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Pricing a House in Today’s Real Estate Market

A question that I am often asked is how you correctly price a home in today’s rapidly evolving market. The word that comes to my mind first when thinking about pricing is compelling. If you are looking to sell a home anytime this year, I believe you must make the price so compelling that a buyer cannot pass it up.

The reason I feel so strongly on this point is because I believe house prices will continue to fall throughout this year and perhaps well into 2011. Why do I feel this way? Let’s break it down.

How will supply and demand impact house values?

The value of anything is determined by the ratio between the number of people who want to buy it and the number of items that are for sale. Real estate is no different. The reason prices skyrocketed in 2004-2006 was because there were more buyers than there were houses for sale. The reason prices are now falling is because the number of homes for sale outnumber the number of people ready, willing and able to buy homes at the current prices. And that gap is going to get wider. Let me explain.

The months’ supply of inventory (the number of homes for sale in a region divided by the number that sold last month) has always been a great indicator of future pricing. Below is a table that I have used throughout my 25 years in real estate:

Find out the months’ supply for your price point and/or neighborhood, and with relative certainty you can predict where prices are headed.

What is the months’ supply of homes currently in the country?

The months’ supply had been falling for several months and prices began to stabilize. However, now as more people are placing their homes on the market and the banks are beginning to release more of their foreclosures, inventory is starting to climb. We can see this in the following graph from Calculated Risk:

And with demand softening over the winter, the months’ supply is beginning to increase as can be seen in a graph below from Tom Iacono showing the months’ supply superimposed over the number of homes sold monthly.

What will happen as we go forward into 2010?

Demand will be strong for the next month as people try to get into contract before April 30 to capitalize on the Home Buyers’ Tax Credit. Most experts believe that demand will drop rather dramatically after that.

Supply will continue to build as more and more foreclosures and short sales come to market. How will this impact values?

The New York Times in an article earlier this week said:

A normal market has about six months of inventory. In 2008, the level hit a modern peak of over 11 months. If the many homes in the process of foreclosure make their way to market in the next few months, inventory levels could jump again, putting renewed pressure on prices.

Similarly, an article this week Housing Wire reported:

Paul Dales, an economist at Capital Economics, estimates another 5m to 6m homes will be foreclosed on, pushing the excess supply up to 21 months.

Demand will soften and supply will increase. When pricing anything we know this means prices will decrease. If the increased inventory is made up of distressed properties, which are sold at a 30-50% discount, prices could fall substantially.

What does this mean to you?

If you are thinking of selling anytime in the near future, waiting any longer is probably not a good idea. Make your price compelling, and sell now before demand slows and competing inventory grows.

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