Wednesday, September 3, 2008

How Do You Price A House To Sell?

*December 1, 2008. The Cville/Albemarle inventory is currently at 18 months. Nationally, the number is 10 months. We'll update again soon.

*OCTOBER 2008: This Post was created before the current credit crisis turned into Bailouts, Bank failures, and a world wide crisis, before the stock market had its worst week ever, before the local offerings had risen to 15 months of inventory.

Sellers and Buyers should keep these elements in mind, as well as the current recession, when pricing or bidding on a house.

*UPDATED on SEPTEMBER 8: See below.

The big selling season of May-August is now a memory and the house hasn't sold. What do you do now?

Realtor/Blogger Jim Duncan of REALCentralVA notes "There are...2,550 properties currently on the market (almost exactly the same number as June of 2007)."

The first thing to do is accept that it's 2008. The market we have now is the market we're going to have for a long time.

So with such high volume, how does a property set itself apart for the buyer? Simple: Price.

Advice seen everywhere: What a seller "needs" to make on the house no longer matters.

And sellers also need to understand what makes buyers hesitant.

It's this: One third of owners who purchased in the past five years now owe more than the house is worth; 45% who purchased since 2006 now owe more than the house is worth, according to

Additionally, sellers need to understand why house prices are declining on a national basis.

The following are the basics about what makes
2008 a different market. The clickable links go to stories which explain the topics:

We've had the Subprime Crisis for a year now. Banks have already written down about $550 Billion (yes, that's a B) in mortgage losses. IndyMac went belly up in July due to mortgage losses--one of the largest banks ever to fail. Bear Stearns needed a bailout due to mortgage losses. And Fannie Mae and Freddie Mac, which own or back nearly half of of the 13 Trillion (that's a T) worth of US mortgages are on a deathwatch--an expected Bailout. Finance, Stock, and Economics sites and blogs have deathwatches going for Lehman, WaMu, and Wachovia.

The latest news? Prime mortgage foreclosures now exceed Subprime. This means that soon there are going to be even more properties on the market--auctions, short sales, etc. More inventory = lower prices.

Our area is not immune. Check out the New York Fed's Dynamic Map of Mortgage Conditions in the United States. Click on Virginia. The problem with Subprime--poor credit--and Alt-A (not stellar credit) loans in Virginia (as elsewhere) is that many of them are idiotic ARMs--Adjustable Rate Mortgages. These have lower rates typically for 1-5 years, then reset to a higher percentage. Default and Foreclosure come when the interest rate resets, and the owner can no longer afford the property. More houses on the market.

We're currently seeing the price of houses in Charlottesville/Albemarle back to the 2006 level. The reality is, there's no waiting out this market. We'll never, in our lifetime, see a real estate bubble like the one that just burst.

So take the advice of REALCentralVA's Sold Comps Now Matter Less:

"After analyzing...aspects and running the house through several different price analyses, then we decide whether and by how much, we need to undercut the competition. The market has changed." [our bolding]

These words were written in February, 2007 (even Jim Duncan is surprised at how long ago this post appeared).

Combine the above sage words with this analysis of national pricing trends, courtesy of CalculatedRISK:

"Real prices are now back to the Q4 2002 level (nominal prices are back to mid-2004)."


"With existing home inventory at record levels, and tighter lending standards, prices will probably continue to decline over the next few years - perhaps another 15% to 25% in real terms on a national basis."

CalculatedRISK is known to be eminently reliable--they haven't been wrong yet.


1. Get with your real estate agent.
2. Figure out what the Comps would have been in 2004.
3. Lower this number by 20%
4. Sit back and wait and soon you'll be Sold!

And we're not even charging a commission for this.

Of course, this is just a bubble opinion. You want the words of a professional. Be sure to go to REALCentralVA: "Posts With Enduring Interest - Just For Sellers." Lots of good info.

UPDATE: September 3. The Washington Post is running an article as part of their investigations series: The Housing Bubble, Still Burst. This article has numerous links about the current financial environment in the United States.

UPDATE: SEPTEMBER 8. Sellers should take into consideration the impact of the Fannie/Freddie Takeover on Buyers' Psychologies. Now more than ever buyers are aware of what's going on in the economy and plummeting housing values, as these are being covered relentlessly. This causes further hesitancy. While mortgage rates may fall to the mid 5's, housing prices will continue to correct. Why wouldn't a buyer wait at this point to see how much lower prices will go?

The current national average of inventory is 11.2 months; in Charlottesville/Albemarle area and environs, there is more than 14 months of inventory.

As of September 4, there are 2,567 properties on the market.

And of course, everybody but the Federal Government knows we're in a recession.


matt s. said...

Your "Easy Formula" is not bad as rule-of-thumbs go. The "Institute for Economic Reality" has more good ideas in their "House Valuation Workshop."

"As we like to say at the Institute For Economic Reality, the difference between a good home and a good investment is the price you pay for it. There are many good houses on the market, but we have yet to find a good investment.

For example, if we have a home that is located in a neighborhood where the median household income is around $75K (the Bainbridge median), and the home represents the median home, what would the value be? Let's say that it rents for $2100/mo, with property taxes of $3600/yr.

"Why is the rental rate important? Given that all but the truly clueless believe we have been in a credit bubble, and that bubble distorted the prices of things purchased with credit (homes), we should expect to see a difference between the bubble value (price), and the non-bubble value (rental value). This is because rents do not move up and down in a credit bubble, as easy credit terms are not available to renters like they are to home owners. Put in another way, you never heard advertisements on the radio, or TV that told renters that they could reduce their payments and get more house, with cash back, and no credit checks. These programs were only available to people that were buying or refinancing homes. Renters had to rely on good, old-fashioned income ratios to qualify for their leases, and the rates they pay reflect the true value of the property.

"After all, the only "dividend" the mortgage throws off is not having to "throw your money away on rent."

"The difference between the rental value and the price is the speculative premium. That is the amount of money that you are committing to attempt to capture a rising sales price of the home. Given the recent national obsession with the concept, it should be no wonder to people that people have committed lots and lots of money to chasing higher resale values."

Real C'ville - The Bubble Blog said...


As many bubble & economics blogs like to point out, lots of "owners" have merely been "renting from the bank."


And it leads to "Jingle Mail." Sending the keys back to the bank.

This formula isn't even as radical as it could be for this area....

trevor said...

seller should pay closing costs, no matter how low the sale price is.

Montpellier said...

Fantastic Post!