In early March it was becoming clear that the market was changing from a frenzied post-pandemic scene to one where rising mortgage rates would slow it down and help inventory finally rise back up. Now, months later, with rates up nearly 100% from the start of the year- January mortgage rates were hovering in the low to mid 3’s and this week reached 6.28%- diminished buyer affordability is causing a big downshift in demand.
For the past few years, with inventory at historically low levels, sellers were coming pretty close to naming their price and buyers were paying. Rising prices weren’t favorable but with historically low mortgage rates, they were still affordable for buyers. The low rates made it possible to offer more on a home as the cost of borrowing was lower and therefore, sellers weren’t the ones competing, buyers were. Homes were selling for well above list prices due to multiple offers, so sellers were not in the position to have to adjust prices to attract buyers.
As you can see in the chart below, the red line indicates that 2022 began with the highest absorption rate of available inventory in the past 4 years but over the past 8 weeks has dropped to right around the same rate or lower than last year and we expect it to be going down more. That’s because fewer homes are being placed under contract. This was covered by Anthony Lamacchia and Gene Lavanchy on Boston 25, click here to watch.
As well, the chart below indicates that the number of homes for sale every Saturday has been lower every year since the pandemic. But this year’s red line has now reached last year’s levels and is projected to continue the upward trend from here on out. This is another sign of continually rising inventory, therefore increased buyer selection; and sellers with less control over the market as they have had over the past few years.
Due to this rapid recent shift, most homes are not seeing nearly as much demand and those who price too high are seeing their homes sit on the market longer than they did even a month ago, which is expected given that some buyers have found the homes they were looking for in the winter and early spring, or some buyers have pulled out of the race due to higher rates and lower affordability. As a result, there’s less demand for the available inventory, creating more price adjustments. Price adjustments/decreases were up across the country in May. In Massachusetts, we saw a 50% increase in them over the prior 6 Mays back to 2017.
In the graphic to the right, you can see this clearly. It’s a sellers’ market in the beginning of the year with lower inventory than the number of buyers, but by summer, the number of buyers drops below the number of sellers, and it therefore becomes a buyers’ market. Sellers then become the ones who need to compete and we are seeing early signs of this happening with a lot more in the months to come. We have been telling buyers for years now that there is a cost of waiting to buy; prices have continued to rise, and rates couldn’t possibly stay at the historic lows we were seeing. Here we are.
The same will be true for sellers. There will be a cost of waiting to sell now that the tides have turned. Right now, rates are still lower than they are predicted to be by the end of the year, and inventory is still low giving sellers more of an upper hand. As the year progresses, inventory will rise as more sellers will list and fewer buyers compete for homes, rates will rise and fewer buyers will be able to afford what they want, and sellers will then be the ones to compete. How do sellers compete? By creating demand with accurate pricing and aggressive marketing. And if their home is placed on the market with a high list price? It will sit and a price adjustment will be the first step in attracting more buyers. Watch this video that Anthony recently filmed for sellers in this new market, click here.
June has historically been when we see the first peak in price adjustments, with the largest number generally occurring in the fall. 2018 and 2019 depict the paths of what was a ‘typical’ market prior to the pandemic. 2020 and 2021 did see slight hills and valleys but nothing as intense as the years prior. The 2022 trend line is likely to mirror that of 2019, albeit at a lower scale, but with peaks in June and later in the fall.
It comes with a negative stigma for sellers to hear that a price adjustment is recommended. But if the home has been available long enough, it’s time to consider adjusting the list price to gain more visibility from more potential buyers. You can already see that May of 2022 has a higher percentage of active inventory with price adjustments than the five years prior. See chart below.
An experienced REALTOR® will make it very clear from the beginning that pricing right is the key to selling faster and for more money. But even with all the data at hand, determining the exact price isn’t always easy, especially in a shifting market like we have seen since the beginning of the year. There are factors such as comparative active properties, recently sold properties in your area, condition of the property, and current market conditions to take into consideration when pricing a home. Even if the home is priced appropriately, the market could shift quicker than anticipated and a price adjustment may be the next best step. As well, looking at a home in which the offer was accepted in January will not have a comparable list price to a similar home listed now as inventory is higher and demand is lower. Demand is what drives prices.
How do you know your house is overpriced?
1. Your home is priced much higher than properties in your area
Your REALTOR® will complete a comparative market analysis of the homes sold in your area in the 2-3 months. This is a common method to determine the target price range for your home. Neighborhood homes are valued relatively close to one another if their size and condition are relatively similar. If you price your home even $50K over the rest, your home may be overlooked. This is a strong sign that a price adjustment is in order.
2. Infrequent showing requests
The first thing that buyers see when they browse homes for sale besides pictures, is the list price. If that price doesn’t reflect the images of the home and the area, they’re not going to bother to come see it. If you don’t have any requests for showings and if an open house yields an underwhelming crowd, you should review your list price and lower it to attract more buyers. Remember, buyers determine what they can afford based on what their monthly payment will be, not the total mortgage so as a seller it helps to get a sense of what a buyer will have to spend every month to own your home.
