Wednesday, May 31, 2017

Pricing is an Art

I've been writing a lot about pricing--signs of a changing market, appraisal issues, the importance of the first two weeks, and other aspects--but I still feel that there is more to say about this critical piece of the real estate market.  It would be nice if there were a formula to apply, that would spit out the correct number every time.  However, the pricing of property is more an art than a science, for a plethora of reasons.

First of all, nothing about real estate is static.  Things are constantly changing, from stock prices and political fortunes (which do affect real estate) to tastes and preferences among buyers.  In the same way that a video can go viral, a trend can suddenly take off (or end), leaving in its wake all kinds of now outdated homes. Even towns and neighborhoods become trendy or not, and make pricing differences apparent from place to place. In the realm of changes, an election can cast a big shadow, be it local or national, with people waiting for resolution before making decisions.

Interest rates deserve their own paragraph, since they play such a big role in what buyers can afford.  They have ranged from low single digits to almost 20% during the course of the last thirty years or so.  Many buyers, probably most buyers, look at the monthly payments more than the actual price of the home, since that's the true measure of what they can afford.  Strangely, though, more buyers pull the trigger on a purchase as interest rates are rising, than when they are falling, because the rise creates a sense of urgency. 

Demographics also factor into the equation.  Millennials have lagged behind their parents and grandparents in the buying of homes, but they are out in full force now.  They waited longer to get married, longer to have kids, and they owe more in student debt, so it has taken them more time to get around to buying property.  For a long time, we believed that they never would, but that seems to have changed. That increases demand, which affects prices.

Values in other markets come into play when we consider relocating transferees.  Those coming into our market may be coming from places with hotter markets, or higher prices, which inevitably influences what they will pay.  This is especially true if they sold a house in a booming economy somewhere else, and for tax reasons or otherwise, they want to reinvest that same amount here.  It's a good example of the old saying:  "The property is worth what you are willing to pay for it". 

Conversely, people relocating within our region may be faced with a decline in the value of their current properties, and may not be able to spend on a new home what they thought they could.  That puts pricing pressure on in the opposite direction.  In addition, the average person spends double the time between purchases (eight years) than he/she used to do, so that dampens demand as well.

Finally, when is the spring market?  As the world changes, and more households are not tied to a school year move, and more families spend time apart before rejoining forces in a new location after a job change, the traditional spring selling season is less certain.  Weather definitely plays a role, whether it be snow lasting into the spring, or even a rainy month (think this month!).  Often the "spring market" lasts longer, and in 2016, we saw that occurring, with the market staying strong into early August. 

All of this together gives you an idea of what goes into a pricing recommendation.  In the past few weeks, we've seen prices lowered at the last minute before listing, and we've seen others raised.  We've seen many more price reductions within the first month on the market than we used to see, and we've seen some homes fly off the market and others not even get shown. We may bring in a high offer, only to have the home not appraise, which in many price ranges effectively means that it can't sell at that price.  Sometimes we are sure we are correct, and sometimes we have our fingers crossed.  Connecticut is harder to predict than other places, since we are in our own "bad economy" bubble, but other markets can face these uncertainties as well.  Much as a doctor may not know which procedure will be best for an individual patient, or a financial advisor can find his or her stock picks having unexpected outcomes, professionals of all stripes have to offer advice with imperfect knowledge.  So we go forward, together with our clients, combining hope and trepidation, into an evolving market in 2017.