This month, we’ll help you make informed buying and selling decisions and will offer you some important guidelines for understanding home prices. We realize that buyers and sellers may feel like they’re simply guessing when it comes to determining a fair price for residential real estate. With that in mind, this month we’ll examine:
- Comparative Market Analysis 101
- Overall Housing Market Analysis
- Current Housing Trends in the Bay Area
- The Risk of Overpricing Homes in the Bay Area
- How to Make an Offer on an Overpriced Home
- Key Takeaways for Buyers and Sellers
For the typical homeowner, purchasing a home is by far the largest investment they’ll ever make. When a transaction valued in the hundreds of thousands or millions of dollars is at stake, it’s essential that both buyers and sellers have a solid understanding of home values.
The single most important thing a seller can do is set the right price for a home to sell. For a buyer, being able to gauge the fair value of a home means they can spot a listing that’s overpriced—or, better yet, one that’s a great deal. Knowing how to price a home to sell and how to accurately analyze home values requires both experience and knowledge.
While a professional agent can provide the experience, buyers and sellers can (and should!) familiarize themselves with two pricing fundamentals: comparables and market data. Why? Because even when they have guidance from a seasoned agent, buyers and sellers ultimately make the final decisions.
Comparative Market Analysis 101: Comparable Listings and Sales
Conducting a Comparative Market Analysis (CMA) is the first step in determining the value and price of a home. It’s not as straightforward as it might seem. For example, two homes that sit side by side may seem like obvious comparables (or comps). If the interior of one has been recently updated and the other hasn’t been renovated in 30 years, their comps will be dramatically different.
In addition to analyzing comps, an experienced listing agent will consider additional critical factors to determine a fair market price for a home. Typically, an agent will:
- Identify homes in the area that have been listed and sold within the last three months which are:
- Within a ¼ to ½ mile radius of the home being priced
- Within a 10% variance in size (square footage) of the home being priced
- Similar in age (year built) of the home being priced
- Collect at least three valid comps based on the criteria above
- Compare final sale prices to the original list prices and note any price reductions
- Note any expired or withdrawn listings that were taken off the market and re-listed
After gathering this information, the agent will conduct a comprehensive analysis between the home in question and the comps, making pricing adjustments as needed. For example, if a home that’s being listed is in a better location or has more bedrooms than the comps, the price may go up accordingly.
While sellers look to comps for information on how to price their home, buyers can leverage comps to make sure they’re putting in a fair offer. Knowing what similar homes in the area were listed for, and what they ultimately sold for, is a great way to figure out a competitive offer price.
Overall Housing Market Analysis
After carefully researching comps, it’s important to analyze local market data and trends to assess market price direction and understand whether the market favors buyers, favors sellers, or is neutral. Here’s what these data points may mean to you:
- In a buyer’s market, prices are usually declining because there are more homes for sale than there are willing buyers. In a buyer’s market, homes should be priced slightly lower than the competition.
- In a seller’s market, prices are usually higher because there are more buyers than there are homes for sale. In a seller’s market, homes can be priced above comparable sales, sometimes upward of 10%.
- In a neutral market, prices are steady because there’s a balance between buyers and sellers. Homes in this market should be priced in line with comparables.
Now let’s take a look at what’s happening in our market this month.
Current Housing Trends in the Bay Area
Based on the October 2019 data, the housing market in most Bay Area counties is neutral. San Francisco is a seller’s market.
In the following section, we’ll consider two primary housing trends: median home prices and month’s supply (a combination of sales and inventory). We’ll also examine two secondary trends: number of days on market and average sold price compared to original list price.
Let’s start by comparing median home prices from October 2019 for the Bay Area with prices from October 2018. Yearly comparisons are important because they remove variations due to seasonality.
When analyzing median home prices, it’s important to take note of both the direction and the degree of price-change from the same time last year. If home prices have increased by a significant margin (10% or more), then buyers and sellers should expect home values to increase compared to past comps. For single-family homes in the Bay Area, all of the counties stayed within 10% of their median prices from the previous year except for Santa Cruz, which saw prices decline by 13%.
