Negotiating Contingent Contracts in a Tight Greenwich Real Estate Market

Plus, the Mid-November Greenwich Market Update

                Greenwich R.E. Market Update

If we did not sell another house this year, 2021 would still be our best year for sales ever. As of mid-week, we have sold 905 single family homes. Add in the 111 contracts that are waiting to close and you have 1,016 transactions so far this year. We need another 95 sales this year to reach 1,000 sales in Greenwich and there are some weekly indicators that we may make it.

                                Inventory

Our real estate engine has been running on less than half of tank of gas all year. Our highest inventory  level all year was only 342 listings in the first week of June. We then slid steadily down to only 229 listings in the last week of October. The fear was that this five month’s slide would continue, and our market would essentially die.

The good news is that our inventory has ticked up by 6 listings at the end of last week to 235 listings and as of the middle of this week we added 3 more houses to the listing. Now 9 listings may not seem like a lot, but what it does is take a declining line and actually turn it up a tiny bit. Our inventory normally drops as we approach the year-end holidays, but the normal year’s low was this year’s high.

                Contracts & Transactions

We have also seen contracts recently turn up from a low of 101 contracts at the end of September to 111 contracts in the first week of November. Our contracts rose throughout October as our fall market inventory, what there was of it, made a bunch of new houses available for sale. In this market, if we have new inventory, we have new sales.

As a result, we saw a spurt in weekly transactions, the total of contracts and sales that week. To me transactions is the best indicator of how active our market is. However, transactions aren’t quite as straight forward a number as the phrase, weekly contracts plus sales might seem. Contracts come in two types according to FlexMLS, the software service for the Greenwich MLS. You have contingent contracts and pending contracts.

Most contingent contracts become pending contracts once the bank makes a mortgage commitment. As a results contingent contracts are counted twice in the transaction numbers, however, getting contingencies removed another sign of market momentum. In a slow market more buyers exercise their contingency and cancel the purchase contract. A rise in pending contracts indicates not only more people doing all cash deals, but also more people moving forward or what were contingent contract.

                Negotiating the Contingent Contract Offer

Contingent contracts mean that that buyer has an out. (NB: Most of the time a contingent contract is contingent on bank making a mortgage commitment, but there are a wide variety of other types of contingencies, such as a land use approval contingencies; neighborhood association approval contingency, a Hubbard clause where the buyer has to sell their present house before closing on their new house,  and many other types of contingencies.)

If the buyer can’t get a mortgage, they have the right to exercise the mortgage contingency and terminate the contract. The seller’s attorney then returns the buyer’s 10% deposit. Of the 876 single-family home sales in Greenwich through the end of October 2021, 499 or 57% of the contracts had contingencies, the large majority of which were mortgage contingencies.

Sometimes a contract will have more than one contingency. Back in the 80’s when I worked as a real estate attorney, it was common practice for their to be two contingencies. The first contingency was an inspection contingency for a week to ten days, followed by a mortgage contingency of 30 to 60 days. This meant that once the contract was signed, the buyer was in control of the deal. If there was something they didn’t like in the inspection, they could call the deal off. More commonly, the buyer would ask the seller to reduce the price or to make repairs.

Sellers weren’t big on losing control of the deal for their house, so unlike many other places, the Greenwich standard is that the buyer has to do the inspection before the seller’s attorney even starts to draft the contract. If the seller gets a better offer while the inspection is being done or the contract negotiated, they are free to accept it. This gives either party the ability to back out of the “deal”.

Some sellers are of the old school and a deal is a deal and they won’t accept the higher offer. Even so the higher backup offer puts tremendous pressure on the first buyer to accept the house ‘as is” regardless of what the inspection turns up. On the flip side, the seller who accepts a second higher offer runs the risk of losing both deals.

If the second buyer does an inspection and decides there are problem, they can back out. If the second buyer backs out, the seller has to go back to first buyer hat in hand and ask them to go through with their original offer. Often the first buyer has found another place, or they tell the seller to take a flying leap out of pure pique.

One thing, the seller can do to lessen the first buyer’s irritation at being gazumped, as the British call it, is for the seller to offer to pay the buyer’s inspection cost and any other reasonable expenses that they incurred. If the seller does that, it’s reasonable for the seller to ask for a copy of the inspection, since they are paying for it, which often comes in very handy. Be aware that many inspectors consider the inspection to be only for that particular buyer.

Once the contract is signed, the prevailing buyer needs to work closely with their mortgage broker or banker to make sure that every “i” is dotted and every “t” is crossed. In this market you don’t want to be asking for an extension on the contingency.

                Contingent and Pending Contracts

This year contingent contracts have remained fairly steady throughout the year, while pending contracts took a jump up in the middle of April and really took off in May, June and even into July. This period, that I call the “Frenzy” had lots of contracts being signed at all price levels, leading to an all-time record sales month with 143 single-family home sales in July 2021.

This was also the period where $5 million dollar houses were flying off the market just like $1 million listings. If you annualized June sales from $5- 6.5 million we had 2.5 “instantaneous” months of supply, while from $1.5 – 2.0 million we had 3.2 months of supply based on annualized sales. The more expensive the house, the more likely, there will not be a mortgage contingency.

Greenwich October YTD Sales Exceed all of 2020, but Way Down from Prior Months as Inventory Shrinks

by Mark Pruner

On October 23rd, 2021, we matched our sales for the full year 2020, even as single-family home sales in Greenwich dropped 46% compared to September. So far this year we have had 875 sales which makes for a new all-time record, already exceeding last year’s 861 total sales with two months to go in this year.

