Wednesday, April 11, 2007


Why you should think about lowering your price

Housing prices are, as economists say, “sticky downward.” While stock prices can plunge dramatically in a single day, housing prices sometimes take years before they fall enough to restore the balance between supply and demand.

Don’t blame buyers for this. They always adjust quite readily to the new reality of lower housing prices. Sellers, though, are slow to come around. And so we must wait while they gradually whittle their prices down to the new levels.

Here are some reasons you should consider cutting yours right away:

1. It’s often best to get out of a falling market as early as possible.

From 1991 to 1996, the median price of a home in California fell from $200,660 to $177,270—or by about 11.6%. In some areas, the drop-off was much more. Smart sellers were quick to lower their prices so they could get out early.

2. If you’re in a newer subdivision, there’s a risk that prices could fall much lower.

Many of your neighbors may already be “underwater” in that they owe more than their properties are now worth, and some of them may be facing foreclosure in the near future. A rash of foreclosures in your area could depress property values, since the homes are often resold at bargain prices.

3. Those statistics that are showing only modest declines in median sales prices may be misleading.

Many sellers (and builders) have been offering generous incentives and credits to sell their homes. So while the statistics are showing just modest drops in sales prices, the amounts sellers are actually netting have been dropping by quite a bit more.

Median sales prices can also give false readings if higher-end homes are selling better than starter homes. This seems to be the case in many markets. (For some evidence of this, click here, here, or here.)

When this happens, reported drops in median sales prices will tend to understate the extent of the downturn. Indeed, it's even possible for the median sales prices to rise in an area where all home prices are falling.

Here’s an extreme example that shows how this could happen: Suppose that there are just two kinds of properties in the town of Homesville: luxury homes and starter homes. In 2005, 200 luxury homes were sold for $800,000 each and 300 starter homes were sold for $400,000 each. In 2007, 150 luxury homes were sold for $600,000 each and 100 starter homes were sold for $300,000 each. Even though the prices of all homes in Homesville dropped by 25% between 2005 and 2007, the median sales price rose from $400,000 to $600,000.

4. It’s a great time to buy.

Your house may have dropped by 15%, but so has your replacement house. If you’re selling in order to trade up, this market may be working in your favor.

5. The amount you’re “bleeding” each month may be larger than you think.

Say you have a vacant $500,000 home with a $100,000 mortgage and monthly payments of $1,000 a month. You may think it’s only costing you $1,000 a month to wait for a buyer. Not so. You’re also missing out on an opportunity to earn interest on your $400,000 of equity. If the interest rate is 6%, you’re losing an additional $2,000 a month.

6. Those listing agents who keep telling you your price is too low may be giving you bad advice.

Some unethical real estate agents routinely tell FSBO sellers that their prices are too low in order to persuade them to sign a listing contract. This sales practice is known in the trade as “buying a listing.” A month or so after the contract is signed, these agents urge their clients to drop their prices.

7. The asking prices of neighboring properties may be giving you an inflated sense of your home’s worth.

In a falling market, many sellers have unrealistic expectations of what their homes are worth. Just because a neighbor with an identical model is asking $600,000 doesn’t mean that your house is worth $600,000.

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