Price Reduced? Don’t be duped.
November 4, 2008I’ve been hearing a lot lately about price reductions, price drops, prices bottoming out, yada yada. Well here’s some news for ya. Listing prices mean absolutely nothing. Here’s why:
1) Listing prices are determined by the seller and the seller’s agent, putting their heads together and arriving at a figure which is amenable to both… but more often than not, a figure that is amenable to just the seller. Realtors will oftentimes take an overpriced listing just for the opportunity to sell the home, knowing that future price drops are part of the deal. Don’t get mad at ‘em. It’s their job to get top dollar for their seller.
2) By law, the seller’s agent owes a fiduciary responsibility to the seller. So, I ask you, could the listing price be a more biased number?
3) There are many strategies to pricing. Price low and let the market bid it up. Price right and hope for the best. Price high and see if there’s a sucker out there. Pricing strategies further cloud the “validity” of a listing price.
4) Most importantly, listing prices do not show us anything about what the market is doing. Sold prices are the only thing that show us that. Solds speak of action, and action defines the market. Everything else is just noise. Listing prices, price reductions, you name it.
- Here is a graph of the meaningfulness of listing prices. Yup, it’s displaying correctly.
Because list prices are biased, fail to speak of action, and mean nothing, so does all the hype surrounding price drops. Every time I read an article about listing prices coming down, another reduction, et cetera, I shake my head. “Show me the solds” is what I think. The solds tell me more about what’s going on.
Now lets play devil’s advocate for a second. Is it possible that listing prices foreshadow sales prices? Is it possible that listing prices do mean something? Are there meaningful trends in listing prices? Good questions indeed. My take is that you can look at list price to sale price ratios and never have a consistent correlation… due to those factors discussed earlier (pricing strategies, etc). So relying on them for useful market info is not all that wise. The only way listing prices foreshadow sale prices is if every seller and seller’s agent were to list their homes at market value. But we all know that ain’t happening out there.
- Hmmm, how can I apply this?
So what does all this mean and how can you approach listings in the future with this knowledge?
1) Because listing prices mean nothing, reductions mean nothing.
2) Naturally, it follows that list price to sales price ratios mean nothing. Next time someone touts “it sold for over asking!”, say to yourself “who cares.” If a property was grossly underpriced in the first place, how is it newsworthy that it sold above asking? What’s newsworthy are the amount of offers and the sales price.
3) Conversely, next time someone says “it’s been reduced 5 times!”, say to yourself “so what.” If a property is grossly overpriced, aren’t reductions just getting back to reality? Perhaps the most newsworthy headline would be “Realtor and seller price home perfectly!” Now that’s news.
4) Don’t use list prices as some sort of market indicator. Price drops galore don’t mean a falling market, it means sellers and their agents are out of touch with what their homes are worth (imagine that!). Rely on solds for market indicators.
What to do? Well, from now on instead of concerning yourself so much with list prices, do your own analysis on the home by looking at sold comps only (or better yet, have your agent do it). If you are a buyer and your agent is worth their salt, they should ignore the listing price altogether and tell you what they believe the place is worth. You can proceed with your bid based upon that number. If your agent is hell-bent on trusting list prices, maybe you should try a different type of salt if you catch my drift. Perhaps Morton’s Kosher, or the healthier Sea Salt varietals. Good luck out there.
- Drastic price reduction or drastically overpriced in the first place?
Well, yes and no. Realtors — certainly the good ones, and there are a few of them — have no interest in wasting their own precious time trying to sell a property that’s overpriced. They know that, as in any negotiation, the list price represents an initial estimate of value. And if it’s too far off the mark, it will discourage offers. So there’s at least some incentive for seller and agent to arrive at a price that’s in the ballpark.
I personally believe that comparing the actual selling prices to the ORIGINAL list prices can give you some sense of the market’s “heat”, if you look at enough data AND if you’re sure to be comparing the sale price to the original list price, not just the last price the property was listed at before it sold. Over-priced properties get rapped on the knuckles pretty quickly and their prices get reduced.
Still, I totally agree that the only way to really verify value is to look at recent comparables. Absolutely and always.
Hey Misha,
You and I see eye to eye on a lot of things. I agree that most Realtors will not waste their time taking overpriced listings. However, a lot of Realtors DO take overpriced listings with the expectation that their seller will have price drops at certain points in time if the home remains unsold. This inflates the initial price when the home hits the market… distancing it from reality.
On the flip side, a lot of homes in SF are purposely underpriced, oftentimes by $100K or more. This creates a buzz and people flock to the home and a bidding war ensues. So the initial price of these homes are to be taken with a grain of salt as well.
For these reasons and the 1,000′s of other motivations people have for their listing prices that I haven’t touched on, I really put very little stock in a listing price. Also, coming from a background in real estate appraisal, I bring with me a bias to put NO stock in listing prices at all and to figure out the value on my own… no help from the listing agent or seller. I think a lot of Realtors pay attention to listing prices but most appraisers don’t. I lean towards the latter, since that is my background and my belief.
I do see what you’re saying though. Your position is more moderate than mine, and I can certainly respect that.