It's the Price, Stupid

Kristn.jpgMost of us are familiar with Roger Showley, a highly respected real estate writer for the San Diego Union Tribune. Roger’s latest San Diego Union installment comes this morning (8/12/06) with the shocking headline “House Sales Down Again”. Two month’s in a row, he points out, we have seen no year-over-year price increase in single-family resale housing. Before we all head to our underground bunkers and await Armageddon, I thought it wise to take a step back and look at this situation rationally.  Let’s take his example of impending doom, namely, a home in Stonecrest which has failed to sell in over four months.

Roger’s poster child is a 1410 square foot patio home which was originally purchased in 1999 for $226,500, was purchased by the current owners two years ago for $480,000, and now, listed at $619,000, “hasn’t interested buyers”. Forgetting for a moment that people in almost any other market in the country are currently choking on their coffee at the thought of paying over $600,000 for a home of this size, let’s look at actual market performance over the past two years. The home in question is asking a hefty 29% more than the two-year-ago sale price. Looking at second quarter sales for 2006, this compares to an approximate actual sale price increase during this same two-year period of 11% for all San Diego homes and 5% for all homes in this particular zip code (per SANDICOR MLS, based on price per square foot). Gee, why can’t these poor people sell? Must be the agent. Or, just maybe…. THE PRICE IS TOO HIGH!

Call our market what you will (adjusting, declining, normalizing) and blame it on what you must (interest rate concerns, national economics, global economy), but the fact remains that we needed a reality check. Might it just be possible that inventory is rising and demand is falling because it was unrealistic to maintain double-digit price increases forever? Is it conceivable that buyers got to the point where they no longer perceived value in the context of prices being asked or that they felt they could no longer afford the product at current pricing levels? I have said it before; we are at an impass. Sellers continue to, for the most part, hold the line on prices (which drives up inventory as their homes remain unsold), and buyers have drawn their line in the sand as they have chosen in larger numbers to wait it out. Something’s got to give, and, as much as I loathe the term, it is time for a pricing paradigm shift.

We represent both buyers and sellers, and therefore we hear both sides. I just shared the buyer’s perspective. Now, based on what we are hearing from the sellers, here are some of the antiquated ideas that deserve rethinking.

  1. I AM PRICED IN LINE WITH OTHER SIMILAR HOMES. Comps-Schomps. Active listing prices are meaningless! The asking prices of your competition are of interest, for sure, but they haven’t sold, so they ARE NOT A COMP. Listings may have been comps three years ago when inventory was low, buyer enthusiasm was high, and the pervasive buyer mentality was “I am buying something today – Let’s pick one”. Today’s buyers will wait if you are perceived as overpriced. And if everyone in the neighborhood is perceived as overpriced, then no one will sell. We have been hearing quite a lot of this from sellers, as a matter of fact. Many find it difficult in this changing market to recognize that being priced “in the ballpark” of other listings means nothing, especially when those other listings are not selling.
  2. I PAID, I OWE, I NEED. Buyers do not care what you paid, what you owe or what you need. I do have a lot of sympathy for those who purchased within the last year or two and now, needing to sell, find themselves up-side-down due to either diminishing values, cost of sale, or a combination of the two. Unfortunately, we are seeing far too many sellers who have taken all of their equity (plus some) through refinancing and now “need” to sell at a certain price to avoid coming out of pocket to close the transaction. Most recently, I met someone who purchased three years ago for $545,000 and while their home is now worth in the neighborhood of $600,000, owes $685,000. This is not a reflection of a bad market, it is just a reminder that the check has been cashed before the sale took place.
  3. THAT “ONE” HOUSE GOT $X. Anomolies do exist. Get over it. So what if the house around the corner sold for $1 million while everyone else in recent history sold for $950,000? In real estate, like life, there are occassional outlyers (buyer paid too much, seller got lucky). Accept it; outlyers are not the norm, and don’t bank your real estate success and financial future on the exceptions. You may enjoy similar success, but you may not.
  4. I’VE GOT TIME. No you don’t. Unless you are the one hold-out who thinks prices are on an upward trend, longer market time means lower sale price. Much like you can’t expect to scare away a buyer with an unrealistically high counter offer and then come back later with a “never mind, I’ll take it”, you can’t initially overprice your home and expect buyers to return in droves at the news of your price reduction. They are mentally gone, over it, on to the next one. Miss that first wave, and you are in the position of waiting for new buyers to enter the market; the thundering herd has moved on to greener pastures.
  5. ASK ENOUGH PEOPLE/YOU’LL EVENTUALLY HEAR WHAT YOU WANT. Realtors, like any other profession, represent a cross-section of America. There are good ones and, of course, not-so-good ones. The “good” ones were here yesterday and will be here tomorrow. They understand market dynamics, their primary role as an advisor (not “salesman”), and the reality of current values. They will tell it like it is and risk losing your business in the name of honesty and fiduciary duty. The not-so-good ones will be most concerned with your approval and the listing, not possessing the experience (or, dare I say, ethics) to recognize that an overpriced listing is not a listing at all and a dissapointed client is not a future client. They have not experienced past market cycles and will likely not be around for the next.

Mr. Showley’s article correctly points out that agents are resorting to gimmicks in an attempt to sell their languishing listings. From my angle, all the free gifts and ice cream socials in the world are not going to persuade me to make a purchase of this magnitude. In 1992, it was “the economy, stupid”. Well, this may lose the election for me, but today… “It’s the price, stupid.”

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