How to Tell If Your Home is Overpriced

Here's an article from the Wall Street Journal that many of the home sellers and realtors in my city need to read. It lists some situations when the house you're selling may be overpriced and includes a few good tips/rules of thumb. But here's the one-sentence summary of the piece that really stood out to me:

Ten showings and no offer or two weeks with no showings, you are probably overpriced for the current market.

I had never heard of this rule-of-thumb before, but it makes sense. If you aren't getting showings at all, it's probably very directly related to the price being too high. Ten showings and no offer could be something else (maybe the house simply shows poorly), but assuming that's not the case (and the seller's realtor should be asking people/other realtors about each of the scheduled showings and the resulting opinions to see if there's a problem), then price is probably the issue.

But who follows this rule? No one. Otherwise, prices would be coming down much faster. I'm currently tracking about 20 homes in my area and maybe one of them lowers its price every month. In fact, I'm seeing more people simply give up and take their homes off the market (which is a viable strategy if you can afford to wait a couple years) that I am seeing people lower their prices. But most of all, people are just sitting there. Their homes aren't selling and they haven't lowered the price one bit.

It's certainly a strange situation.

Comments

[Enrak]

This is actually a fairly common phenomenon. Certain prices are "stick" downwards. Similar situation exists with wages, which is why layoffs are the preferred solution to wage cuts.

The funny thing is that economics refers to this situation all the time, but it is behavioral finance that actually examines the issue. People are more loss-averse than they are gain-loving according to behavioral finance experiments (i.e., most people would rather avoid a $2 loss than gain $2.50). Economics assumes that people will treat avoiding a one dollar loss equivalently to gaining one dollar.

[Enrak]

"stick" = "sticky"

[Wendy]

My house has been on the market for a month.
Even in a slow market I am having one showing a week, at least. It hasn't sold because of the house next door. UGH!! Otherwise, I could be asking more for my house and it would already have sold.

[Jake]

People can know that they are overpricing their house and still want to list it at the same stable price. For example, if they are constrained by the amount they owe on the mortgage/2nd/HELOC on their home. They'd love to sell it where they listed it, but prehaps they can't afford to sell lower.

["Mo" Money]

I am considering putting my house on the market soon and I found this something to consider.

[Kevin]

Home prices in my Missouri county actually went up almost 2% last month. I guess we are an oddity.

[Matt]

One thing that keeps getting overlooked with stories about people asking too much for houses is that if you were foolish enough to listen to banks/realtors and bought near the peak or took "equity" out of your house around the same time, then you can't lower the prices.

I bought well before the peak BUT I did 100% financing because I had minimal savings; I then took "equity" out. I realized that mistake quickly enough to put most of said equity back in my house, but I still owe about what I paid for my house and I can't sell it for that much.

I listed my home too late and chased the market down like many others. Now the market is below what many people owe. Even though I'm "losing" several hundred dollars a month vs renting I'm not willing to default nor do I have the funds to pay the house down to what it might sell for.

What gets reported is that people are unrealistic about what their houses are worth and are being stubborn. While I'm sure this is often the case you cannot dismiss the fact that many are already at their minimum price and can't realistically lower it to market value.

Personally I'm just weathering out the storm - paying down my house while trying to build significant savings outside of my 401(k) for the first time. Plus I'm glad my next home will not cost half a million dollars. I'll take the pain now if it means my next house is affordable.

I'm just wondering where the price floor is so we can find out how much and for how long inflation has to go to make up the difference so home prices will be back to 2000-ish levels.

[FMF]

Matt --

You can always lower the price. You'll have to take the loss, though.

BTW, my realtor thinks the market in this area won't fully recover for 4-5 years. Obviously, it's a guess, but interesting to hear her opinion.

[Joe @ Simple Debt-Free Finance]

I have heard of this rule, but it's more of a suggestion. We just sold our house (the first sale in the neighborhood in the last 6 months) and there are 7 houses for sale in the neighborhood. Some are absolutely ridiculous in price, and I know for a fact that the most absurd one ($25k over market value) gets a lot of showings. The key is that they're not really interested in buying the house. It's just curiosity. They want to know why that house is worth 25 grand more than the others. When they see it, and realize that it's the same as all the other houses only priced for 2005 market, they move on.

