February 4, 2018

Tight inventory puts pressure on listing price strategy


There are myriad considerations when it's time to put your home on the market, but one stands heads-and-shoulders above the rest. It doesn't matter if you're in a down market or one that's booming, strategic pricing plays a critical role in what happens in the all-important first few days when a listing goes public.

2018 NETAR President

For the past two years, we've seen record level sales in the 11 counties monitored by the Northeast Tennessee Association of Realtors®' Trends Report. Those sales have absorbed the excess inventory in the $200,000 and below resale market. That price range typically accounts for over 75% of sales. And while new listings are looking better, they were only up a half point in 2017 compared to 2016, and active listings were 16.5% lower. The average for the year was 5.6 months of inventory, and the indicators point to more of the same this year.

Now that you have that background here's the dynamic to keep in mind. Buyers who haven't committed have seen and passed on many listings. They – and their agents – are vigilant about watching new listings and waiting. They're waiting for something that's priced right so they can get out front of other buyers. But that doesn't mean they'll engage in a bidding war. While there are examples of sales prices exceeding the list price that's not the norm in this market. There are many more examples of buyers walking away when they think the price is too high.

So where is that pricing sweet spot that triggers a fast-track deal?

There are several variables, but typically it's somewhere between the average listing price and the average sales price of comparable properties.  "Somewhere" is the key question.

One consideration focuses on a study done by Eli Beracha, Ph.D.  Florida International University and Michael Seiler Ph.D. at the College of William & Mary. The research project's goal was to take some of the guess work out of pricing. It looked at 1,000 buyers and a pool of more than 370,000 listings. According to the Journal, researchers were able to determine the impact of 'rounded-pricing' listings vs. 'just-below pricing' strategies.

Beracha was quoted in a Journal of Housing Research article saying, "Our study suggests that by using the just-below pricing strategy sellers can price their home slightly higher without driving away potential buyers." Seiler added, "As a result, they end up selling their house for more."

So how does that work?

Beracha gave an example that goes something like this:  buyers are more attracted to a property priced at $199,000 than one marketed at $200,000. The research suggests pricing at a price more attractive to buyers yields a selling price about 2.5% to 3% higher when compared to the property priced using a rounded-listing strategy.

This strategy isn't a guarantee, and there's a rebuttal that says listings based the rounded-price strategy have lower discounts and a shorter time on the market.

Obviously, there's disagreement because the best listing price technique is an age-old debate among real estate professionals. Still, it's something to consider when buyer preference is a concern; when the inventory is tight; and when there are willing, but very price conscious, buyers. This is especially true of the crop of first-time buyers who are now looking at buying while juggling student loan debt.

What we're experiencing is technically a soft seller's market. Last year was the seventh straight year of annual sales increases. But the growth rate is slowing. If the 2018 market is a status quo of what we saw last year the slowing sales growth rate could become a headwind for higher sales prices. That makes strategic pricing even more important.

Your Realtor® can lay out all the data from sales of homes in your neighborhood and community. That's a starting point. Once you have the hard data, it's a matter of talking to your agent and developing a plan that matches your property.

Aaron Taylor is the 2018 president of the Northeast Tennessee Association of Realtors®. The real estate education and trade group is the voice for real estate in the Tri-Cities and has over 1,250 local Realtor® members and almost 100 affiliates.