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Pool of Buyers

Back on May 2, I wrote about days on market versus price range. The recent sale of former Blazer, Scottie Pippen’s house underscores that the higher the price, the smaller the pool of buyers.

At the median home price and below, there are lots of potential buyers. The majority qualified (and desiring) to be in the market can compete. The first time buyer competes with investors, downsizers and anyone else. As price moves up, segments drop out until the pool shrinks and there are just a few buyer’s left. Pippen’s house took 812 days to sell and had two different agents. He also lost 25% whereas the market increased at least that amount. If you have 500 homes that sold in an average of 50 days and you add one that sold in 812, the average time on market shifts 1.52 days up. Also note that it was listed under four MLS numbers and the last was only six days old at time of close!

Think there is some truth about not owning the most expensive house on the block? In Portland, there are two different houses priced at $5,750,000. There are some more expensive residential properties in the area but are typically on acreage.

8 Comments on “Pool of Buyers

  1. On of the basics of micro economics is the law of demand. While I do not remember it word-for-word as a good economics professor would, the basic idea is that as the price is increased the quantity demanded decreases. In other words, there is a “high” quantity demanded when the price is near zero, but at some very, very “high” price, the quantity demanded is zero.

    It should also be noted that just about “everyone” is an able and willing buyer at a price of zero, but how many individual buyers are able to purchase a residential property over $5M?

    I have been very loose with my terms here, but I hope it is so obvious that it does not need further rigor.

    By the way, this illustrates how housing is essentially a dutch auction.

    This ties directly to your previous post about the $5,000 rational versus irrational behavior. The basic idea is to buy the property for as little as possible, but you don’t want to lose the bid. If the home is really worth the extra $5,000 (on either a rational or irrational basis), then what is the best strategy? In your post you revealed that the home was worth the extra $5,000 after someone else had purchased it, but what if you would have taken the bid at the lower price, then you would have gained $5,000 in value.

    Question back: Since the home was listed between multiple agents and for “only six days” before close, what number is included in the average? Is it 812 or six, or what? Finally, do you think it would be a good idea to use a median average for the days on the market? This would eliminate many outliers that are at issue.

  2. I don’t know how RMLS parses its data. The property took 812 days to sell but my guess is that it will hit the stats as six days. Median days on market might work better.

  3. It might be interesting to look at median days on the market versus simple or annualized return. It would be my guess that people are not as willing to sell “for less than purchase price” regardless of what the “fair market value” of the property is. This Pippen situation is exactly in that case. If the property would have gone up in value, then he would have had a buyer far sooner.

    I had a friend who chased the Washington DC market down–the agent suggested a quick sale at $600k, but he insisted to list for $620k. Well, he slowly reduced his price, but the market was falling as fast or faster than his price reductions, thus he was always overpriced, until the market finally stablized at approximately $450k for him. It was a very expensive game he played.

    On the other hand, I had a friend in California who purchased a property, and poorly managed a flip, but the market was going up so fast that his poor management actually made him money.

    It would be my guess that when prices are rising, thus “profits” are being made, the number of days on market is fairly low. When the market is flat or slightly downward, people go searching for the golden buyer–which almost surely exists, but with a zero (or near zero) probability.

    In any event, it has been my observation that people expect real estate to increase in value, and when it does not, they concentrate on the past, rather than true market value.

    I wonder what is a reasonable sales commission on a $3M residential sale. His sales price was about $3M, but then we need to subtract the transactional cost from there.

  4. No! Demand does not go down with successively higher prices, demand is far more complicated than that.

    The QUANTITY demanded approaches zero as prices increase. Since in this case we are dealing with a single item, the number of buyers is equal to the quantity demanded.

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  6. I think that this is a fact that even those sellers in the $700K+ market are finding out. Some houses in Forest Heights and Bonny Slope have been over six months now. Even with numerous RMLS numbers, you can recognize the house by the pictures.

    I’m actually surprised that new construction is being offered at such high prices. With the sub-prime lending practice now out of the picture, these certainly won’t be selling any time soon.

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