An interesting pricing phenomenon is happening on homes listed for sale in our county. During the month of May, 56 sellers reduced their listing price. That’s pretty normal based upon the number of listings. But in June that number doubled. By July it nearly doubled again and by the end of this month one in three sellers will have reduced their initial asking price. For many it will be their second or third price reduction. Why are we experiencing a plethora of price reductions during the best seller’s market in years?
Most sellers naturally have an inflated opinion of the value of their home. After all, it’s their home and that alone makes it a very special place and deserving of greater consideration than other comparable homes. But once a homeowner has made the decision to sell and move on in their lives, they have three primary goals: Sell the home at the highest possible price, in the fastest time and with the least amount of inconvenience. That’s where a knowledgeable agent can help. Most do, but some are shorting their client’s objectives of getting the house sold quickly for the agent’s primary interest of obtaining a listing and a commission.
This is how that happens. Just imagine you’re a homeowner that has made the decision to sell and buy another home. You know that houses in your neighborhood sell between $400,000 and $450,000. You call your previous agent Martha, tell her you are interested in selling and ask her what she thinks would be the value of your home. She says between $435,000 and $445,000. To double check Martha, you call Mike, an agent who had a recent sale down the street and ask him the same question. He says maybe as high as $450,000 with some new paint and carpet. You make one more call to agent Carol who says, “Listings are selling over their market value. We can get $525,000!” Now as a seller, who do you sign a contract with?
Carol gets the listing. After a few showings, Carol informs you the market has changed and you need to reduce the price. You reduce the listing to $475,000. Another 30 days go by without any offers and you reduce the price again to $450,000. After 120 days on the market you get an offer at $435,000. Martha and Mike were right on their valuation but Carol ended up with the commission.
Whenever there is a shortage of listings, some agents will bump up their market valuation in order to induce the seller to sign the listing with them rather than another agent. They know the property will never sell or appraise at the listed price they quoted but their strategy is to work the seller down in price over time. At some price the property sells and a commission is earned. Sellers naturally want to believe the agent who agrees with them that their home is worth substantially more than what other homes are selling for or that the agent has sources of buyers willing to pay substantially over the home’s market value.
Another reason for price reductions is when agents and sellers misread the data. Recent headlines in a major Sacramento newspaper read “County home prices up 40 percent.” The article went on to say that the $238,000 median selling price was an increase of 40 percent over July of last year. That was correct for the homes that sold but the 40 percent price increase cannot be applied to all homes, only to the ones that sold. The median selling price is a point where half the homes sold for more than the $238,000 but half sold for less also. Another frequently misinterpreted number is the average time on the market which is calculated based only on the homes that sell and not the homes that don’t sell.
Mark Twain is credited with saying, “There are three kinds of lies: lies, damned lies and statistics.”
Since every home is different, pricing a home is a bit subjective. The really unique homes or ones on large acreage are without many comparables and agent’s opinions as to their value will greatly vary. There are two primary different pricing strategies employed by agents.
The most frequently used in an appreciating market is to price high. The agent reviews what other homes have been selling for, makes adjustments for condition and size and adds 2 to 3 percent to the listed price.
Another school of thought, in a seller’s market, is to price low. The agent under-prices a home by 5 or 10 percent, which attracts a huge amount of interest and starts a bidding war. The goal is to end up with a higher price than if the home was priced at or slightly above the comparable sales. So which is a better pricing strategy?
A study published in the Journal of Economic Behavior & Organization earlier this year found that homes priced higher sold for more than homes that were priced lower. The research explored a behavioral trait called “anchoring.” It is a common tendency to rely on the first price information offered when making a decision.
Sales are likely to cool this fall and winter. To get into escrow, sellers will need to be more objective as to their home’s value, correctly interrupt sales data and remember if an agent places a value on your home that seems too good to be true, it likely is.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached at kencalhoon.com.