Pricing in Today’s Market: The $64,000 Question (recently reduced from $67,900)

I admit it, I’m a geek. Not a “got beat up in High School geek”, no those geeks are somewhere making serious coin writing code for some new fangled web 2.0 gig. No, I’m simply a stats geek. The kind of geek who crunches the OBP and OPS on my nine year-olds baseball team. The kind of geek who can figure the ERA and WHIP on my eleven year-olds baseball team. And the kind of geek who looks at real estate market data with a gleam in his eye and a skip in his step. Weird, huh?

Anyway, sometimes this numerical obsession actually comes in handy. I’m not sure if you have noticed but there have been a couple of price reductions recently in the market (sarcasm alert!). While out looking at houses the other day, a buyer client asked me the most basic, simple, yet incredibly appropriate question I had heard in a long time.

“If the sellers were going to have to eventually drop the price this much, why didn’t they start out with a more realistic price?”

Ah. The $64,000 Question (recently reduced from $67,900, by the way).

I could have waxed and waned about the seller’s unrealistic expectations, or the possibility that the agent had failed to properly advise them on the current, shall we say, pricing pressures in the market, or, who knows, maybe the agent just “bought the listing”. (Nah, that NEVER happens).

But I refrained from mounting the portable soap box (I carry one in the trunk specifically for these occasions) and instead explained to my client that these things happen. I assured her that we would unquestionably be evaluating our purchase/offer options based on our analysis of the homes value, regardless of how much of a “deal” it looked like after the serial price reductions.

While she was satisfied with the answer and my assurances, the question nonetheless remained ingrained firmly in my brain, bouncing relentlessly back and forth between my two remaining brain cells. I had to research this, because, hey, it likely included some variation of stats. Woo hoo.

So off to the database, spreadsheets and refrigerator I went. Determined to create an answer, THE answer, as to why a seller shouldn’t just start off priced high and come down “someday”.

The following chart shows the correlation between initial pricing and final sales pricing, with an analysis of corresponding time on the market. It is the product of a couple of hours of research and a few cold brews. Any inaccuracies should be addressed to the boss.

In a nutshell, these stats were based on homes that were: 1) priced within ~20% +/- of the Median Home Price; and 2) SOLD in the month of August, 2007. Obviously these numbers would be significantly skewed (and NOT positively, mind you) if we were to include all listings that didn’t sell too. But that is another post altogether.

Bottom line, if you actually want to sell your house in a timely manner, this data says it CAN happen, even in this market… but initial pricing is critical.

For those looking for the simple interpretation of the chart:

Sellers who priced their houses right to start (or close to it, as defined by a final Sales Price of at least 98% of initial List Price) sold relatively quickly, on average 39 days. Those who started high and finally sold their house on a reduced basis (defined as a Sales Price of less than 95% of initial List Price) saw the process drag out to 108 days (or almost three times longer). Again, these are successful sellers; the numbers would be waaaay (sorry for the technical jargon) worse if it included all those that failed to close.

There you have it. Now, if you’ll excuse me, all this dry reading has necessitated a thirst-quenching cold one… we’ll see what kind of chart that leads to.