Hat tip to duncbdunc for sending this along from the Atlantic, written by senior editor Megan McArdle – who isn’t a realtor!
So since we became homeowners, I’ve become more interested in HGTV. Not obsessively so, but I have more interested in watching programs about renovations and such.
One of the shows I’ve watched is called “Property Virgins”. The plot is about like it sounds: first time homebuyers try to find a place.
What’s interesting is how many of the homeowners have trouble getting their offers accepted. The shows filmed post-crash, and while it’s by no means universal, a number of the couples on the show put in an offer only to lose the house . . . and a substantial minority put in offer after offer, only to lose again and again. And what’s really interesting is that this happens in places like Florida and California, where you would think it would be easy to find a house.
I wonder if they aren’t experiencing something like I described when we were hunting for a house. In the neighborhoods we wanted to buy in here, there was a lot of inventory–homes that were wildly overpriced. Those homes sat on the market for months, even years. Meanwhile, anything that came on at a reasonable price went to contract within a week, and usually within a couple of days–we made an offer on the house we now own the day it came on the market, and this was far from unusual. Bidding wars on these properties were frequent–universal, in the months before the first-time homebuyer tax credit expired.
This sort of rapid-fire bidding is bubble behavior; it’s not supposed to characterize a normal market. While well-priced houses always sell faster, this level of bifurcation is extreme (or so my real-estate agent mother assures me). She also assures me that putting things on the market high, and then lowering your price if it doesn’t sell, is lousy strategy–once something’s been on the market for a while, it’s damaged goods. Price reductions don’t get the same enthusiasm as new listings, so if your house is wildly overpriced, you’re going to end up selling it for less, not more.
But this bifurcated market makes sense in the context of the housing crash. It even makes sense that I’m noticing the phenomenon in places where housing prices have fallen the furthest: states like California and Florida, and beginning-to-gentrify neighborhoods like mine, which got bid up at the height of the bubble, and then fell by around a third.
Those are, of course, the places where homeowners are most likely to be upside down on their mortgages. But that doesn’t really explain the phenomenon–if you need to sell, then arrange for a short sale or give it back to the bank, while if you don’t, why put it on the market at a price that no one will take? And why do a surprising number of the homes that come on the market languish for so long without a price reduction?
Because prices are sticky, and they are stickiest where the needed reduction is largest. The owners of these houses simply cannot bring themselves to believe that they took a loss. They will instead drop their house on the market 20-30% too high, or more. Even when it’s obvious that no one is going to buy at their price, loss aversion prevents them from admitting that it isn’t going to happen–either by dropping the price, or taking the thing off the market. The result is that a normally-sized population of buyers gets compressed into the relatively small number of houses that are a) coming on the market at b) a price that recognizes that it’s no longer 2006.
This suggests that even as housing demand recovers, it’s going to take a while for the markets to follow suit. A lot of the stock isn’t even coming on the market; a lot more isn’t priced to sell. Until circumstances force a sale–or the buyers bid up that limited turnover to 2006 prices–those houses will sit there. Meanwhile, frustrated buyers will feel like it is 2006–as they lose house after house until they manage to make the first offer.
This shows the number of inexperienced and desperate agents out there. Agents so proud to get a listing, but with ZERO chance of selling it. The owners have reason to be greedy and not admit to losses. These dumb agents are screwing it up for everyone.
Jeff, that’s just what I thought. Then I thought wait a minute surely the seller will just send that listing agent packing if they try to start near the market price (the seller thinks it’s too low). But it would still be the listing agents job to fully explain where their research told them the market price is and that they should list as near that price as possible. The listing agent gets sent packing after a few months on market and no sale though sadly the result and your sad conclusion are the same “the dumb agents are screwing it up for everyone.”.
I thought the article to be reasonably insightful, but I did not learn much. Price matters and the spot price is what will sell. A bifurcated market is also the pricing I see here in the East Bay.
Agents follow (or should follow) the instruction of clients. Many or most of the “dumb” agents are those who are stuck representing unrealistic clients or who lack the analytic and communication skills to convey the message that “this is not 2006 anymore”. I am sure that there are dumb agents, but you cannot conclude that from the price alone.
With underwater properties there are at least three parties: seller+agent, buyer+agent, bank+minions This greatly complicates matters.
I have seen several wishful prices which work out to be the seller just trying to cover their loan and get out. Based on 2006,2007 prices, these often fail. Next step: short sale, and there the prices are all over the map. In a few cases I know, the short sale price is a fiction and the listing agent believes she can sell a package to the bank for a much lower price. Sometimes the short sale amount is the unrealistic counter from the bank in a prior round. The bank’s “approved short sale pricing” may or may not be realistic.
In short, I think it is pretty hard to generalize about the motives for unrealistic pricing. You can lay the blame at the feet of sellers, agents, and banks and have a case for each.
Agreed, and add to the list the agents who will take a high-priced listing now, with the intent of working the seller down later. A common ploy.