Price is the most important factor to consider when selling. So when pricing a home to sell, should you list competitively, or should you speculate a bit and see if you will catch the 'big fish'? We will take a look at both options, and then consider how this applies to the current Calgary, AB real estate market.
Pricing your home low...
Let's pretend you have your home listed for sale, assuming an average home price of ~$400,000.. What would happen if the real estate market suddenly shifted in favour of sellers, and you had priced your home off comparable properties that were now outdated (your priced too low)? In this case, you would likely have an offer on your home within a couple days and within 98-100% of your list price (let's say you get $400,000). You may even get competing offers and receive more than the original asking price. Your sale is now done and you can forget about it. You may have gotten $5,000-10,000 more in 30-60 days, but that is only a 'maybe'.
Pricing your home high...
What if you decide to speculate a bit and you list for a modest $10,000-15,000 over the determined market value (let's say $415,000)? Maybe the stars will align and the perfect person, who is looking for a house like yours, will completely ignore the rest of the homes on the market and decide to pay more for your property out of pure bliss and emotion. Or, it will sit for a while. No one knows how long for sure, but you will likely consider a price reduction before 30-45 days on market. You'll end up reducing to 400,000 anyway, but that doesn't mean you'll get it. If the market is moving up, then your home may sell in a few months when the market catches up to your price - but what if it doesn't?
What to consider...
When considering a home to purchase, buyers don't look at the price alone. They always want to know how long a property has been on the market. If it has been sitting a while, they want to know why, and generally assume that something is wrong with it. Furthermore, when they first view a home and decide it is not for them for whatever reason (maybe even just price), following up with a price reduction rarely entices them to take a second look if they already feel they didn't like the home. Finally, if you are forced to price reduce, this can be a slippery slope. After waiting for 30 days in a slower market, you will not be the only person who has reduced their price. You will still likely be overpriced compared to your competition, as everyone who was priced 'OK' originally is also the victim of the slow market, and they are also reducing their prices. You may now actually get less than you would have if it was originally priced lower, due to the stigma of your home and potential market fluctuations, and it is now 90 days or more later. If you already bought another home, this can be a very stressful experience - especially if are carrying two mortgage payments.
In the example of pricing too low, you sold very quick, got on with your goals and if the market went up, you hopefully bought again to take advantage on your purchase before the market increase. Yes, it's true you may have left a few thousand dollars on the table starting out at a lower price. In the example of pricing too high, you had to price reduce, you may have extra carrying costs (like two mortgages), your home now has a stigma and if the market went up, you probably missed out on buying your new home at a lower price. In fact, if the market went down, you will have to keep reducing until it becomes more appealing than the other homes on the market. Notice that a down turn in the market is less likely to affect you if you started out at a lower price, because you most likely sold quickly and were done before the market slowed down.
The key to pricing a home is to look at your goals and assess how soon you would like it to sell. If you would like to sell quickly, then price your home 1-2% below market value to cushion yourself from fluctuations and to get on with your goals. At market value, you should expect to sell in the average selling time (which depends on your market and style of home). But when you are overpriced, no one wins. It is like passing up a guaranteed cash pay out in a lottery to try for the big prize. You just might get it... but at what cost if you don't?
So what was Calgary, AB's Real Estate Market like in September?
The market did not respond to the recent interest rate increases, or the end of summer, as was expected at the beginning of September. The expectation for September was that there would be an uptick in sales after the holiday months ended, and with added motivation to buy before interest rates rose further than they had already. This was not the case, as sales dropped across the Calgary Real Estate Board (CREB) by just over 7%. The sales to new listing ratios across CREB were 45.74%, resulting in rising inventory as sales didn't keep up with new listings. House prices remained stable in most sectors, but prices are expected to soften as the inventory rises. There are still divisions between pricing categories and styles of homes. Single detached homes for example remained at an absorption rate around 4 month +/-, which is fairly stable and balanced. But if inventory continues to rise faster than buyers interest, these numbers would be expected to shift more towards a buyers market with downward pressure on prices.
What does this mean for sellers?
For the sellers that need to sell, it would be wise to get ahead of the market and price aggressively to sell. Other than pricing, it will also be competitive getting the attention of the buyers that are in the market. For the sellers that have the flexibility to sell, it may make the most sense to wait until Spring when the market typically picks up. Think of it this way - if you're thinking of selling but are just kicking the tires (you aren't really motivated to sell), testing the market will only help drive values down by contributing to the high inventory levels. As always, it is important to determine what your goals are and what is happening in the community prior to creating a price strategy. In the current market, the effects of overpricing we've discussed are likely to come true.
What does this mean for buyers?
The potential for a "better deal" is just around the corner with softening markets. The challenge is that should interest rates continue to rise, the affordability may become less. The higher cost of lending could off set any drops in pricing that we see over the winter months. Beyond the higher cost of borrowing, there are also more mortgage rule changes being proposed by the federal government, that if implemented, will reduce the borrowing power of buyers with more than 20% down payment (conventional purchases).
Similar to the rule changes in October 2016 that reduced buying power of those with less than 20% down, the proposed changes could reduce borrowing power of conventional buyers by around 20%. If this might affect you, now would be a good time to contact your mortgage and real estate professional about your next move.
As always, real estate is a long term investment and all we can do is time our move so that it works for our current lifestyles and requirements. With lots of options available on the market, it is a great time to buy right now. With recovering oil prices and the economy further stabilizing, there is growing confidence that should translate to improvement in the real estate market which would put upward pressure on pricing.
JoAnne and Joseph Purcell
Content adapted from an original article by Lindsey Smith, CIR