Price Versus Time on the Market

Every seller wants the same thing—the highest price in the shortest amount of time. But what is the relationship between getting the highest price obtainable and the market time necessary to achieve it?

The short answer: In any market segment, it’s competition for the next best property (all things considered) that drives the price and shortens the marketing time.

However, the relationship between time and money is a complicated subject. The devil is in the details for many reasons we’ll review below. To really understand this relationship, we need to start simple with a working definition of market value.

MARKET VALUE is what a buyer will pay in an arms length transaction. Put another way, people buy by comparison–cars, toasters, houses, spouses!

MARKET VALUE IS NOT INTRINSIC: In other words, it has little to do with inherent cost, or what a seller paid originally—the premium they may have paid for the lot, or what improvements they may have made on a cost basis. In the world of residential resale, that premium lot will frequently not have the same ‘market value’ as what it cost; and the cost of improvements rarely translate to a dollar-for-dollar return on investment.

MARKET DYNAMICS (COMPETITION): At any given moment in time, in any given market segment there is a group of ready, willing and able buyers looking for the best value.

To the extent that there is competition for the best properties, the greatest activity is most often the early activity. 

TIME AND ACTIVITY — THE HOVERERS: In residential real estate we hear the old adage ‘time is of the essence.

Price versus Market Time

However, in truth, time is the enemy. We see this in the Activity Graph (right), where the activity is heavily skewed to when a property first comes to market. These buyers are ‘the hoverers’—buyers who have come to understand there is always competition for the best. When sellers miss those ‘hovering’ present-time buyers (through over-pricing), they miss the best opportunity to get the highest price through ‘competitive positioning.’

At the other end of this Activity versus Time spectrum there is the phenomenon we call ‘market worn’ (the perception that a property has been on the market ‘too long’). Properties that are perceived as market worn are deemed to have something wrong with them, begging for low offers.

MARKET WORN: We can refine our working definition of market worn by saying any time a property gets much beyond the average days on market for that market segment it may be fairly perceived as market worn.

It is in the sellers best interest to ‘competitively position’ their property to avoid becoming market worn.

However, becoming market worn is relative. $200 homes have a larger pool of ready, willing and able buyers than $2,000,000 homes. Average market time is affected accordingly showing up in what we call the # of month supply.

# OF MONTH SUPPLY: The number of months of available inventory that can be projected based on the current pace of sales (absorption rate). The current # of available listed properties divided by the pace of sales (average # of sales per month) equals the # of month supply e.g. 25 available (and comparable) homes selling at a pace of 5 per month equals a 5-month supply.

Today there is only a 1 to 2-month supply of $100K to $300K homes in the Valley. By contrast there is a 6-month supply of $800K to $1M homes (6-months is considered a balanced market). But it’s a different story in the $2M-plus market, where there is a 20-month supply; and over a 3-year supply when we look at the luxury market over $3M.

There can be no doubt that price range and # of month supply are generally correlated—the higher the price the longer the marketing time (and visa versa). Having said that we find that even new-to-market $2M homes can generate multiple offers when competitively positioned!

Clearly establishing the relationship between price and market time is complicated by a host of factors.

OTHER FACTORS: For example, just as there are fewer qualified buyers for more expensive homes, there are fewer buyers for homes in any price range where there are factors that shrink the pool of otherwise qualified buyers—issues of condition, location, architecture, floor plan, busy street, over-improvement, largest home in the neighborhood and the list goes on.

REALTY REALITY: As the ‘target market’ (of qualified buyers) shrinks, the market time lengthens.

With all deficiencies or factors that limit demand there is always one remedy…price. Lowering the price expands demand, shortening the marketing time.

SUCCESS RATE: Not every seller is willing or able to price to sell. In today’s market, for example, over 75% of properties listed under $2M sell. Over $2M it drops to about 50%. In the luxury sector the resistance to pricing at market value is painfully obvious. Even so, sales prices in upscale communities like Paradise Valley are off about 45% from their peak.

TRADING RANGE: Yet another factor not fully understood or appreciated is theefficiency of the real estate market. Homes ‘trade’ within a narrow range. The industry calls it the list-to-sales-price ratio—meaning the average percent sellers negotiate down from the listing price at time of sale. We can call it the trading range—the identifiable range in which properties in any given market segment sell.

What’s not fully appreciated about the trading range is that it is narrow—generally in the 2 to 5% range. This is true good market or bad and generally across all price ranges, though the higher price ranges will frequently have a wider trading range of 8 to 12%.

TYPICAL SCENARIO: The marketing process often goes like this: A property is listed for sale. It doesn’t get a lot of attention evidencing it is priced too high. Over time the seller reduces the price and reduces the price until the property falls within the sweet spot of the trading range. In that sweet spot buyers are attracted and offers are generated. The trading range can be identified for any home in any market segment.

Most professional REALTORS know how to identify the trading range. Most sellers resist.

The irony is that when properties are priced within the trading range from the beginning they sell for a higher price as they avoid becoming market worn. Clearly, there is less incentive for sellers to reduce their price early on and again, it’s competition for the next best house in any given market segment that drives the price and shortens the market time.

STRATEGY: Since there is the fear of ‘leaving money on the table,’ a common alternative strategy for getting top dollar without becoming market worn is to ‘test’ the market above the known trading range with a set plan to reduce the price within a short time period if the property doesn’t get activity. This strategy can be effective in avoiding becoming market worn while satisfying the seller they’ve tested the limits of demand.

This is an especially common and perhaps justifiable strategy with luxury custom homes. Their higher price-point means a reduced pool of qualified buyers, making initial market time less of a factor when the average days on market is often more than a year. Then there is the fact that by definition custom homes may be difficult to find comparable sales or active competition. Those ‘special’ properties require finding that ‘special’ buyer who appreciates the value AND can afford it. Of course what every REALTOR will tell you is that pretty much all sellers at all price points feel their home is ‘special!’ Home is where the heart is.

MARKET TRENDS: Then there is the variable of market direction or trend. Are prices trending up or down? This is something that is frequently misinterpreted with the broad brush of statistics. For example, today we find the lower-end (under $400K) on fire (trending up). Mid-range home prices are recovering. High-end home prices are still soft.  The broad brush is misleading.

SUPPLY AND DEMAND: Embedded in the trend are the dynamics of supply and demand. For example, the explanation for the low-end on fire is simply too many buyers (demand) chasing too few available properties (supply). Investors with cash have fueled 25% of the lower-end activity. In the luxury sector, the supply has been trending down as well, but with more tepid demand.

INVENTORY CRISIS: An interesting consequence of the limited and shrinking supply of homes for sale is that year-over-year sales are off 20% in the Valley—not because of lack of demand, but lack of supply. Paradise Valley’s inventory is off a third from 2-years ago. Valley-wide inventory is down by half from 2-years ago.

IN SUM to our original query, is there a correlation between price and marketing time? Absolutely. Time is the enemy. As we have shown however, there are a host of factors to consider and manage in the quest for getting top dollar in the shortest amount of time. One clear take-away for would-be sellers:

It takes a market specialist to decode and navigate the ebb and flow of Price versus Marketing Time distinctions.

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