The Holy Grail in Greenwich real estate is breaking 1,000 sales in a year. We have already done that for the last twelve consecutive months from November 2020 to October 2021. For those 12 months we have had 1,058 sales compared to our 10-year average calendar year sales of 620 home. The question is can we do what Novak Djokovic couldn’t do in tennis and have a calendar year Grand Slam with over 1,000 sales in one calendar year.

The answer is that it is going to be close.  As of the end of October we have 122 contracts waiting to close. If you add that to our 875 sales, you get 997 sales and contracts for 2021. Not all of those 122 contracts will close in the next two months, but a bunch of selling homeowners that are not yet under contract want to close before yearend. (I have two clients, that have told me to do just that.)

The problem with getting to this Holy Grail is that our monthly sales have dropped from July’s all-time record of 143 sales to only 43 sales in October. Our October 2021 sales, for the first time since June of 2020 were a smidge below our 10-year, pre-Covid, average of 46 sales in October. You don’t have to look far to see why this is so.

              Demand remains high

Our drop in sales is not due to a lack of demand. Of our 43 sales in October 63% had been on for less than 2 months or more than 6 months. Most people wouldn’t think of sales that have been on for more than 6 months as a sign of a hot market, but it often is. What’s happening is that houses that have been passed over for half year or more finally sale, because seller overlook the objections that prior buyers had shown previously. Of course, a price reduction, or two, often helps this sale along.

              Little to Sell Leads to Dropping Sales

What is causing sales to drop is lack of new inventory. Our inventory, as of the end of October, set another new record low with only 229 single family homes listed for the entire town. In Old Greenwich, arguably our hottest market, we have only 10 listings on the market. Of these 10 listings, only 1 is under $1 million. Of the other 9 listings only 1 came on the market in October. Six of the ten OG listings, 6 had been on the market for than 5 months with 2 of them on the market for a year or more. The majority of what is available in OG are hard sales.

For the month of October, we had a total of 57 listings with 15 of those 57 October listings already under contract and 3 new October listings are already sold. To be honest, those 3 October listings marked as sold never appeared on the Greenwich MLS. They were off market sales.

Many of these off-market sales are at the upper end of our market. Of the three off-market sales that were reported, I represented the buyers in a sale at $4.9 million and another sale, in OG, closed at $7.4 million. Most off-market sales, are not reported, so were you to add in these sales, we would be well over 1,000 sales for the year.

When you look at a table of inventory, you’ll see that none of our price ranges have over 40 listings. Two years ago, every price range from $1 million to $10 million had 40 or more listings. (OK, from $5 – 6.5 million we had 38 listings, but absolute statements always look more dramatic and 38 is very close to 40.)

In 2019, we had 120 listings from $2 – 3 million, now we have only 37 listings. Lower inventory and higher sales bring months of supply way down. From $2 – 3 million we only have 1.7 months of supply, while only two years ago, this price range had 11.9 months of supply. Said another way, we went from almost a year of supply to less than 2 months of supply in the last two years.

              Buyers Want Larger Houses

All of this is part of the Great Upsizing. Our median house size sold was 3,669 s.f. in 2019. In 2021 our median house size sold is 4,000 s.f. That is an increase of 331 square feet or 9%. This might not seem like that much, but the square root of 331 is just over 18 so you are looking at people adding a nice size bedroom or two offices. As an example, the master bedroom at 15 Laub Pond Road, a 7,400 s.f. house, is 18’7” x 18’4” (open house this Sunday ;).

As people are spending more time at home due to Covid and the rise of WOOFH, Working Occasionally or Often From Home, people need more space. Our median sales price is up from $1.87 million in 2019 to $2.3 million in 2021 or an increase of 23.2%. Greenwich homes are appreciating nicely, but we are also seeing an increase in the size of houses that people want. When you look at just the increase in price per s.f., which factors out the increase in house size, we are up 17.6%

              Will Housing Inventory, and sales, continue to fall?

Connecticut has done an excellent job with 71% of our residents vaccinated. This bodes well for not seeing a repeat of last winter’s jump in infections and will certainly result in fewer deaths this winter. So, the Covid pressure to move is shrinking.

                            WOOFH is here to stay

The majority of the working populace really like WOOFH. The Jamie Dimon CEO’s that want everyone back in the office on 9 – 5, five days a week are seeing major pushback and employees voting with their feet. WOOFH means that people are spending less time commuting so buyers that used to want a 30-minute commute are looking at towns with 45 minutes to an hour commute. Also, technology for telecommuting is now ubiquitous and free or low cost. (Zoom really deserves a medal for providing connectivity for billions of free video conferences.)

What’s going to happen next year? Have most people who have wanted to move already moved. Will we reach the Holy Grail of 1,000 sales? The big factor pushing us there is the Great Upsizing’s surge in intra-Greenwich moves. For an intra-Greenwich move our sales increase by two, while our inventory remains unchanged as the buyer of the bigger house also sells their smaller house.  

                            Will our inventory fall to zero?

Is our inventory down, because most of the people that have wanted to move have moved? Realize that even with 1,000 sales, we are only looking at around 5% of our housing stock. The other 95% of homeowners are still in the same house. We will always get life cycle inventory as families get bigger, couples divorce, kids leave home, people retire, and homeowners pass away. Inventory will never go to zero.

The result of all this is that unlike any other year, November is a great time to list your house.

Stay tuned, this quarter is going to be like nothing we have ever seen before.

Mark Pruner is a sales executive with Compass at 200 Greenwich Ave. He can be reached at mark.pruner@compass.com or 203-969-7900. He would also like to thank everyone who voted for him and his fellow candidates on the Board of Assessment Appeals.