Price reductions are starting to appear more frequently. Yet, seller expectations around listing price have not caught up with the current market. Last month, more than 75% of metro areas across the U.S. have seen price reductions on at least 25% of the houses on the market, and three major metro areas saw price drops for over 50% of homes for sale.
These price drops are happening largely because sellers are still basing their prices on market conditions from the recent past.
You need to know exactly how to explain to a seller why their house won’t sell when their neighbor’s house flew off the market at the same price just a few months ago.
It’s not a fun conversation to have. But the alternatives are bolting or changing the subject whenever the seller asks, “Where’d all the buyers go?” and “Do we have any offers yet?”
There’s a better way.
Seller expectations around listing prices—where do they come from?
A lot of sellers have an idea of how much they can expect to make from the sale of their property. Right now, that number isn’t always reasonable.
After all, people they know have sold comparable houses for as much as they’re asking or more. So, why haven’t they gotten 20 offers over asking price?
As an agent, you need to know what’s happening and how to present that information to sellers with disappointed expectations. Because those expectations didn’t come from nowhere.
For much of the past two years, buyers have been pouncing on houses, making bids that were tens of thousands of dollars over the asking price. It wasn’t a dream.
With mortgage rates nearly double what they were a year ago, the monthly mortgage payment on the median home price has gone up by more than 47%, pricing many would-be buyers out of the market.
Your job is to look for the opportunities this holds for sellers (as well as buyers). It’s not all doom and gloom.
Do your research
As a real estate professional, you should know about interest rates and the median home prices specific to your area and your target audience.
Based on up-to-date market data, have a preliminary understanding of what your buyers can afford and what your sellers can expect.
Sharing this information during your first meeting helps the seller understand the shifting market. Better yet, sharing this information on social media gives consumers a glimpse of what they can expect—before the listing appointment.
The sooner they know, the sooner they can adjust their expectations and price to attract buyers.
Don’t shy away from difficult conversations
Telling a seller their asking price is too high is one of those conversations no agent looks forward to having with a client.
You want your seller to be glad they decided to do business with you. And, depending on the seller, this conversation could spell the end of your working relationship.
That said, having conversations like these is a skill every real estate leader needs to learn and transfer to their team.
So, what should these conversations cover?
- The hard data showing the change in market conditions over the past year (or so)
- The impact of rising mortgage rates and housing prices on buyer demand
- The cost of pricing too high
- The advantages of pricing at or below market (from the start)
This is not the time to worry that the seller will accuse you of being in cahoots with a buyer—or using real estate jargon to cover up your mediocre agent skills. Leave the ego out of this.
Sellers need to know how today’s market impacts their sale.
Explain the drop in housing prices
As we discussed in a recent Walk Thru episode, the biggest factor behind the apparent drop in housing prices is the fallout from sellers not realizing the impact of market conditions on buying power and setting their prices too high.
It’s not that their properties are worth less now; it’s that buyers can’t afford to pay as much.
Even with price reductions in many areas, property values, on the whole, are increasing. The issue is sellers continue to think listing prices will continue to jump exponentially, when in fact, appreciation has slowed. The number of price adjustments will likely decrease as sellers set more realistic prices from the beginning.
That’s where you come in.
Show the shifting market’s impact on buyer demand
Hard data on rising inflation rates and mortgage rates is not hard to find. And both those rates have a measurable impact on a buyer’s spending power.
Buyers earning the same amount two years ago could afford to bid more on a house, knowing they could afford the monthly mortgage. But with mortgage interest rates nearly doubled since the beginning of this year, monthly payments are up 47.6%.
Add the steadily rising cost of home prices, and buyers are faced with fewer choices that fit their current budget.
To attract more buyers, sellers must understand how much inflation and mortgage rates influence buying power.
Spell out the cost of pricing too high
When a seller sets their price too high, some of the costs are obvious enough. For one, their house sits on the market far longer than was normal a few months ago.
Eventually, they realize houses in their area are selling at lower prices, so they adjust their asking price accordingly.
When offers do start coming in, there are fewer than the seller expected.
And they’re going to ask you, their agent, why their neighbor, whose house was no better than theirs, had several offers, most of them over asking, when they’ve got a handful offering the base price or, at most, a little over that.
The sooner you make the situation clear for them, the less stressful this will be for everyone.
Highlight the advantages of ‘just right’ pricing
If sellers are willing to price according to today’s market, they’ll likely attract more buyers, who could then start a bidding war, driving the price up.
We’re not saying you should encourage sellers to put their home up for sale for less than it is worth, but talk to them about the prices comparable homes are selling for in their area within the last couple of weeks. Going even three months back in your comps could give the wrong impression.
Redfin economists encourage sellers to price their homes slightly lower than comparable homes in the area to drum up interest and avoid price drops.
It’s a lot more fun to see your house sell for more than you expected at the outset.
What are you doing right now?
Most buyers are already painfully aware of their reduced buying power. They’ve probably talked to a mortgage lender who has spelled out their monthly mortgage if they buy a home in a certain price range.
With sellers, though, it’s different. Many are inclined to price their homes based on numbers they’ve heard from transactions made earlier this year. How could the market change so much?
You can help clear up the confusion and help them attract more offers. The more buyers they can attract, the more they will get for their property.
What are you doing now to help set seller expectations around listing price? And what will you do this week to further educate yourself—and your clients?