In a Down Market, Pricing Needs to Get Out Ahead of the Curve

In the book Shift: How Top Real Estate Agents Tackle Tough Times, author Gary Keller discusses the notion of “pricing ahead of the market.” Would-be sellers and their agents would do well to pay attention to his ideas.

The concept of pricing ahead of the market relies on the notion that the market (i.e. the prices at which homes sell) moves in a direction, up or down. Keller acknowledges that sometimes the market will be in a state of equilibrium, but it seldom remains there very long.

Consider pricing ahead of the market in an up market (i.e. prices are rising; it is a seller’s market). This was a common occurrence just a few years ago. If a neighbor’s home – as much like yours as is possible – sold for $300,000, that would presumably tell us that yours is worth $300,000. Now, what if you decided to put your house on the market? It is unlikely that you would have listed it for $300,000. In an “up” market, sellers are inclined to price themselves ahead of the market (above what their home is “worth”) because they don’t want to “leave money on the table.” You might have listed your home for $310,000 or $320,000. Many sellers did this a few years ago, and many got their price, sometimes even more.

In a rising market, buyers are frequently willing to pay more than they would if the market were static. This is because they think that prices will go up even more, and they don’t want to miss the opportunity.

What about a declining market? Here, sellers need to price their homes for less than – as best it can be determined at a given moment – what their property is worth. They need to be ahead of the market. Why? Because in this situation, buyers are worried about paying too much. If the market is declining, they don’t want to pay what a property is “worth” today, because they expect it will be worth less tomorrow.

Suppose you want to sell your stock in the ABC Corporation, which closed at $100 today, and the market is dropping. If you put in a sell order at $100 (what it is worth right now) and not a penny less, your stock won’t be purchased if it keeps dropping to, say, $95. But if it closes at $95, and you put in a “sell” at $95, you may go unsold the next day as it continues to drop. You may “chase” the market, but if it is truly in decline, you won’t get a sale until you offer to sell it “ahead” of the market (which could simply be an order to sell at market price).

There are importantly different consequences to failing to get ahead of the market depending on whether the market is going up or down. In an up market, if you don’t price ahead of the market, then you might not get as much as you could have. This may cause a bit of wailing and gnashing of teeth, but it hardly calls for sympathy. (Never regret making a profit.)

On the other hand, if you fail to get ahead of the market when the market is in decline, the consequence is not that you simply receive a lower price; the consequence is that you don’t get a sale at all.

Sellers are understandably fearful in a declining market that, if they did get ahead of the market (i.e. downward) they would then just receive offers even lower than their asking price. But this is where negotiations come in. The first order of business is always to have someone to negotiate with.

As we approach the spring season of 2009, sellers and their agents in many parts of the country need to take a hard look at the realities of the market place and the trends of the general economy. If they perceive the market to be heading downward, they had better get out ahead of it.

April 17, 2009; by Bob Hunt