Pricing in a Declining Market

That's the title I give to a discussion I have with sellers before listing their home for sale. I long for the day when I can skip that discussion, but for the time being it is a crucial part of selling a home. Sellers commonly take the approach of, "Let's see how much I can get first, then we can drop the price." I can absolutely relate to the thought process that produces that statement as I have sold property myself and thought the same thing. As a real estate professional, however, I can tell you that statement is downright dangerous. There are three reasons sellers are hurting themselves by taking that approach, backed up by mountains of data.

Reason #1: The first three weeks on the market are the most precious. That's a known fact in the real estate community, and although it's founded in buyer psychology it's statistically proven. This is when all the buyers who have been searching for a home see your listing come on the market. If they look at the listing or perhaps schedule a showing and determine the home is overpriced, you've most likely lost that buyer for good. Because no matter how many times they see your listing pop up, such as with every price drop, they will always see it as that overpriced house they looked at awhile back. You remember that old adage about first impressions, right? If you lose the buyers who are already looking at the time you list, then you have to wait for new buyers to enter the market and hope one of them notices your listing. Would you guess there is a greater number of buyers currently searching for homes in your area than the number of new buyers who will enter the market in your area in the next month? If you guessed yes, you guessed right. Best to capitalize on that opportunity as a well-priced new listing.

Reason #2: As your market time ticks up and you repeatedly drop your price, your home becomes less appealing to buyers and you lose negotiating leverage. What do you think are two of the most common questions asked by buyers during a showing? How long has it been on the market, and how much have they dropped their price. In fact, buyers don't even need to ask anymore because that information is now visible to buyers on the MLS listing. Which of these two identical houses do you think generates more interest and urgency in a buyer:

• House A, which has been on the market 125 days and has dropped their price from $199,900 to $164,900, or... 
• House B, which just came on the market 8 days ago and is asking $164,900? 

The houses are identical and listed for exactly the same price, but House A looks like a desperate seller and House B looks like a listing that might get snatched up if the buyer doesn't make a move immediately. That also means House B is more likely to get a higher offer whereas House A will attract low-ball offers and have a difficult time negotiating them up. Ironically, the seller of House A has actually diminished the amount they can get for their home by trying to get more for it.

Reason #3: If you're not priced right when you list and the median value of homes in your area is still declining, you are faced with the challenge of dropping your price at a faster rate than the rate of market decline. The primary problem with that is that we don't know at any given point how quickly the market is declining. Contract prices are private until the sale closes, at which point 30 to 90 days have passed since the buyer made their buying decision. Since then, your toughest competition has lowered their asking prices. That means in a declining market, even if you price your home for exactly the amount the identical home next door just sold for, you are priced too high because you're at a "three months ago" price.

Consider the graph below. This shows a [hypothetical] listing that comes on the market for $149,900 at a time when it was actually worth $125,000. They drop their price $5,000 here, $10,000 here, wincing each time at the money they're losing. Meanwhile, the market has continued to decline. At the end of 12 months, there will be a very frustrated seller and an unsold house. They have dropped their asking price by 20% since they listed, but to no avail because the market value of the house has fallen by the same rate over the same time period and they started above the curve. Even with slightly more aggressive price drops they may not have caught up - they would have had to drop from $149,900 to $129,900 within 60 days of listing in order to have a shot at being "priced right," and I don't know too many people who are ready to stomach a perceived loss of that size, that quickly.

By contrast, consider the next graph as an example of how it SHOULD look:

Here, the seller actually gets more for their house than they would have in the first example - they sell for about $125,000 now, instead of being stuck with the house for a year until it's worth only $100,000. Just like with Reason #2, pricing too high will result in selling your home for less.

As I mentioned before, the primary problem with this whole scenario is that nobody knows exactly where that green curve is until three months later, at which point value has already been lost. We do have information about how declining markets work, though, so if we (seller + broker) take that information seriously and adopt an aggressive approach to pricing, you can beat your competition and sell your home for the highest possible price.