The key is to price your home at market value. It's not pretty in this market but you have to accept reality and the fact that 2005 prices are just not going to happen for a while. The market dictates what your home is really worth and you can take it or leave it, but accepting that reality is the only way you're going to sell in this market.

[Laura]

I've been tracking a number of houses in my area as well, and I'm amazed at some of these over-priced houses. Prices aren't really moving down, I wonder if some of these houses will ever sell. It's frustrating for us since we're looking to buy, and everyone keeps saying "it's a buyers market, you won't have any trouble finding a house" - but it's really not such a buyer's market as everyone thinks (at least in my opinion in our area).

[Matt]

FMF,

How can I take the loss if I do not have funds to bring to closing to make up the difference? Short of liquidating my 401(k)?

[FMF]

Matt --

I'm pointing out the fact that many people can lower the price if they want to -- they just don't want to.

As far as your situation, you may just be stuck.

[mrm]

Not getting any offers after showing your house doesn't necessarily mean your house is overpriced. Maybe it just looks like crap and you need to give it a little TLC. :) I wouldn't be very impressed with a house I that I would have to sod in back, paint, replace the carpet, AND cover nail holes in the walls. First impression is everything.

FMF,

Is that a fact or a supposition? Of the 20 houses you are tracking, how many have any equity in them? What were they bought at? Can you even know the full financials of the sellers? They aren't keeping the asking prices high just to waste peoples' time.

I understand it's frustrating on all sides.

Laura,

I'm not sure that it's really a buyer's market. It's absolutely not a seller's market either. It's a stalled market.

Most speculators have already dumped what they can. Builders have to run out existing permits and keep business moving, creating a glut in supply. Why buy a preexisting home when builders are having fire-sales on brand new homes? Those who want to buy a pre-existing home expect foreclosure prices. Existing home owners who can service their debt either cant or wont sell for fair market value let alone compete with said fire-sales or short-sales. Banks are reluctant to lend... to anyone.

Mortgage rates are deceptively low because few can actually get a loan. If real inflation is closer to 12% as reported on FMF recently, why would a bank be in a rush to write a mortgage for 6.5% on a flat or depreciating asset? Maybe banks aren't writing loans until rates get more in-line with real inflation - which will increase mortgage payments and drive down prices or move the stabilization timeline out further.

The market is correcting, which I am glad for - but it's going to be a mess for a while.

Of course this is all based on anecdotal evidence in the Central Florida area and is complete armchair quarterbacking. I just think that "they just don't want to" is not very useful to the discussion.

[FMF]

Anon --

Is what fact or a supposition? The fact that I'm tracking 20 houses and that they've kept their prices up? That's fact. That maybe one of them lowers their price every month? That's fact. That more are taking the homes off the market than lowering prices? That's fact. (I track all these things on my realtor's site -- I can "watch" properties and I have all sorts I'm looking at to see what the market is doing.)

I do NOT know what anyone owes on these properties, if that's what you're asking.

[Matt]

"the fact that many people can lower the price if they want to" that "fact"

You're implying that many of those 20 could sell for less, they're just being unreasonable. Since you do not know the financial positions of the sellers, that's a supposition. Unless I'm misunderstanding you.

[FMF]

Matt --

That is a supposition, but one based on some information given the demographics of the area, the length the people have lived in the home (I can verify that), etc.

[rwh]

Maybe I'm just looking at things too simplisticly, but if a house isn't selling, if it isn't even getting showings, it's priced too high.

I've read several comments about the unknown financial situation of the sellers, the condition of the property, the condition of the neighbor's property or simply the market in general. None of that matters when it comes to the worth of the house, as judged by the market.

