The Real Impact of Pricing Right

by Coldwell Banker Evergreen Olympic Realty, Inc. on October 9, 2009

In this housing market not many positive records are being set. One notable exception comes as a great surprise to the casual market observer – length of time on the market. In this down market, well priced homes are selling in record time.

And time, as the old saying goes, is money.

With the torrent of down news about the housing market over the past couple of years, most people would expect that all homes are languishing on the market, just praying for a buyer to appear.

The market as a whole is certainly moving much slower than it did a few years back. The average market time for existing home sales now stands at 125 days, which is nearly two months longer than at the peak of the market in 2006.

But that picture alone is a bit deceiving. A more detailed look at today’s market reveals quite a different picture.

When we separate September 2009 homes sales into categories of those that required a price reduction before selling (overpriced listings) and those that did not (well priced listings), we find that the well priced listings are selling in just 28 days. This is 17 days faster than well priced homes sold in the summer of 2006, the peak of the recent boom market.

If you regularly follow our blog, you know that well priced homes have been selling at this pace for most of the year. Today’s buyers realize that these well priced homes are at levels of affordability that haven’t existed for some time. They are jumping to take advantage of both the lower prices and very low interest rates.

A different story emerges for the overpriced listings. They averaged 204 days on market. After six months on market, these homes are requiring an average price reduction of 21%. They are then selling in an average just 28 days once they get to the correct price.

That extra six months on market hurts in a couple of ways. First, these homes end up selling for less than they could have if they had just started off priced right. Our market, like all others around the country has seen declining prices over the past two years. Since the peak in prices in 2007 the average sales price has dropped about one-half a percent per month. That means the six months of extra market time cost the seller an additional 3%. This amounts to $7,938 for the average priced home ($264,600).

The second concern is the extra months of mortgage payments. The typical seller only receives a financial benefit on about half of the mortgage payment. The other half is lost. And the amount is significant.

The average time in a home before selling is six years. In the sixth year of a 30-year fixed rate mortgage at 5.5% interest, only 26% of the payment goes toward principal. The tax write off of the interest portion of the payments (for a tax payer in the 28% bracket) brings that benefit up to 47% of the mortgage payment. That means that 53% of the mortgage payment does not bring any financial benefit to the seller. On the average priced home, this costs the seller an additional $8,000.

So the financial impact of pricing the home right is significant. The emotional impact is also huge. Six additional months of keeping the home in show condition, of the feeling of being in limbo, and missing the chance to move to that next home that better suits the seller’s current needs are also a big part of the equation.

More and more sellers are beginning to understand these factors. Last month, 45% of sellers priced their homes right and sold in an average of just 28 days. Still not a majority of sellers, but the percentage is up significantly since the start of the year. In January, only 29% of sellers priced right from the start.

The overpriced sellers should not beat themselves up too much. In a changing market, it is sometimes hard to know what the right price is. Sometimes it takes entering the market to get feedback from buyers to know if the price is right. The key to finding the right price in those instances is to quickly review the market feedback and then make a swift price adjustment to bring it in line with the market. When done, our market’s steady activity tells us these sellers will find a ready and willing buyer.

Click image to enlarge.

Statistics compiled by Coldwell Banker Evergreen Olympic Realty, Inc. from the NWMLS database. Statistics not compiled or published by NWMLS.

Leave a Comment

Previous post:

Next post: