Are home prices dropping in your community? If so, don’t panic. Home prices and home values are not always perfectly aligned. Let’s look at overall market conditions today and why seller strategies may currently have a larger influence on listing (asking) prices.
Real estate market conditions are generally driven by supply and demand. By supply, we mean the number of owners offering their property for sale. Demand is a little more complex, since it consists of the number of qualified buyers who are currently ready, willing and able to purchase a home at market prices. Interest rates remain relatively low, employment has improved since the first of the year, yet the volume of home sales is lower than forecast. The weak link in buyer participation appears to be willing.
Several studies suggest that even in markets where the average wage earner makes enough to buy the average priced home, many potential buyers prefer to rent. Some renters fear taking on the financial obligation of home ownership and others have reasons to maintain the mobility associated with a lease versus a mortgage. We’re also seeing an alarming number of young people staying in their parent’s home longer or returning to live with their parents – even when they are gainfully employed. Sociologists can probably explain this better than economists. At the time I bought my first home, my peers at work and friends my age were all trying to buy homes. Prices were about as affordable as they are today, but mortgage interest rates were double, averaging around 7% to 8% for a well-qualified buyer with a 20% down payment. I bought my first house at age 26 – the average age of a first-time home buyer in California today is about 31.
So, is this lost generation of younger home buyers missing from the housing market weakening demand? In most communities, probably. Home values are determined by actual sale prices. When more buyers submit competing offers, sale prices rise. This is especially true in communities where the supply of homes for sale is unusually low.
Does demand influence listing prices? Sure. Demand factors into setting the initial listing price of a home, but whether demand is weak, stable or strong doesn’t explain home prices dropping just days or weeks after the home is placed on the market. Market statistics don’t change drastically over that short a period in time, an indication that either the seller quickly realized they made an error in computing their asking price or seller strategies are causing the change. There are two nearly-identical strategies that influence home prices dropping just after a home is listed for sale.
The first strategy is setting the listing price high in anticipation of market forces rising to meet it. The price may be set above current market value as determined by comparable sales in the community, therefore the strategy is often called breaking comps (click the link for my blog post on this topic). However, if comparable sales begin to close that indicate market values are moving downward, sellers may reduce their asking price quickly. Since home sales often close on the last day or first day of each month, it is common to see a flurry of listing price changes in the following week.
Another strategy is to simply set the asking price above estimated market value to pull up offers. This strategy gambles that even though all offers may be lower than the asking price, they will be higher than market value. Setting the price high is considered (by some) to create a perception that the property is worth more than comparable sales might indicate. If no offers come in immediately after listing, some sellers will blink and reduce their price to embrace a more conservative, market value driven sales strategy. They may also lower the asking price several times in small steps, testing the market at each price level.
Any strategy that sets an asking price above market value is risky. Smart buyers know that when a seller drops their price, it is for a reason. The seller may have set the price too high or they are running out of time to meet a deadline. Regardless of the reason, buys consider themselves in a stronger negotiating position when the seller has recently reduced their asking price.
The reasons for home prices dropping discussed here may or may not be applicable in your community, every neighborhood is different and selling strategies can vary. The important thing to remember is that listing prices and actual values can be two different numbers. Whether you’re a buyer or a seller, knowing a property’s market value should be the starting point to develop selling or purchasing strategies.
Have a great week! Questions about dropping home prices or buying and selling real estate? Drop me a line: Contact Us.
About Real Living with Broker John™
Each week Real Living with Broker John™ provides innovative tips and information regarding all aspects of owning, buying and selling real estate. John Souerbry is Broker/Owner of Cordon Real Estate, a full service brokerage in California’s San Francisco Bay Area (CA BRE 01370983). Contact John with questions or comments regarding Real Living or real estate in Wine Country, East Bay and Silicon Valley.
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