A house is worth what somebody will pay for it at a given point in time, not one dollar more. If you lower the price far enough it will sell. If you can't afford to lower the price, as some have mentioned, that doesn't change the market value of the house, it only affects the owner's ability or willingness to sell.

I guess if enough people refuse to sell their house because they are upside down, a shortage of houses will occur, and then prices will rise. I have seen no evidence of that nationally or in my local area.

FMF's housing search is proving quite interesting. He blames the 20 plus sellers who are asking too much for their respective houses without even considering the possibility that he may be the one who isn't willing to pay the "market" price. The fact that no one (out of 20 houses he if following) will sell FMF a house at the price he wants to pay indicates that he is at least partly to blame.

Of course, the sellers aren't getting their houses sold either, so they are to blame too. As has been discussed in a previous post, the market has been disrupted with potential buyers and sellers not being able to agree on prices. When transactions aren't taking place, it is impossible to say what the market price of the houses really are.

rwh mentioned that the financial situation of the seller shouldn't affect the market price, but FMF's inability to find a "properly" price house may be the result of the financial situations of many, many borrowers. I think FMF may be understimating the number of home owners who took out home equity lines at the peak of the market. Such owners could be unable, as Matt points out, to gather enough cash to sell their houses even though they didn't buy the house recently. I think that it is ridiculous for FMF to say they could lower their price if they wanted to. They would say that FMF could raise his offer if he wanted to.

It looks like the unsuccessful sellers in FMF's neighborhood really aren't that interested in selling for whatever reason (seems like a lot of realtors are having their time wasted by people not that interested in selling now). FMF is also not desperate to buy, so they are both just maintaining the status quo. As rwh concluded, the situation will eventually work itself out. People need to buy and sell houses eventually. It is not clear, however, whether buyers or sellers will have to take most of the hit to make the market work again. Given the current trend, FMF's view that the prices will eventually come down is probably more likely, but not a sure thing.

[FMF]

Anon --

Your comment implies that I'm basing my thoughts on opinions (as you are, btw) and not facts. I am basing my conclusions on facts.

In particular, the best estimate of a home's fair market value are the actual sales prices of comparable homes in the same area. Though the actual price of any one home is actually determined by the agreement of one buyer and one seller, comparable sales are a very good estimate. Given these, I can say with some confidence that most of the homes I'm tracking are over-priced.

Add to this the fact that the homes have been on the market for quite some time -- simply sitting there. This leads me (and most others as noted above in the post) to conclude that they simply aren't getting any offers at their price (otherwise, the houses would have sold.) And since they aren't getting any offers at this price, their current prices are too high if they actually want to sell their homes.

The actual market value of a home has NOTHING to do with how much is owed on it. Just like a car, the value of a home is what the market is willing to pay, not what the seller owes on it. Case in point, look at all the foreclosures and distressed sales that are happening nationwide. Many of them are selling for less than what's owed on them. Why? Because the current value is below the amount they owe. It's just that simple.

Now I'll agree that the amount owed may keep some sellers from selling/lowering their prices. If they can afford to keep the home, why should they sell if they're going to take a loss? Then again, no one's going to buy a home worth $300,000 for $400,000 simply because the owner owes $400k on it. So what happens? It sits there.

But if owners can't afford to hold on, the bank will eventually take the homes over and sell them at the market price (at a loss) to get as much back as possible. That's what we're seeing across the country and what I'm starting to see in my area more often.

As you say, time will tell what actually happens. Personally, if we never move, it will be ok with me, so we're in a great position. If we find something we like at a great price, then we'll move and be happy. If we don't find anything we like, we'll stay and be happy. It's a great position to be in.

[FMF]

All --

Interestingly enough, I got an email alert this morning noting how one property I've been watching just lowered it's price by $20k and another has gone down $15k. Maybe the market is moving.

[Kevin]

I house we've been interested also went down over $15k recently. We're watching it closely just as you are. If it goes down another $15k or so, it might speed our moving plans .

[Mike Hunt]

Hi Matt,

How much is the difference between what you owe the bank(s) and what you think is the market value for your home? Have you tried to contact the bank to request a short sale? You can always hint that you may not be current on your payments and get them to consider a short sale in good faith.