3. A few weeks go by without an offer
Due to the inventory levels this past winter and spring, many homes sold for over asking in multiple offer situations. If your home has been on the market without any strong offers, it may not be priced correctly. In typical real estate markets, a seller should receive at least one offer within the first two weeks of listing the home. If three weeks go by, contact your REALTOR® to discuss an adjustment on the list price.
4. You hired the agent who recommended the highest price
It’s not necessarily wise to go with the REALTOR® who said to list your home for the highest number. That could be a sign that they’re not fully understanding the market in your area and that they may underdeliver. Make sure you fully grasp why your REALTOR® suggests the price that they do by asking them to show you comps in your area that have sold recently and that are currently active on the market. If their price is outlying the comps, you’re risking the loss of a fast and strong sell price.
When should you adjust the price?
If you’re questioning whether it’s time to adjust, then it’s time to adjust. If three weeks go by without a strong offer or a decent response to the listing, adjust the price. There’s no sense in delaying the inevitable and the sooner that you attract more buyers, the sooner you’re likely to receive requests for showings and offers.
How much do you adjust the price?
Lamacchia Realty has been selling homes since 2005 and tracking data to develop an effective model on pricing homes. The Lamacchia Realty Target Pricing Model has been implemented in the selling process since 2007.
Despite an earnest attempt at correctly pricing at the start, adjustments may have to be made on the list price to attract more interested buyers, as previously explained. You’ll see in the graphic below how to determine the level of reduction that needs to be made.
You can see that if you accurately priced your home, you are in the bullseye and receiving strong offers. If not, the areas around the bullseye will tell you roughly how much of an adjustment is recommended.
Get Your Price on Target
- If your home is receiving showings but no offers, somewhere between a 3-5% adjustment should be made.
- If you’re receiving a small number of showings and only some drive ups, you probably need somewhere between a 6-11% adjustment.
- Not getting any showings at all is a red flag that at least a 12% adjustment is necessary. When this happens, sellers are usually the most hesitant to adjust because they just cannot believe no one has even come out to see the house.
There are factors and variables involved in a price adjustment that your experienced REALTOR® will be able to review with you.
Consider the Price Brackets
Along with comps and the Target Pricing Model, price brackets are a helpful tool to use when adjusting the price of your home. Simply put, lowering your price to the next bracket will expose your home to those people searching within that next price range.
Real estate websites set up their property search tools with price brackets. The person searching for a home will select the area, the number of beds, baths and as well, their price range. If your home is currently listed at $475,000, everyone searching for homes in the $450K to $500K range will see it, but you’re missing every person searching for homes under $450K.
The limitation with only following the Target Pricing Model is that if you are on the market at $429,000 and you adjust your price by say 5%, you will end up at an adjusted price of $407,550. If that is what the target pricing model calls for you can do it but in this case, it would be a lot smarter to shift down to $400,000 so that you can reach new buyers. Your home will fall into two brackets, the $350K to $400K as well as the $400K to $450K, if they’re in $50K increments. Although you’re listing for $7,550 less, you may receive multiple offers which could develop a bidding war. Bidding wars generally get homes sold for over asking, so you could theoretically make that money up in the end.
To illustrate this scenario, we went into MLS and utilized the “Marketing Overview” feature which tells you how many additional matches you will receive from lowering the price.
From the image below, if the current list price of $475,000 was reduced by 5%, the new price would be $451,250. In the red text, you’ll see that by this reduction, the sellers will attract 70 more people. Please also note that the home will remain in its current bracket of $450K to $500K.
From this image below, however, you’ll see that if the current list price of $475K was reduced $1,250 more than that initial 5% reduction, the seller’s home would attract almost 400 buyers! For that small amount of money, 323 additional people will be reached than if the reduction was limited strictly to 5% which attracted just 70. Now, this home is in two price brackets, the $400K to $450K as well as the $450K to $500K.
When a listing in MLS has a price change, agents are notified as well as buyers with saved searches that match the home’s criteria. If the listing in this example actually changed their price to $450,000, 393 active buyers would be notified that this home is available to be purchased as well as agents. This is an incredibly effective way to gain interest in a listing that has otherwise sat on the market without much of a response.
In the book Zillow Talk by Spencer Rascoff and Stan Humphries Chapter 15 talks about Pricing. One of the points they make is about price adjustments. They say “If you overprice it’s better to admit your mistake and cut the price all the way down to the true market value in one fell swoop.” They are right.
Sellers tend to see a lot of value in their home and lowering the list price can feel as if they are telling people that the home is less valuable. That is an emotional response to a business transaction, and although understandable, it’s not going to achieve the bottom line of selling the home for as much money as possible.
The shift in this market due to rising mortgage rates and diminished buyer demand will undoubtedly call sellers to focus a little more on what their list price is. If you are a seller who is at the point where buyers aren’t biting, lowering the price is the fastest way to attract buyers and more demand.
As mentioned in our previous blog, there are 5 considerations when pricing a home. Exploring comparative sold properties, the market climate when those comps were sold, comparative active properties, the current inventory, and the current market. Even if the seller and their experienced agent do their best to price well, it may become evident that an adjustment is in order after a few weeks. Using the target pricing model and revisiting those 5 considerations along with paying attention to the price bracketing will help refocus that target price and get your home sold.