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April 03, 2014

Hot or Not?

Research and Analysis
For Sale

Whether you live in a hot or cold real estate market could be the best determinant for setting your home’s listing price. New research shows that the largest driver for the optimal initial listing strategy is the health of the local market, not the underlying value of the home.

In a hot market, such as Los Angeles, a seller should list slightly lower relative to value compared to a seller in a cold market. A hot market is more dynamic and efficient, allowing a seller to achieve a better price by enticing a bidding war.  In a cold market like Cleveland, sellers need to set a higher price as offers below list price are commonplace.

Listing Price Strategy

Chart Legend: x-axis is ratio of initial listing price to final sale price; y-axis is ratio of final sale price to HVE value. HVE is Freddie Mac’s proprietary AVM model. The AVM value is considered as-is fair property value. Cleveland is considered to be a cold real estate market, and Los Angeles is a hot real estate market. The sale price to HVE value ratio is the recovery measure, the higher the sale price to HVE value ratio to better the house value realization.

These findings could help address a key problem for most sellers – deciding the initial listing price of their property to maximize sales price. With housing price indices growing quickly in many areas of the country, we could see more and more sellers opting for lower list prices.

More information is available in working paper “Optimal Listing Strategy in Selling Residential Real Estate,” which was presented this week at the annual meeting of the American Real Estate Society.

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