Agents, Are You Pricing For Today’s Market or Yesterday’s?

In Real Estate It’s All About What’s Happening Now

It’s easy to be so pumped about what’s been happening that we miss out on what is currently going on. This can happen in the real estate market as well.

In Real Estate It's All About What's Happening Now

As an appraiser, we must stay on top of what is going on in the market or we can miss the mark on value. Because real estate agents and appraisers are striving for similar results (estimating accurate value) we can all gain valuable insight from the same market data.

Granted, the job of a real estate agent is to get the highest price for their client, but they must still live in the real world by studying historical sales trends.

If financing were not an issue, and the buyer couldn’t care less about how their contract price compared to other similar properties, it would just be a matter of connecting the buyer with the seller and signing on the dotted line, but life isn’t always so easy.

In the real world, most buyers obtain financing and even the ones who don’t require a mortgage loan are very concerned with the quality of their investment. I can vouch for this by the number of appraisals I do for cash buyers.

Don’t Get Stuck In The Past

So what does all of this have to do with pricing for today’s market as opposed to yesterday? A lot.

If we’re not careful we can fall into the trap of pricing a home for what it may have sold for 2 or 3 months ago compared to today. In a stable market that may not be an issue but in today’s ever-changing environment it can cause serious problems.

In my personal opinion, an agent’s approach to value should be similar to that of an appraiser. Today I thought I would share with agents what stats an appraiser analyzes when developing an appraisal in hopes that this may also give them some additional insight when coming up with an asking price for their clients.

If agents and appraisers approach the pricing/valuation issue from the same perspective there may be fewer differences between the contract price and appraised value, which is something that I believe would make everyone happy.

When attempting to arrive at a market-supported list price it’s important to study what is happening currently, especially in a rapidly changing market. There can be a substantial difference in the current stats compared to what was happening in the past. Are you analyzing what is happening now or 6 months ago?

So what stats do appraisers look at? I have included the top things I look at when appraising homes. If you look at other things please leave me a comment below and let me know, I’m always open to considering what other professionals have to say.

9 Stats To Consider When Pricing A Home

1) Current Interest Rates or Recent changes – This is super relevant right now because of the recent increase in interest rates. Word on the street is that higher interest rates are putting a damper on sales activity.

The market has been so hot lately that it may be hard to see any major differences in inactivity. Even so, there is no denying the fact that higher interest rates and payments are keeping affordable house payments out of reach for some buyers.

Higher interest rates have the potential to reduce the pool of buyers. This may not be easy to see since we are in a seller’s market, however, as interest rates continue to rise it will become more apparent.

It will be important to keep an eye on rates as the year progresses so that pricing takes this into account.

2) Pending Contracts – Today’s pending contracts are tomorrow’s sales. It is important to keep this in mind and to be aware of the trend because this will affect overall sales trends.

Pending contracts help us to gauge the health of the real estate market. Because they are a looking glass so to speak into what we can expect closed sales stats to be it is wise to keep an eye on what direction they are heading.

A decrease in pending sales typically signals a decline in closed sales in the next several months. There can be numerous reasons for a slowdown in pending sales.

They range from potential problems with obtaining financing to home inspection problems, or appraisal issues. The recent increase in interest rates can also affect the number of potential buyers and might lead to a decrease in pending sales.

Knowing the level of pending sales can help in pricing strategy because it relates to current supply and demand dynamics.

3) Total Sales Volume – Total sales volume can help us measure year-over-year performance in the housing market. A dip in volume may reveal that demand is down, something good to know when deciding whether to be aggressive or conservative in a pricing strategy.

Home sales tend to be seasonal in nature so while sales may be down for the month compared to the previous month they may be on target overall for the year. Monthly sales volume can provide us with a different perspective.

4) Monthly Sales Volume – A comparison of monthly sales volume can help us to gauge the time of year with what has occurred in the past. If sales are down from the previous month this may be perfectly normal for the time of year.

By looking at the prior year’s monthly sales volume compared to the current numbers we may find that a dip in sales is perfectly normal. This can help us to avoid doom and gloom news headlines that may predict a crash due to decreasing sales.