-Mike

FMF,

This is anon. I generally agree with what you are saying, and I think you will eventually get a better price on any house. But, you are focusing only on one side of a market transaction. You say that a house is only worth what a buyer is willing to pay, but this is not true. The market price is determined by what a buyer is willing to pay and for what a seller is willing to sell. Markets, and market prices, need two willing parties.

Because you and the buyers are not even in the same ballpark about the value of the houses, ther is no market and comparables sales are largely irrelevant. Normally, comparable sales would be useful, but they are not when the market failing. The problem in this situation is that there are a lot of buyers who seem to be uniformally asking more than you will pay (possibly due to their own debt problems, not being in a hurry to move, or simply being irrational).

The fact that there aren't many transactions to use as comparable sales is evidence of the market disconnect/failure. The fewer the sales, the less acccurate the comparable sales are for determining the value of any home.

The sales that did happen were most likely to sellers being in desparate positions (being foreclosed upon or needing to move for a job) and were probably below market from the seller's perspective (b/c they were forced to sell for less than they would like).

Given that more sellers are likely to become desperate than you are (especially with the glut of homes on the market), the prices will probably come down, but that does not mean that the market price right now is less. There simply is no mutual agreeable market price right now, so it is a meaningless statement to say they are overpriced just as it is meaningless to say that you are offering too low a price.

[DC Smith]

This reminds me of a story someone once told me. One of his neighbors decided to sell. It was a nice, desirable neighborhood in a good sunbelt market (pre/early bubble). They were friendly enough for casual teasing so he told the neighbor "You moron. That price is outrageous. You'll never sell at that price." The neighbor insisted his house was worth every penny and someone would be lucky to get it for his price.

This went back and forth for a while, the seller defiantly standing his ground, insisting it would sell for his price. Well, it finally did... nearly 24 months later. The seller smugly made the announcement of his "victory" in his best "I told you so" voice.

The thing is, while he got the number, he was still a bonehead. During those two years, the market's double digit annual appreciation rate just rose to meet his price. During those two years, of course he kept paying his taxes, his four figure monthly mortgage payment, and he continued to maintain the house in "on the market" condition. Oh, and let's not forget it was the entire market that rose to his level, so when he buys a new house, it has also gone up in price.

Yup, he got what he was asking for all right.

The difference now is, values aren't rising to meet inflated prices. They're getting further and further away.

[MetaMommy]

Anon (June 26, 2008 at 12:18 PM)
You're addressing this from a philosophical point of view, not a realistic one. At the end of the day, comparable prices are the most valuable way of assessing the market. If sellers aren't willing to accept those prices AND their homes aren't selling, they're probably not priced well. It really doesn't matter if the seller thinks they're priced well if no one is interested in buying. And the longer a property languishes on the market, the less likely it will sell as priced.

Of course, there's a lot more hesitation on the part of buyers these days because they think they can get a good deal. Fair enough to both parties, I say. Sellers want to maximize their profit, while buyers want to minimize their expenses. It just means the whole process is a bit slower than what it was a couple of years ago. But that was madness!

[FMF]

Anon --

I said:

"the actual price of any one home is actually determined by the agreement of one buyer and one seller."

I'm thinking of both sides, so I'm not sure why you say I'm not.

Anyway, as I noted, prices are starting to fall. I'm looking at five homes this weekend too, so there may be new news next week.

[AdamCO]

I'm a "potential buyer" sitting on the sidelines, as the NAR likes to say.

When mortgages run 14-18x the annual rent, I'll buy. 'til then, I won't.

I'm not even going to start looking until 2010

[Bill in NC]

"if owners can't afford to hold on, the bank will eventually take the homes over and sell them at the market price (at a loss) to get as much back as possible."

Banks are often VERY reluctant to drop the price on a house when it first comes back on to their books.

It can take some time before they're willing to reprice that foreclosure you want.

After all, it's not the loan officer's personal cash flow at risk.