Priced Right? If Not, Don’t Expect To Sell!
One of my tips for sellers (in a buyer’s market) is to “price right”. What do I mean by this simple phrase? And why is pricing according to market conditions a difficult pill for some sellers to swallow?
To understand why that old adage is so important now, I’m going to explore history and economics. Economics is what drives markets, such as real estate. And history will show us how markets and economic models can change.
(Keep in mind that these comments are general. Every home is unique… some are more different than others, and pricing for those properties can be much more subjective, as can buyers’ tastes in those properties. But what I’m talking about today applies for most homes in our area.)
We’re used to price appreciation that averaged about 25% per year over the past 3-5 years in Palm Beach County. It can be habit forming! But it’s clear that the market has changed, because the market factors that sustained these increases have gone away.
Two years ago, in 2004, homes that had been selling in 2000 for $125,000 were changing hands for $250,000, and prices were increasing with each new listing. The new listings in each neighborhood were relativly scarce, and as they became available, they were typically fought over. Why? Many buyers, one listing, and the anticipation in each buyers’ mind that the next home would be priced $10,000 to $20,000 higher (and not available for several more weeks). Savvy sellers were using this knowledge to dictate price, and the primary factor that kept appreciation in check was appraisals that lagged. (Don’t thank the appraisers, though… slowing sales down is not supposed to be what they do…). And the knowledge that prices were soaring was generating even more buyer demand.
Buyers were coming from everywhere! Snowbirds decided to own their retirement home before they retired (”while prices were still within reach”, many of them thought), and interest only mortgages were a great help. Some northerners relocated here, flush with cash from the sale of even more expensive residences in New England or on the west coast. The cash buyers were king, they trumped most of the other buyers. So the influx of buyers added to the high demand, and scarcity of homes, and the pace of appreciation.
In that market, most sellers were pricing with the (scarce) competition, or even higher… and getting pretty much whatever price they asked.
Today’s market is a completely different situation. Without trying to analyze why the market changed (that’s a good topic for another day), let’s simply look at what it is.
First, homes are no longer scarce. Actually, at current inventory levels, there is an oversupply of homes. In central and northern Palm Beach County, there are approximately 10,000 MLS listings of resale detached homes. Uncounted condos and new construction homes are also on the market, and there are still homeowners attempting to sell on their own.
Second, buyers are getting harder to find. There may be fewer buyers than last year… there were about 600 homes sold in the same area in February. At that pace, it could take 16 months to sell every available home, not counting new listings. Buyers who need to sell their home in order to purchase another are going to be delayed… so the remaining buyers are becoming highly desired by all these sellers.
Third, buyers and sellers are changing their approach and their thought process. These few buyers are going to be extremely reluctant to play last year’s games this year. They will be looking for bargains. If I was a buyer, I would be hesitant to purchase a home that is priced above the market. And sellers who need to sell will be under pressure… eager to reach a deal with any buyer, as long as the deal is “reasonable”.
So what constitutes today’s “market price”? For any given home, a “fair” market price is unlikely to be much above what that same home could have sold for a few months ago. Buyers will look at comparable sales to ensure they are getting value for their money. And appraisers and lenders will be much more careful too.
What happens if a seller prices above recent sales? There are too many competing listings… buyers will look at other “more reasonably priced” homes first. If one neighborhood has ten or more homes but they are all overpriced, then buyers will go to other neighborhoods, or negotiate with a select few sellers. The buyers will have the upper hand, and will find it easy to walk away from a property since there are so many others available. Eventually they will find the more motivated sellers.
But the worst situation for some sellers may be harder to comprehend… being overpriced, they may get very few showings and offers. They may lose buyers to their competition. And several months from now, if conditions have not changed and there is further downward pressure on pricing, they will find that buyers are now comparing their homes with even lower recent sales. They may end up selling for less tomorrow than they could have sold for today.
Some sellers will rationalize that they “don’t have to sell”, or can wait. Most resistance to pricing “right” may come from a desire to still eke out every last penny. But today’s buyers are not sympathetic to a seller who purchased a home 2 years ago for $250,000 but is expecting $500,000 today. Most buyers are not necessarily looking to “steal” a home (yes, a few are), they are simply looking for a new home at a reasonable price. Buyers will just wait until higher asking prices are reduced, and they will for the most part skip homes that are not priced in their range.
The sellers who understand these market conditions, and consider what buyers have to choose from, will be pricing their homes much closer to recent sales. Their properties will be shown much more, and sell sooner. There are things that a good agent can do to improve on the average results (see my other tips), but in a buyer’s market, they can’t compensate for a price that’s too far above the “right price”.
Market conditions will undoubtedly change again. How soon is anyone’s guess. But today’s sellers need to understand today’s market, and forget about what happened last year, if they want to get results.