Affordable Housing Institute : US

With 2006 home prices flat or sliding slightly (as I and many others predicted), and amid all the resulting speculation over trends in home prices — everybody either has a home or wants a home, and everybody either wants to buy, to sell, or simply to be reassured she got a good price — I have become fascinated by why home prices are so resistant to the sudden drops experienced by other, more liquid asset classes, like stocks and bonds.  

 

Why don’t we see this more often?

 

Because the reality is, despite the constellations of pixels that die with grief because columnists bemoan the anticipatory market collapse, when a housing market cools, it is not a bubble bursting so much as a railcar coasting to a plateau, as we see in this breathless Boston Globe article:

 

Home sellers are learning what any retailer, from Wal-Mart to the owner of the corner gas station, already knows: Low prices are one of the surest ways to beat the competition.

 

Coldwell Banker Residential Brokerage, Massachusetts’ largest real estate firm with more than 3,500 agents, is coaching agents on how to persuade clients to list their homes at an asking price that undercuts those of comparable ones on the market.

 

Price below the competition?  Brilliant!!

 

The hope is low prices will attract more prospective buyers, leading to faster sales. Other real estate agents in the Boston area report success with similar strategies in a housing market with an unprecedented glut of properties for sale.

 

It’s not unprecedented, nor a glut — rather, it’s merely an unfamiliar surplus of houses.

 

Called “drama pricing” or “energy pricing,” it is a drastic measure for difficult times.

 

“You cannot be serious about that price!”

 

How drastic are the cuts?  To uncover the truth, we must hack through the hyperbole:

 

You think we can find the truth in that?

 

After Robert Picciano’s employer, EMC Corp., relocated him to Connecticut, he and his wife wanted to sell their two-bedroom condominium in Walpole. They estimated its value at $360,000.

But Coldwell Banker agent Robin Wish laid out the facts on how tough it would be to sell:

 

In mathematical terms, houses are a highly complex asset, with numerous dimensions of potential difference: financing environment, inflation environment, city, neighborhood, size, room number, room layout, current condition, amenities are nine that come readily to mind.  With multiple dimensions, perfect price comparisons are impossible — the variability overwhelms the sample size.  But when the apartments are identical, then price becomes the sole differentiator:

 

five other active condo listings in their complex — all 1,488 square feet, like Picciano’s — were on the market for $329,900 to $359,900.

 

Betcha can’t buy just one!

 

The key word above, boldfaced, is active.  With five to choose from, who can pick?

 

Paris had only three, and look what trouble he got himself into.

 

Wish suggested $342,500, slightly undercutting another two-bedroom with extras her clients didn’t have, a fireplace and extra bath.

 

“We were disappointed,” Jennifer Picciano, Robert’s wife, said.

 

Math timeout!

 

The price cut was — 4.9%. 

 

 

Five percent drops?  My goodness, sell the heirloom silverware!  Pawn grandmother Dilson’s antimacassars!  Prepare the battlements for the protracted siege.

 

Oh, wait — there wasn’t a siege:

 

Within four hours of their May open house, the couple received an offer at the asking price — within the week, a second offer, slightly smaller, came in.

 

In an earlier post, I speculated about five reasons home prices resist sudden drops — dimensionality, buyer inexperience, consumability, psychological security, and the appreciation baseline.  [To enjoy these AHI-exclusive terms properly, click here. — Ed.]

 

Here’s one of them:

 

1.  Psychological security: everybody wants to own her own home.  Demand very seldom disappears entirely, rather it retreats to the sidelines, waiting for what it perceives as a bargain.

 

We’re just waiting for bargains.

 

The Piccianos’ experience is quite representative:

 

“It’s another indication that it’s clearly a buyers’ market,” said Timothy Warren Jr., chief executive of The Warren Group, a Boston real estate research and publishing firm that tracks the market. “There’s a lot of stuff on the market, and it’s going to have downward pressure on prices.”

 

The median price of a single-family house in Massachusetts has declined 4% over the past year, to $331,000 in May, and sales volume has fallen five consecutive months.

 

A 5% drop is equivalent to today’s Dow Jones stock market dropping five hundred points. 

 

 

The Dow dropped that much in the last two months — did we hear talk of market panic?

 

Any of you fellows picked your window to jump from yet?

 

The traditional strategy of incremental reductions in asking prices can frustrate sellers because properties grow stale and buyers lose interest. In 2005 and 2006, prices were reduced on nearly half of all homes listed in eastern Massachusetts from Jan. 1 through July 12, up from 41% during the same period in 2004, according to MLS Property Information Network, the primary database for realtor listings. Yet, a house sits, on average, on the market 97 days, up from 85 days in 2004.

 

As anyone knows who’s ever sold or bought a house in New England, summer is among the worst times to sell a house: buyers move in early spring and mid-fall, curiously not much in summer.  July and August are particularly torpid.

 

Not selling houses amid scorching heat and humidity? Brilliant!!

 

Another reason home prices don’t plummet:

 

2.  Dimensionality: houses have many elements of potential uniqueness.  With their multidimensionality, houses are personal, so the buying decision is heavily influenced by emotion, and because home buyers are by definition amateurs (unlike their professionals and their brokers):

 

Janice Hoffman created a buzz in Cambridge by using drama pricing to sell an eight-room Victorian, which sold for $185,000 above the $1.1 million asking price.  [17% above — Ed.]  How so? She attracted 130 people to the April 9 open house because the asking price was at the low end of similar houses in the Cambridge market. Her client received nine offers that ignited a bidding war.

 

Prices should be set “so that people who can afford it will step up,” said Hoffman, an agent for William Raveis Real Estate in Newton.

 

Price low and encourage people to bid up? Brilliant!!

 

A third reason:

 

3.  Buyer inexperience: comparison alternatives are obscure.  Few people are facile with buying and selling homes; most of us do it once a decade, if that.  Lack of practice brings the emotions into play, the more so given houses’ multi-dimensionality.  It’s all about the image:

 

Buyers are “overloaded” with options and “only respond when they see a perception of value,” said Angela Stamoulos, who teaches Coldwell Banker’s course on this pricing technique, which the firm rolled out this spring in Connecticut and last month in Massachusetts.

 

Kathleen Horigan prepared her North Attleborough home for prospective buyers. She also threw in a $3,000 gasoline gift card as an incentive. (Janet Knott/ Globe Staff)

 

Offer free gas? Brilliant!!

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