The Anchoring Effect and Asking Price in Real Estate

sebfreyCommentary

Anchoring

There are a number of theories and philosophies when it comes to pricing real estate for sale. Most real estate agents will tell you that the best practice is to list a home for sale somewhere around what they feel is market value – or even just a bit under market value, to foment a bidding war. However, there’s a school of thought that suggests there’s a better way to get the highest price for your home, so in this article I will talk about the anchoring effect and asking price in real estate. Many home owners are uncomfortable with the idea of pricing their home competitively, that is to say, at or slightly below “market value.” There is real trepidation when it comes to trusting that the market is going to work its magic and deliver sufficient buyers to create a feeding frenzy that will be needed to boost the sale price of a home up over asking price. Additionally, some sellers fear that bidding wars turn off buyers and dissuade them from even making an offer in the first place. That is undoubtedly true, however the counter-argument to that is that the buyers who are put off by a bidding war are typically not the strongest, most-motivated buyers anyway. Instead of under-pricing or “fairly pricing” their homes, many sellers will choose to set a high price. Doing so, they believe, will give them “room to negotiate.” Beyond leaving “room to negotiate,” a high asking price also may work in the seller’s favor due to … Read More

Sales to List Price Ratio by Weeks on Market

sebfreyCharts and Statistics

Sales to List Price Ratio by Weeks on Market

Is it true that the longer it takes to sell your home, the less you are likely to receive for it? There’s a lot of evidence that indicates this is in fact true. Check out this chart, which illustrates the sales to list price ratio by weeks on market: Source: National Association of Realtors 2013 Profile of Home Buyers and Sellers As you can see, homes that sell within the first 1-2 weeks of being listed on the market get, on average, 100% of asking price. As time goes on, you can see that the sales to list price ratio begins to drop: by 3-4 weeks on market, the ratio drops to 98% of asking price, and by 5-16 weeks on market, sellers receive an average of 96% of asking price. But then look what happens for listings averaging 17+ weeks on market: sellers receive only 92% of asking price on their listings. Some of this is due to the fact that homes were initially overpriced, and it took a while for sellers to drop their price to a point at which it would sell. If you are in a situation where your house is vacant and you’re looking at paying to keep up that property (taxes, mortgage payments, maintenance, etc.), it can get very expensive to over-price your home. What isn’t shown on this chart, and which is hard to quantify, is what would have happened to these 17+ week sellers if they had priced their homes correctly? Would they have ultimately netted more money … Read More

Real Estate Price Reductions and Market Time

Seb FreyCharts and Statistics

Price Reductions by Time on Market

How important is it to set the price correctly when a home is marketed? One way to answer this question is to look at how long a home takes to sell, using the number of reductions as a metric, rather than price differentials which can vary from market to market. In the 2013 National Association of Realtors Profile of Home Buyers and Sellers, data is provided showing how often home owners reduced price by time on market. You can see the breakdown in the following chart: Looking at this chart, you can see that 86% of homes which sell in less than 1 week have no price reductions at all, and that for those that sell within two weeks, 84% of homes have no price reductions. Looking at the very right of the chart, you can see the statistics for all sellers, regardless of how long it takes to sell a home. You can see there that 53% of home owners never reduce their price, ever – which means that a bit more than half the time, home owners are pricing their homes correctly. Unfortunately, it means that nearly half the time, home owners overprice their homes. The most interesting cluster to look at is the 17+ week column, the second from the right. There, you can see that for homes that took 17+ weeks to sell, only 15% of home owners did not reduce their price at all, 25% had one reduction, another 25% had two reductions, and 18% had three reductions, and another 18% … Read More