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Week of June 10th-16th
Property Tips and Tricks
Analyzing Price Reductions in the Luxury Market
The past year in the Monterey Peninsula real estate market has been a fascinating period, characterized by fluctuating interest rates and inventory levels, as well as shifting demand across various property types. In this dynamic environment, both buyers and sellers have become increasingly attentive to market trends, closely monitoring pricing, days on market, and new listings.
If you have your sights set on a particular property or area, tracking price reductions as well as the terminal sales prices can provide valuable insights into the optimal timing for taking action. By closely monitoring listings, you can identify when a property becomes "ripe" for negotiation.
This information also offers valuable insights for sellers and prospective sellers as understanding the dynamics of price reductions can inform your pricing strategy and help you navigate the market more effectively.
To gain a comprehensive understanding of price reduction trends, I examined over 100 property sales on the Monterey Peninsula over the past year, spanning a price range of approximately $2 million to over $18 million. Each of these properties underwent at least one price reduction during the listing period. We'll look to the data to answer a few key questions.
Was one price cut enough?
Does the percentage of the price reduction offer clues about the property's eventual selling price?
Why would someone reduce the price by only 2-3%? Does it work?
If a price cut happens, should a buyer seize the opportunity and make an offer?
If you want to get right down to the brass tacks, skip the next few paragraphs.
First, understand that the list price is typically determined by the seller, often with guidance from the listing agent. It serves as a starting point for negotiations and may not reflect the final sales price.
The sales price is ultimately dictated by the market, which is influenced by supply and demand. While the market is beyond individual control, sellers can employ strategies to sway outcome in their favor.
Real estate markets are in constant flux. For example, if you list your home and the next day a neighbor lists theirs, the supply has increased without a corresponding rise in demand. To stay competitive, you might need to consider actions like a price reduction if your home doesn't sell within an expected timeframe.
Adjusting the price is somewhat common, and not necessarily a negative reflection on the property. Reasons for price reduction can vary, including:
- Macroeconomic changes that affect the overall market
- A surge in similar listings, increasing competition
- Initial overpricing of the property
- A time-sensitive need to sell, perhaps due to the purchase of another home
- Market feedback indicating that a lower price could expedite the sale
In short, pricing a home is a nuanced process, one that sometimes entails reducing the initial list price.
Now, onto the data.
Single vs Multiple Reductions
Of all the properties studied, 42% had one price reduction, while 58% had two or more price reductions. So, once a price reduction happens, it is more common to have the price reduced a second time before the sale happens rather than a one-and-done price reduction.
Impact of the First Price Reduction
If the first price cut is 10% or more off the initial asking price, there's about a 70% chance that the home will sell without another price cut.
If the price cut is 3% or less, there's a 94% chance that another price cut will be needed before the home sells.
Why would someone elect to reduce the price by only 2-3%? One reason is to boost visibility on popular online real estate search portals.
The Psychology of Price Reductions
Price cuts at or near psychological price barriers tended to have more of an impact (for example, going from $2,050,000 to $1,950,000 is more effective than going from $2,195,000 to $2,075,000).
Further Negotiation
Out of more than 100 properties that lowered their prices before selling, only 7 managed to sell without any additional price drops during buyer negotiations. In essence, if a property’s price has been cut, it’s very likely that sellers will agree to sell it for even less than the new listed price.
On average, across all properties that had at least one price reduction, buyers were able to further negotiate 5.46% off the lowest advertised price.
I hope you found the above information informative, thanks for tuning in!
Real Estate News
California Dreaming
Record Household Wealth in U.S.
U.S. households have reached an unprecedented level of wealth, surpassing $160 trillion in the first quarter of 2024. This staggering figure represents a wealth value 17 times greater than the combined market capitalization of the top three largest companies: Microsoft, Apple, and Nvidia.
The rally in tech stocks has been a significant contributor to the growth of household wealth. Another major factor has been the substantial increase in home equity. Homeowners across the country have collectively experienced a $1.5 trillion increase in equity since last year, with the average homeowner equity now standing at around $305,000.
This equity growth has been widespread, with all states experiencing annual equity gains in homes. California led the nation with an average equity gain of $64,000 per homeowner.
Nationally, home values have tripled (up 315%) since 1991, outpacing the cumulative rate of inflation during the same period, which stands at 130%.
Real Estate Remains Local
While household wealth has reached record levels, certain areas across the country are experiencing significant price cuts in the residential real estate market. States such as Tennessee, Florida, and Texas are among those witnessing substantial price reductions.
Notably, these states have also experienced large year-over-year increases in housing inventory, potentially indicating a shift towards a buyer's market in these regions.
Property Tax Considerations
In a recent newsletter, the importance of understanding fixed and variable costs was covered. One variable cost is property taxes; reviewing property tax assessments periodically is a good habit to adopt. It is advisable to verify the details provided by tax appraisers, including the measured size of both the structure and the land, and ensure agreement with their description of the property.
Additionally, it is recommended to compare the assessments of neighboring properties, as this information is publicly available.
California Insurance Market
The California Insurance Commissioner is working on a "sustainable insurance strategy" aimed at attracting more insurance companies to the state to write homeowner and commercial policies. Major insurers, such as Allstate, are awaiting the details of this strategy before deciding on resuming the issuance of new home insurance policies in California. Expect further updates on this in the coming months.
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Jonathan Balog
DRE# 01980970
Broker
M: 831.747.0310
[email protected]
Compass is a real estate broker licensed by the State of California operating under multiple entities. License Numbers 01991628, 1527235, 1527365, 1356742, 1443761, 1997075, 1935359, 1961027, 1842987, 1869607, 1866771, 1527205, 1079009, 1272467. All material is intended for informational purposes only and is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdrawal without notice. No statement is made as to the accuracy of any description or measurements (including square footage). This is not intended to solicit property already listed. No financial or legal advice provided. Equal Housing Opportunity. Photos may be virtually staged or digitally enhanced and may not reflect actual property conditions.
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