Matthew Ferrara, Philosopher

Real Explanations for “Falling” Housing Prices

There’s a simpler explanation why housing prices might be falling in some markets, but it only makes sense if you understand what “list price” means.

I don’t know about you, but I”m pretty sick of “context-less” reporting. You know the kind: someone throws some numbers, charts and spreadsheets into a “report” then releases a summary without analysis or conclusions. They let the reader draw their own conclusions – filling in the gaps with their own fears and misconceptions. A reader presented with what looks like a trend or pattern often mistakes measurements for conclusions.

In my opinion, that’s just what Altos Index 10-city index that appears on HousingWire’s website did today. It’s a perfect example of reporting that lets readers infer that the housing markets must be falling again, when it might not be the case. In fact, the report even offers contradictory indicators that support the opposite conclusion, but the headline reads like the sky is falling in 25 of 26 markets nationwide.

The report’s headline: “List Prices Declined in 25 of 26 Markets: Altos Research Index”

List prices? Really? That’s what we’re reporting in the middle of the deepest recession in the housing market in a century? For the few people who might not know, the list price is the asking price usually set by the seller and which the agent dutifully enters into the local MLS system.

The List price is the asking price. Period. Not the final sale price. And everyone alive knows that the single greatest certainty in the housing market was, is, and forever shall be that sellers will ask more for their houses than the market will bear. Or they will ultimately get.

That goes double during a prolonged housing recession.

List prices decline all the time. It’s a given that if the average listing agreement in America is 6 or 12 months duration, the seller will play games with the broker’s money. Why not try to find a dumb buyer who will overpay for their home. (See our related article, “Why Overprice if Just a Little“) Sellers will try out a price, then drop the price in 30 days. Most end up dropping it multiple times during the listing period.

Big deal. That’s not news.

It’s called life in real estate. It’s what happens when real estate agents agree to take over-priced inventory and place it in MLS and show it to buyers who laugh at them and wait around until the sellers’ distress reaches higher levels and then – wham! – the list price falls. Falling listing prices don’t necessarily mean a declining market; They aren’t market indicators at all.

Falling list prices simply reflect dumb pricing decisions by some sellers and their agents.

In fact, the report indicated that the amount of inventory was falling in some markets. With fewer homes for sale in the same markets shouldn’t list prices be rising?

Not at all. Remember, the initial list prices for some homes is so high – so ridiculously, laughably, fantastically outside the realm of buyer demand – that even with inventory is falling, some list prices will still fall. The market – defined as the place where properly priced homes are naturally absorbed by agreeable buyers – might be humming along quite nicely in the very same neighborhoods where overpriced listings are falling, month after month.

Yet the Altos report makes it seem there’s a problem because “list” prices are falling. At least, that’s what the headline infers.

It’s really not helpful to the modern consumer for these kinds of reports to hit the news. Listing prices are notoriously fickle; they reflect emotional whims of sellers and spineless agents who bring “to market” unsellable inventory that sits and rots until the price falls. Falling listing prices mean nothing more than some people still refuse to make objective pricing decisions. Falling listing prices means too many real estate practitioners who are just that: “practicing.”

A better headline for this report might have been any of these:

  • Some home sellers still don’t get it; nor their agents.
  • Falling list prices reflect fantasy expectations by sellers.
  • Too many sellers still pricing themselves out of the market.
  • Sellers finally understand buyers set the price, and adjust downward.

The last one is the most generous, of course, giving sellers the benefit of the doubt that they eventually “learn” that their overpriced house must fall in price to attract buyers, who control today’s marketplace.

But let’s not confuse the public – or the industry – any further with context-less reports like these. List prices can fall in any market – even hot ones – because it’s possible to “list” a home at any number that flits into the sellers’ heads. More helpful would be reports that focused on sold prices – the price that reflected where the meaningful market activity actually happened. Admittedly, the report caught my attention, which may have been its only objective. But other readers who don’t actually understand the nuance of reporting list prices might otherwise conclude – erroneously – that markets are falling when in fact, a great many are not.

  • Pat Tasker

    I love your alternative headlines…Sadly, they are all true!

  • Scott Sambucci

    Hi Matthew – I really enjoyed your perspective on this. Thanks for sharing. You’re correct about the report vs. headlines. We publish data – it’s up to the user to determine which is useful and which isn’t. But, list price trend is a leading indicator of transaction prices, which is why listing prices (and subsets of listing prices such as the “price of new listings”) are vital signals to market direction. Using the Case-Shiller HPI as a proxy for transaction prices (opinions about methodology aside), listing prices lead the Case-Shiller HPI by 90-120 days, so for those that want to understand market conditions in real time, listing prices are an excellent signal.

    Listing prices also have the advantage of sample size. There might only be 1-2 transactions in a market during a week, but that same market will have 100s of homes for sale. 1-2 transactions are not statistically significant to determine trend, and in fact, can misdirect the market. (See a blog post I wrote called the “Great Miami Head Fake.) If 1-2 really high priced homes sell in a Miami neighborhood, that doesn’t mean that prices are rebounding – too anecdotal.

    We certainly don’t attest that listing prices are the only indication of market conditions, but when layered with transaction prices and additional real-time market indicators like DOM, inventory, and the percentage of homes with price reductions that can’t be shown in a final sales price, they do serve as a leading indicator of future transaction prices. If you’re interested in reading more, shoot me an email and I’ll send over some statistical research we’ve performed to illustrate. [ scott at altosreseach dot com]. Many thanks.

  • Hi Scott:
    First, please don’t think I don’t value the work Altos does; on the contrary, measuring listing price declines is VERY important; I just think the way it is reported was off target a bit.

    For example, I’d have published that data to MANAGERS as a training tool to help them drill home the need for better pricing practices by their agents. Or I’d have created a “For Seller Education” tool with the data that REALTORS could provide to them and/or have educated sellers that their “guesses” in price are still inaccurate, etc. I think you see my point.

    When HousingWire picked it up, the “inference” was the market is falling, which I think we both agree may not be the case.

    As for using listing price as an indicator of where the market conditions are going in real time, I’m still “on the fence” about that. Here’s what I mean: If my neighbor drops his price EVERY month for 10 months before getting an offer, but I list at the price where homes are being absorbed (bought by buyers) in 30 days, which is a better indicator of the “market”? I will readily admit I really don’t know exactly how to use “list price” as a gauge of much of anything, really. Like any negotiated commodity purchase (car, stock, even airline tickets on it’s the final price that really indicates the market.

    I appreciate you taking the time to respond to our post. Again, your data is probably accurate, clear and well researched. Maybe Housing Wire or other outlets for your summaries could use some guidance when they publish findings as news. And certainly, I meant only to address the data “as it was presented” not as a reflection of your company.

    I would love to see the research, too. Will be emailing you shortly.

    Have a great day!

  • Scott Sambucci

    Hi Matthew – Thanks for the reply. Indeed – as I always tell people – data is data. It’s up to you to process it into information. Please do send over an email when you have a moment.

  • Matthew,

    The issue I have is with the median price comparison used by Case/Schiller, et. al. If we were to take a sample of 100 people at the local mall, measure their height and find the median of say, 68 inches, that would be fine.

    But when we take the next 100 as a random sample, measure their median height and find it to be 65 inches, the trouble begins. When we start claiming that the population is getting shorter based on differences of these two random sample sets we are misleading people.

    The only true way to determine if home prices are rising or falling is for the same unique properties to sell over and over. Then we can accurately determine whether they are bringing a higher price than before or selling at a discount.

  • Nice perspective! I think I agree – yet another reason why C/S is really a bad perspective on the market……. thanks for reading and commenting!