their homes but decide that if they can get a certain amount over the market price they'll sell; and if they can't, they won't," he says. "This doesn't represent a large segment of the market. A seller generally can't ask too high a price for the home because nobody will talk to him.

"The answer to the question, 'What's the right difference?' varies greatly, also with regards to timing," Kaufman explains. "When the market is stable, the gap between the opening prices of the seller and buyer could reach between NIS 100,000 and NIS 150,000 - or about 10% of the home's value."

The "bubble" index

Lately, however, the market hasn't exhibited stability. "From 2009 until the end of last year, prices rose sharply, while banks made mortgages easily accessible at low interest rates," Kaufman says. "Sellers kept raising their asking-price thresholds, and buyers were forced to compromise and pay more than they intended.

"Now it's different," Kaufman continues. "If a seller quotes a price 10% over market value, buyers won't bother calling at all. The problem nowadays is that buyers are convinced prices will come down 20% and this isn't happening. Prices are staying firm. If pressed, there might be a compromise for 5% to 7% less than market; but if a buyer approaches a seller with an opening price that isn't serious, the seller won't talk to him."

What, then, can someone wanting to sell his home ask for without being rejected outright by homebuyers?

A study conducted for TheMarker shows that the answer isn't clear cut and differs greatly based on location. Moreover, beyond giving buyers and sellers a sense of the negotiating range, the answer to this question can also serve as a tool for assessing the market's condition.

A mechanism commonly used in the United States is the "sale-to-list ratio." This compares the final selling price for a home to the initial price listed by the seller. MNA Real Estate Research measured this ratio for the first time in Israel, comparing the average prices for apartments containing three to five rooms sold in various parts of Israel, and average asking prices for similar apartments on Internet board listings. For example, if the average actual selling price was NIS 900,000 and the average listed price for similar apartments was NIS 1 million, the index would be 0.9.

"The closer the index is to 1, the closer the transaction closing prices are to the sellers' asking prices," the firm explains. "As the ratio falls, the more sellers start out by asking prices exceeding what buyers are willing to pay."

When asked if there could be a situation in which the index is greater than 1, such that closing prices are higher than what sellers started out asking, the answer was a definite yes.

MNA says that in Santa Clara, California, for instance, the index reported was higher than 1 for the ninth straight month in April 2010. In other words, the average price paid for a home was more than the average asking price for similar homes. This is an interesting statistic considering the state of the U.S. housing market in recent years. Ratios like these were found in "bubble" markets like Miami before the sub-prime crisis.

How could such a thing occur?

"In a market in which money is very cheap, homebuyers - particularly speculators - generated competition among themselves and raised prices, like a bidding war," MNA explains.

If so, it may be assumed that the higher the ratio, the more reason for concern that a "bubble" is forming. The firm decided therefore to nickname this ratio "The Bubble Index." But it's important to point out that most other "bubble" indices throughout the world are based on real values, like comparing home prices to those in the past, to rental fees, or to average wages.

Another important thing to point out is there is no ratio anywhere in the world that serves as the basis for declaring a housing market to be inflated; too much depends on local factors and circumstances. The sale-to-list ratio also doesn't take into account changes in housing prices so it can't completely attest, with any certainty, to the formation of a "bubble." That said, there is no agreed-upon economic indicator for the existence of a real-estate "bubble."

Sellers won't bend

A look at the "bubble" index prepared by MNA shows that the ratio of sale transaction prices in Israel for 2010 and 2011 to listed prices is close to 1. This means that homebuyers were willing to pay close to what the sellers were asking - sometimes even higher.

"Buyers can't really bargain with the property seller; and in many cases in the Israeli market, the sellers aren't bending on price," MNA says.

But at sharper resolutions, the findings are different. A more detailed examination showed that by dividing the country into northern, central and southern regions, differences in market behavior indicative of demand and expectations can be discerned.

"The index over the past year in the central region is 0.92 to 0.98," says the firm. "We see a slight drop in both the prices asked by homeowners and what buyers are willing to pay. You could say that in the central region, the market seems to behave properly."

If we look at several cities in the center, however, we'll find many differences. In Jerusalem, for example, the index exceeded 1 throughout almost the entire year, except from June to August. This shows that demand in the city was strong, and perhaps even intensified during the year; but in June, this changed: Although there was a steep increase in prices asked by property owners, reports to the tax authorities showed a freeze or even a drop in selling prices. It should be noted that the surge in asking prices has been stemmed and has reversed into a downward trend.

"This result could attest to Jerusalem homeowners expecting prices to jump even though they are now in decline - due perhaps to the opening of the light rail system, followed by declining expectations brought on by the social protests," MNA's report said.

In Tel Aviv, the index was over 1 the entire year. This depicts a contradictory situation: Homeowners, on the one hand, accepted the fact that the market is undergoing changes, reflected by a reduction in transaction prices recorded and in prices asked by sellers. But demand remained high and the prices obtained were still higher than what homeowners were asking.

"Although we see a decline in prices, the bubble index actually went up," says MNA. "The explanation could be that there are buyers in the market driven by expectations of future price increases who think the current slump is merely a downward correction. Sellers who lowered their prices are flooded with offers and are, in fact, managing to sell for more than they asked."

A considerable shift, however, can be seen in Bat Yam: The index, standing at 0.99 at the beginning of the year, has fallen to 0.83 - indicating a sharp decline in demand in light of rising prices over the past three years.

In Hadera, the index stood most of the year at 1, indicative of a sellers' market. Haifa, where until recently the ratio was lower, has seen it climb steadily to nearly 1, an indication of the improving situation for property owners in the northern metropolis and buyers' optimism that prices in the city will continue to rise.

In the south, the index averaged 0.85 most of the year, pointing to either low demand or a larger supply than in the northern region, and to buyers wielding a stronger bargaining hand against property sellers.

With the highest rate of construction in the country today, Ashkelon exhibits wiggle room of about 10% on prices asked by homeowners and a lower level of demand. This is in contrast to Ashdod, its neighbor to the north, where the index was greater than 1 most of the year thanks to demand from foreign residents willing to pay lavish sums.

Be'er Sheva enjoyed steady demand throughout the period, likely due to being one of the country's most important university centers. The index here hovered near 1 most of the year. Prices in the city have risen sharply, particularly near the university, doubling over the past two years. At the same time, though, there are signs that expectations are starting to wane and demand is beginning to drop, as reflected in the index.

The conclusion of the study is that despite the fall in the number of deals concluded in the last few months, the real-estate market in most of the country is characterized by strong demand: Property owners still have the upper hand in most central areas over buyers who find it difficult to haggle down prices and are sometimes forced to pay more to land their dream home. However, the analysis shows that despite the great demand for homes in the center, owners can't demand exorbitant amounts if they want to make the sale.