Monday, December 01, 2008

The Dynamics of Real Estate Pricing

There are far too many dynamics that affect real estate pricing to discuss in one post of course. But one important one, time and again that we see, relates to price adjustments, how to make them, and when to make them.

Our experience shows that price adjustments are most effective:

  • early in the listing period; in other words, get the price right up front and price for the market you are in, not for the market you want to be in, and

  • in fewer, more dramatic increments to get a "bang" in the market, especially since any interested parties will be watching the property for significant movement, and also it takes a dramatic incremental move to expose the property to new price-point buyers in the market. $5,000 increments over time will accomplish little more than a slow ineffective leak in the price with little to no impact... resulting in a lower sale price and longer time on market.

This is of particular interest right now because of parallels with the larger discussion about the best size and scope of government responses to a slowing economy. While it is natural and correct to be concerned about future deficits, most economists seem to agree at this point that doing too little right now is a far greater risk than doing too much.

From the recent Nobel-winning economist Professor Paul Krugman this

The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn’t just a hypothetical argument: it’s exactly what happened in two important episodes in history.

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

This is remarkably parallel on a macro level to what happens when a property is on the real estate market. Incremental adjustments are fine when the market is on solid footing - sometimes small moves can be effective -- in tight markets. But as Joe Kernen on CNBC Squawk Box this morning keeps mentioning a very instructive quote from Barrons over the weekend: "Now is not the time for the Fed to act like a blushing virgin." Adds Kernen, "This is the time to be a big ol' hooker..." (See 1:40 mark for discussion of rescue size, 1:51 for quotes, and don't miss discussion of oil price impact/non-impact at 1:15 mark in video.)

In other words, in extraordinary market challenges, the markets require bold action, bold responses. This is a time to pull out all the stops, and leave everything on the road, including mixed metaphors.

Success in the market right now requires bold action, and it requires a recognition by sellers of the true nature of this market right now. Sellers who can adapt to current market conditions and offer appropriate market incentives, including price, will be today's winners in the market. Ironically, they will sell for more and they will sell faster, both of which bring the optimal financial outcome.

It is what it is right now. And no amount of clapping is going to make this a different market. Sellers ignore this at their own financial cost.