Taking a look at historical median home prices, the Bay Area saw significant gains year-over-year from 2010 until the beginning of 2019. From that point on, home prices leveled off and closely tracked those of the previous year, which so far suggests that homes should be priced in line with their previous sold comparables.
Next, let’s examine month’s supply.
Month’s supply measures how many months it would take for all current listings on the market (including listings under contract) to sell at the current rate of sales. Nationwide, most analysts consider six months of supply to be a balanced market between buyers and sellers. A low level of supply means that there’s more buyer demand than there are homes for sale. In this environment, sellers may list their homes for more than the comps would indicate, get multiple offers, command higher prices through a bid process, and/or sell the home quickly. For a market with high supply, generally, the opposite is true.
Month’s supply is well below the six-month level in many of the markets, which typically indicates a seller’s market with plenty of buyer demand. In California’s high-demand market, however, experts define “balanced” as having a much lower month’s supply. In September 2019, the supply for all of California was just 3.2 months, which, for this region, is balanced.
By this measure, counties in the East Bay and South Bay are “hotter,” meaning buyer demand is higher and available housing is lower than the California average. Napa, Sonoma, and the northern counties are “cooler.”
Again, supply measures the time it would take to sell (sales) all of the current listings (inventory). We can take a closer look at those two individual factors below.
Sales measures how many homes are sold in a given month. For a seller, this number is driven by the level of demand and the number of buyers in the market. Very low or very high sales can influence how a seller prices their home. For example, very low sales, which equates to very low demand, might encourage sellers to price their homes more competitively.
Sales in most Bay Area counties trended lower over the past year, a trend which reversed this fall. In October, sales exceeded their numbers from last year, with a notable exception of San Francisco County, which was down by 16%. Again, these sales figures show relatively stable heading into the winter months, which should not significantly impact pricing.
Finally, we consider inventory.
Inventory measures the number of homes listed for sale. For sellers, it’s an indication of how competitive the market is. For buyers, it measures how many options are available on the market. Very low or very high inventory can influence how a seller prices their home. For example, higher inventory levels mean that sellers have more competition, and potential buyers have more choices. In this scenario, a seller might price their home more competitively, while a buyer may come in with a lower bid, especially if they’ve seen lots of price reductions in the area.
Inventory levels in the Bay Area are slightly lower than this time last year. In the winter months of this past year, inventory levels were up almost 40% in the South and East Bay. This movement was significant enough for sellers to price their homes more competitively. However, in the month of October, we are in a neutral market again. Overall, inventory levels are relatively stable heading into the winter months, so pricing is unlikely to change significantly.
Now that we’ve thought about home pricing based on the CMA and the two primary market trends (median home prices and supply), let’s shift our focus to days on market and the average sold price as compared to the original list price. We’ll see how understanding both of these factors can help sellers avoid the critical mistake of overpricing a home.
The Risk of Overpricing Homes in the Bay Area
While underpricing a home can leave money on the table for the seller, the market usually corrects this mistake naturally when multiple offers drive the price back up to its market value. The real danger lies in pricing a home too high—a mistake that can lead to increased time on the market and a lower final sales price.
Using market data from October 2019 for the Bay Area, let’s separate sold homes into two categories: homes priced correctly (and sold without a price reduction) and homes that were overpriced (and had one or more price reductions).
It is important to realize just how common price reductions are. In the North Bay, half of the homes sold in the month of October experienced a price reduction. In the South and East Bay, more than a third of home prices were reduced.
Across all counties, a clear pattern emerges when we look at the number of price reductions over the last two years: the number of price reductions goes up when home prices are trending down.
Geographically speaking, price reductions have been more common in the North Bay than in either the South Bay or the East Bay, due in part to supply and demand. Closer to the economic centers of San Francisco and San Jose, where demand is highest, price reductions are fewer.
