I pulled up a listing history in RMLS and found that the listing was first listed at $215,000 in November of 2009 and is now priced at $199,500. The price has crossed the $200,000 threshold so should see a new pool of buyers even though the listing has been on the market for more than a year.
The price has come down 7.2%. Here’s the problem: if it was $5000 overpriced then, it is even more overpriced in today’s market. The Case Shiller Index for Portland real estate has dropped 8.0% in that time so if you do the math, the current listing price, just chasing the market down should be $197,800 ($215k – 8%). Subtract the $5000 that it is overpriced by and the selling price is $192,800. You have to play along and assume that the house is representative of the market according to Case Shiller and the $5000 overpricing is accurate.
What it means is that the house would have sold for $210,000 when it was listed would sell for $192,800 today. By chasing the market down the seller has lost $17,200 and realistically more than that. During the listing period the price reductions have resulted in a price increase in today’s market.
An analogy: if you were at the back door of the bus when it started to pull way and you need to get in the front door to get on, you’re now at the back bumper a year later.
Great story and example…..
Here’s another case study for anyone who’s interested:
In Feb 2007 I moved into (and way overpaid, of course) my current house in a fairly nice suburb. The house across the street was vacant and for sale at about 10% above market. The house is still vacant and priced about 10% above market 4 years later.
It was listed around $420,000 when I first came around. Last time it was on the market, around the end of 2010, it was listed for $290,000 and I’ve yet to see anyone even stop by the open house. Realistically, it would go quickly for 250K but the seller will never do it.
I’ve met the guy a few times and, although a very nice guy, is extremely stubborn and cost conscious and refused to budge (or read a paper, apparently).
At the time I joked to my then prenant wife that our unborn child would be able to walk across the street and grab a flier from the box before the house sold. Ironically, our second child just took his first steps within the last few weeks and will be heading for the box soon. At the rate things are going I’m thinking I may be able to pick the place up when my kids are ready for their first house 🙂
I always have a difficult time with your math.
8.7% of 194,06 is not 20,093.
Tim, you’re right, there was some funky math based off a typo. I’ve fixed the numbers within the post. Look better?
LOVED this post. Your analogies were perfect. We just had a presentation by FATCO today, who has a computer model of this very problem to s-p-e-l-l it out to buyers and sellers, with the Case Shiller market values and interest rates to boot. Thank you!
something is still wrong.
8.7% of $192,800 is $16,770, not $17,200.
I suspect you didn’t reduce the $5,000 to $4,600.
Let me be more clear:
If it was overpriced by $4,630 last year, then it’s overpriced by $5,000 today, since the market has gone down by 8%, but I suspect there are additional problems with the math.
Let me try one last time–
If it’s overpriced by $4,630 last year, then it’s overpriced by 8% more–the $4,630 is now $5,000 over, but we still need to discount the amount it would have sold for too.
Tim,
First, thanks for taking some time with this.
The $17,200 comes from 8% of $215,000. Yes, I could have marked up the $5k to $5040 by adding 8% to that as well. We could also take Time Value of Money into the equation but are not.
$215,000 to $199,500 is a price drop of 7.2% ($15,500). The market says it should be priced at $197,800 [$215,000 x .08) but then we’ve “agreed” that it is $5000 overpriced. The difference is $1700 + $5000 or a predicted sale price of $192,800. If it would have sold at $210,000 and will now sell at $192,800 the seller has lost $17,200.
Still not quite right, but you give me enough to work with:
If it would have sold for $210,000 last year, then the seller lost 8% by waiting, so the loss is $16,800.
Also it will now sell today for 8% less than $210,000, or $193,200, not the $192,800.
Here you go:
Here’s the problem: if it was $5,000 overpriced then, it is even more overpriced by more in today’s market. The Case Shiller Index for Portland real estate has dropped 8.0% in that time so if you do the math, the current listing price, just chasing the market down should be $193,200 ($210k – 8%). That $5000 it was overpriced by then has increased to $5,400 over. You have to play along and assume that the house is representative of the market according to Case Shiller and the current $5,400 overpricing is accurate (8% more than $5,000). The difference is $1700 + $5400 or a predicted sale price of $193,200.
What it means is that the old asking price of $215,000 is $21,800 over today’s selling price of $193,200. The $21,800 is the $5,000 the seller was originally over plus the $16,800 in market value decline.
Oh, if only we Realtors could convince sellers of the fallacy of the thought, “we’ll start a little high. We can always reduce the price if we need to.”
That strategy almost never works. Buyers agent Realtors view the property when it first comes on the market, decide its over-priced and ignore it from then on. It is very, very difficult to get a Realtor to re-show a home that was overpriced to begin with regardless of any price reduction that follows.
As a buyer agent, I can tell you that once I see an over-priced listing, I won’t even bother showing it. It’s hard enoguh getting a deal done today without having to deal with unrealistic sellers.
“Oh, if only we Realtors could convince sellers of the fallacy of the thought, “we’ll start a little high. We can always reduce the price if we need to.”
Some more math for the discussion: If you truly know your buyer going to get a far worse price for the home because of seller intractability why don’t you offer to reduce your commission by 2% and have them reduce the price by that difference in the first place? Isn’t .04 of 210k better than .06 of 192k? Oh, wait, I guess not. So really wouldn’t our seller be better off by reducing the price to say 206k (4 thousand below market) and using a fee for service agent?
LOVED this post. Your analogies were perfect. We just had a presentation by FATCO today, who has a computer model of this very problem to s-p-e-l-l it out to buyers and sellers, with the Case Shiller market values and interest rates to boot.
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