Selling a Home in a Slow Market

When the number of unsold homes increases, that's a sure sign of a slow real estate market. Buyers might have a wide selection from which to choose, but what if you're trying to sell your home in a slow market? There's a lot of money at stake when you're selling your home, so it's important to understand just how much an unsold home can cost you.

In this publication, we're going to look at the economics and dynamics that occur when the real estate market slows to a crawl. As part of that discussion, we'll talk about the law of supply and demand, and how that can affect the selling price of a home. We'll also talk about the opportunity cost you're losing when a home goes unsold for an extended period of time. Finally, we'll talk about some of the tactics you can take to ensure you're getting a fair price for your home.

Selling Homes

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We're going to start this discussion by making a couple of simplifying assumptions. The first has to do with market efficiency, while the second deals with future prices:

Market Efficiency - the real estate market is not as efficient as the stock market. Some buyers may undervalue a home, while others may place too high a value on the home. But it's reasonable to assume that there is enough information about the homes in a given area to make the market fairly efficient.
Future Prices - the random walk hypothesis states that future prices will not follow a pattern or trend, and that past performance cannot be used to predict future prices. So an uptick in home prices following a slump doesn't mean home prices are going to start to rise; they could just as easily go lower.

Real Estate Markets

These two underlying assumptions are important to understand. Market efficiency is important because it means that if a home is not selling quickly, then it's very likely that the asking price is too high. For example, let's say a seller believes their home should sell for $750,000 but the home is not sold after seven months on the market. In this example, it's very likely the asking price for the home is too high.

If the seller were to lower the asking price to $1, then it's very likely they would be immediately flooded with offers to buy the home. Obviously, selling the home for $1 is too low. In this example, we can safely make the assumption the home should be priced somewhere between $750,000 and $1.

Logically, we can conclude that when a home is priced correctly in a given market, there will be a sufficient number of buyers interested in the property (demand equals supply at a given price). If activity is too slow, then the home is priced too high. If activity is too robust, then the home is priced too low.

Future Real Estate Prices

As is the case with stock prices, market analysts (in this case real estate agents) will often try to convince their clients that they know which direction the market is heading. Burton G. Malkiel, an economist, professor at Princeton University, and the author of A Random Walk Down Wall Street, dispelled the myth that individuals are able to predict the future based on historical trends.

Based on the findings of professor Malkiel, as well as those of other studies, we're going to assume that even in a slow market, no one can accurately predict when a housing market will finally turn around.

Slow Real Estate Markets

During the Great Recession of 2008 / 2009, home prices plummeted. According to the U.S. Department of Housing and Urban Development, the average selling price of a new home in 2007 was $313,600, while the average price of a new home sold in 2009 was $270,400. In 2006, the median number of months to sell a new home was 4.3; while in 2009, the median number of months to sell a new home was 13.9. There was no doubt in anyone's mind that 2009 was a slow real estate market, and the data proves it too.

Unfortunately, when prices decline, sellers often place too much emphasis on how much their home was worth before the market slowed down. Psychologically, sellers have a tough time coming to the realization that their home is worth less, and they cling to the hope of finding a buyer - even if the home is priced out of the market.

Carrying Costs

Experts generally state that an unsold home has a carrying cost of around 1% of the home's value each month. That is to say, each month that a home goes unsold, it costs the owner around 1% of the home's value. That seems like a lot of money - let's put this theory to the test.
We can use information gathered by the Census Bureau's American Housing Survey. We'll use the 2005 survey results in this example, but the same results should hold true regardless of the year.

The results of that survey demonstrated that on average each home cost:

Real Estate Taxes - $127 per month or $1,524 per year
Mortgage Payments - $767 (principal and interest) per month or $9,204 per year
Property Insurance - $52 per month or $624 per year
Electricity - $71 per month or $852 per year
Natural Gas - $71 per month or $852 per year
Fuel Oil - $104 per month or $1,248 per year
Drinking Water - $35 per month or $420 per year
Trash / Garbage Disposal - $19 per month or $228 per year
Routine Maintenance - $27 per month or $324 per year

In this same survey, the typical home cost was $165,344. Adding the above numbers we can conclude that owning a home costs the average American $1,169 per month or $14,028 each year. That works out to about 8.5% of the home's value per year, or 0.7% each month. That's pretty close to 1%. Of course the above costs would grow or shrink with the size of the home, so this example should hold true regardless of the home's value.

Fair Home Prices in Slow Markets

We're going to finish this topic with some tips to help ensure you're getting a fair price for your home - even in a slow real estate market. The first tip goes back to your emotions. Forget about what your home was worth in the past, you need to focus on what the market will pay for the home today.

You'll also need to check out the competition. Set aside some time over a weekend or two and visit local open houses. Take notes, and compare the selling prices of those homes, as well as the features they offer, with your home and the asking price you have in mind. With this information, you should be able to determine the fair price for your home.

Next, you should figure out how long it's taking to sell a home in your local market. This is accomplished with two data points that any reputable real estate agent can provide: the total number of homes for sale in your market (however it's defined), and the number of homes sold in that exact same market. With these two data points, you can determine the average time it's taking to sell a home in your area.

For example, let's assume your local market has 1,200 homes currently for sale, and last month 140 homes were sold. At that same pace, it would take 1,200 / 140, or 8.6 months to sell a home.

If you decide to price your home the same way everyone is currently pricing their homes, then it's probably going to take you around nine months to sell your home. At a carrying cost of 1.0% per month, it's going to cost you nearly 9% of the home's value over that timeframe. If you want to sell your home faster, then you'll need to price your home more aggressively.

Finally, you should take into consideration that certain times of the year are better to sell a home than others. Fewer homes will sell between Thanksgiving and the middle of January. This is because most families are focused on the holidays, and spending time with family and friends. The most desirable time to sell a home is in the spring, because it's less disruptive to move a family when schools are closed for summer vacation.

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