On the other hand, if we are seeing a big change in monthly sales volume from the same month in previous years that may signal a shift in the market that we need to consider.

5) Multiple Offers – The market has been very competitive locally and nationally. Knowing this information can give us helpful insight into what a pricing strategy should look like.

Many listings have been getting multiple offers due to a shortage of housing inventory and the high demand we’ve experienced. Of course, the recent increase in interest rates may exclude some buyers who can no longer afford the payment.

This may reduce the number of buyers competing for a property and the multiple offers may decrease. This may put a damper on prices being driven up and we may see average sale price to list price ratios decrease to more realistic levels than where they have historically been in the 96% to 98% range.

6) Sale Price to List Price Ratio – The sale price to original list price ratio can be a measure of how accurate the pricing strategy for a listing was. That is if you are in a normal market.

The closer the final sale price is to its original list price the more accurate the pricing strategy is. If a house is priced accurately it should sell very close to its original list price.

If pricing does not take into account current sales activity the house may either be underpriced or overpriced. To be honest I believe that it is more likely that a home is overpriced than underpriced.

If it is overpriced then it will require multiple price reductions which will decrease the sale price to list price ratio. Of course, in today’s competitive market we are seeing the exact opposite.

Even if a home is priced accurately, the fact that we have limited inventory and a lot of motivated buyers, we are seeing the sale price to list price ratio exceed 100% of the list price because of multiple offers and escalation clauses being a part of the offer/contract process. Of course, we may start to see less of this as interest rates rise.

If the sale price to list price ratio is near 100% or above we know that we have a very strong seller’s market and pricing can be more aggressive. A lower sale price to original list price ratio would indicate the opposite.

7) Price Reductions – Price reductions can provide us with a quick picture of a shifting market. If we price a house using old data in an erratic market where we have increasing interest rates it may be necessary to decrease the list price.

If we see these reductions on a widespread basis it may indicate that the market is shifting from a seller’s market to more of a buyer’s market. Not that we are in that type of market but we may be heading in that direction.

If that is the case then you may want to be less aggressive in your pricing strategy, taking into consideration a possible decline in demand.

8) Months of Inventory – This is a measure of how many months’ supply of homes we have if no other new listings were taken on. It factors in the recent rate of sales activity over the past 12 months as well.

If you have strong buyer demand and homes are selling as soon as they are listed (sound familiar?) then this number will be low.

If demand cools off then the rate of sales will decline and the months of inventory will climb. Generally speaking, the different types of markets are broken down in three ways.

A seller’s market occurs when there is less than 3-4 months of inventory, a balanced market occurs when there is from 4 to 6 months of inventory, and a buyer’s market is from 7 months of inventory and greater.

Pricing a home by taking into consideration the months of inventory is wise because it gives you an idea of how much competition you have. These statistics are readily available from most local MLS systems.

9) Median Price Levels – The direction that median price levels are headed can tell us several things. For one, they can tell us that prices are increasing as a direct result of strong demand and limited inventory, both a good thing for sellers.

Of course, the opposite is also true. Declining median home prices can be a signal that demand is declining which is important to know if you want to accurately price a home.

The same can be said for median prices as was said regarding sales volume. It is important to know the context of the trend in median home prices.

If one month typically has fewer sales this may affect the median price depending on what price range the majority of sales occurred in. Comparing year-over-year numbers in addition to looking at month-to-month differences may give us a better understanding of what is occurring in the market.

Conclusion

In the end, it is never a good idea to limit ourselves to looking at only one statistic. We can gain a better understanding of what is currently happening in our local market by studying multiple trends because it paints a more complete picture.

If you have any questions on pricing a home or if you are in need of appraisal services feel free to contact me and as always thanks for reading.

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Comments

  1. Reminds me a what I used to tell sellers, “Price it where you think prices will be in 2 months.” That works well in both rising and falling markets (so you don’t chase prices down).

  2. The housing temperature has really changed lately. Lots of competition, but it’s not January and February 2022 any longer…

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