Housing Prices & Seller Efficiency

July 16, 2009

by Scott Sambucci

4 comments

There’s an ongoing question about those “crazy sellers that always over-prices their homes.”  While there are anecdotal cases in every market of a seller asking waaaaay too much for their home, in aggregate the research shows otherwise.  Let’s look at the data for this Spring:

Altos-20 Price New Listings vs. Price Listings Absorbed

It’s clear that the overall median price of new homes entering the market is approximately 5-10% above the price of homes exiting the market each week.  This makes sense since sellers and their agents use recent sold activity and current contract/pending prices as a baseline measure of where to price homes entering the market.  “The house down the street just went into contract at $338K, so let’s price yours at $359k to see what we get…”

What’s interesting is watching the lockstep nature of the new listing prices each week as the prices of homes absorbed move up over the Spring.  (If you’re surprised to see that prices of absorbed properties are climbing since April, don’t be.  There’s been high volumes of transaction activity, particularly at the lower end of the market this Spring that’s yet to be captured by the S&P Case Shiller Index.  And while prices might be accelerating in the short-term, this doesn’t bode well for the market as move into the summer.  More on this in another article.)

Implications for Modeling the US Housing Market

Back in January, I attended the American Economic Association conference in San Francisco where Frank Heiland from Florida State University presented his paper, “How Well do Individuals Predict the Selling Prices of their Homes?,” which provides some evidence that sellers do indeed overshoot, but in aggregate may not be as far off from the final sales price as is generally thought. The positive implications of measuring this overshooting are significant when modeling the current real estate market.

The authors quantify this “seller vanity premium” (my choice of words) to a specific range. From the paper:

We find that homeowners, on average, overestimate the value of their properties by between 5% and 10%. More importantly, we are the first to establish a strong correlation between accuracy and the economic conditions at the time of the purchase of the property.

To restate the authors’ findings – sellers clearly have inflated price expectations in the estimated market values of their home, but those inflated expectations are 105-110% of the final sale price.

Real estate agents often come under fire for listing properties at the behest of sellers (i.e. “telling the sellers what they want to hear just to get the listing”), but even if agents opt to initially list a property at the sellers’ perceived value, it is a simple process to discount aggregate listing price levels by 5-10% to estimate the final future sales price by using the given list price. Additionally, given immediate visibility into the price of new listings entering and homes exiting the market, it provides a real-time outlook on where home prices are trending.

(This real-time real estate market analysis happens to be our specialty here at Altos Research.)

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