Monday, September 03, 2007

Deadly RE Sins: Gluttony

Every day or so, Redfin sends me updates of market activity in a few areas of OC that I care to study. In essence, these updates tell me two things: new properties that have been listed and properties where their prices have changed for one reason or another. I always enjoy seeing what properties are coming on the market, but I've got admit, I find the prices changes the most interesting.

As I've been reviewing the pricing changes, I've found that there are essentially three elements to a price change: direction, magnitude and frequency. Direction is simply whether a seller is lowering his price or raising it, magnitude is the amount of the change and frequency is essentially how often the seller adjusts his prices.

Today, I thought I'd noodle a little on that first aspect of price changes: direction. And I'd thought I'd start by looking at people clever enough to raise their prices in today's market, and introduce the first of our Deadly RE Sins: Gluttony.

You might be tempted to believe that no one at this point in the market is raising the price on his home. And you would be wrong. Believe it or not, there are home sellers, some of whom have had their homes on the market for very long durations (90 days+) that are actually raising their prices. Here's an example:


20857 Cabrillo LN #7
HUNTINGTON BEACH, CA 92646
Days on Redfin: 123

Previous Price: $799,00

New Price: $899,000

I mean, seriously, how does conversation go around the dinner table?

Husband: "You know, dear, the house has been for sale for over four months now. And we still haven't gotten it sold."

Wife: "Yeah, hon, I've noticed that, too. Maybe there's something wrong with our pricing."

Husband: "Well sweetie, maybe people just don't realize what a primo condo this really is. Maybe if we raise the price, we'll attract a better class of buyer, the way a Four Seasons resort attracts blue-bloods!"

Wife: "You're right dear. If we're ever going to sell this house, we're going to have to raise the price..."

If we are to believe that the conversation went something like the conversation above, I think we'd have to come to the conclusion that our hypothetical couple just aren't particularly bright or are completely economically naive. Frankly, I don't think that's the case. Instead, I believe that people raise their prices when their homes aren't selling for one simple reason: economic Gluttony.

They want more for their house and damn the torpedoes, they are going to get it!

Rather than focusing on the reality of the market, I think some sellers convince themselves that can get a higher price for their home just because they are asking for it. Maybe the feel elite, may be feel lucky or maybe they feel entitled to earning better ROI, but somehow, they don't seem to feel that the prevailing economic conditions apply to them. They are WRONG. Their house is not going to sell for a dollar more than the market thinks it is worth.

By raising their price, they're seeking to line their pockets with more silver, but in the process they are decreasing the demand for their home! In a market where there is a lot of inventory and many substitutions for a given commodity (i.e. houses) demand elasticity is remarkably high. So, what I don't think they realize is that by raising their price by 15%, they likely are dropping demand for their home by more like 30, 50 or maybe even 90%.

Ironically, given that we are in a declining market, the greed that inspires them to raise the price of their house is the precise cause they will end up getting less than their original asking price.

In The Purgatorio penitents for Gluttony were forced to stand between two trees, unable to reach or eat the fruit hanging from either. What these sellers don't realize it that they are volunteering themselves to play out the same penance with their equity.

2 comments:

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Anonymous said...

what is going to kill the OC market is the options out of state. The homes pictured in OC REO owned would not get 50% of the REO asking price in Colorado. People have options and now in CO wages are about 10% less than CA and housing is 50%. I can see a mass exoudus in CA for other areas of the country. Is simply now ROI

 
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