The chart below shows the final sold price of a home compared to its original list price. What’s clear is that overpricing can lead to a loss of home value.
In the South Bay and East Bay, for example, homes without a price reduction sold for 103% of their original list price, while homes with one or more price reductions sold for 90% of their original list price. That’s a difference of 13%. Using the median sold price ($900,000) for all residential homes in the South and East Bay in October, that translates an average per-home loss of $117,000. In the Bay Area, the difference in home value remains consistent regardless of the time of year.
It is important to note the average sold price compared to list price in your county.
We can use price-change data to understand the conditions of the market (favoring buyers vs. sellers or remaining neutral) and for pricing and negotiating offers. When homes consistently sell above list price, the market is considered to be a seller’s market, and buyers and sellers should expect to negotiate accordingly. In San Francisco, where the market favors the sellers, buyers and sellers should expect to negotiate a home well above the listing price, assuming that the home is priced correctly. In Napa, buyers and sellers should expect to negotiate at a slight discount.
Let’s look at the median number of days on market for homes sold in October to see how overpricing played out.
In the Bay Area, homes sold without a price reduction were on the market for 34 in the North Bay and 17 days in the South and East Bay. Homes with one or more price reductions sat for three times as long as average (100 days) in the North Bay and almost four times as long on average (63 days) in the South and East Bay. The extra two months result in additional mortgage payments and extra days spent staging, showing, and selling the property. For time-sensitive sellers, the impact of overpricing is even riskier.
We know that overpricing a home comes with serious consequences. So why does it happen so frequently? Sometimes unlucky sellers simply get caught on the wrong side of the market and have to adjust their price accordingly. This can happen when interest rates increase, buyers get sidelined, and both demand and home values diminish. In this instance, the only way to sell is to be more competitive than everyone by slashing the list price.
More often, however, overpricing occurs either because the seller overestimates the value of their own home or the agent fails to help them set the right price. Unfortunately, some agents win business by claiming they can sell a home for an unrealistic price. The promise can be hard to resist. Who wouldn’t want extra cash to help fund the kids’ college education, pay down debt, or afford a bigger home?
The reality, of course, is that when an overpriced property remains on the market for longer than average, price reductions follow. Ultimately, the final sales price falls well below where the seller should have listed the property in the first place.
How to Make an Offer on an Overpriced Home
What happens when buyers find the home they want and realize it’s overpriced? Here are four strategies to keep in mind:
- First, look at the days on market to determine whether the home has been listed for longer than average. If it has, you know the home is most likely overpriced.
- Second, have your agent conduct a buyer Comparative Market Analysis (CMA) that proves to the seller the home is overpriced based on comps.
- Third, make your offer as attractive as possible (beyond the purchase offer). For example, include a mortgage pre-approval, put up a strong earnest money deposit, or waive contingencies.
- Finally, be patient. The seller and their agent may need some time to accept that their listing price is not competitive with the rest of the market.
Key Takeaways for Buyers and Sellers
- The first step to pricing a home is to find comparable listings and sales (CMAs).
- The second step is assessing the local market conditions to determine if the market favors buyers, sellers, or is neutral. Sellers should educate themselves about pricing a home correctly to avoid overestimating the value of their own home or being swayed by the unrealistic expectations of an agent.
- The two serious consequences of overpricing a home are the loss of home value and the increased time it takes to sell a home. Overpriced homes in the Bay Area spend an average of at least 3x more days on the market.
- Sellers need to do their homework and be realistic about the value of their homes. Buyers can provide their own CMA to a seller to negotiate a lower sale price for an overpriced home.
Pricing a home correctly takes both experience and market knowledge. To navigate the shifting real estate landscape, buyers and sellers need an agent they can trust. We’re dedicated to helping our clients achieve their goals, and we welcome you to contact us with questions about the current real estate market or for an evaluation of your home or condo.