Pricing Properties Based on Low Inventories

The good news the shortage of inventory brings? With the current market shortage of inventory, the increases in home prices should remain constant, if not slowly increase in the next few years.

That’s been the case for all three agents interviewed. “I am seeing price increases from 3 percent to 9 percent since the fourth quarter of 2012,” Gaikowski says. “Low inventory leads to multiple offers, which leads to higher sales prices.”

Movoto.com tracked 38 major metropolitan areas and discovered inventories in March 2013 fell by about 21 percent from a year ago. Thirty of the 38 cities had an average annual list price increase of 11.5 percent per square foot. The reason agents are so encouraged by these findings is that home prices typically grow at about the rate of inflation, which is now about 2 percent, according to the Bureau of Labor Statistics.

And after months of declines, Case-Shiller has finally reversed its course – though home prices in Chicago were flat from February to March in the latest Case-Shiller Home Price Indices from Standard & Poor’s, they showed considerable progress on a year-over-year basis, rising 7.8 percent. From January to February (the most recent month of data from S&P), Chicago home prices declined 0.8 percent, though admittedly, eight of the 20 major metropolitan markets tracked by S&P also showed negative price growth for those months, and home prices do typically decline in the earlier months of the year. Moreover, Chicago home prices were up 5.1 percent from February 2012, though that was the second weakest yearly increase in the nation; only New York, at 1.9 percent, was slower.

Pricing properties based on low inventory, in addition to all other comparables applicable, is one of the toughest challenges Gaikowski faces today. Like most agents, he has always carried 10 to 12 active listings, selling and adding on continuously. In addition, pricing a property improperly can turn it into a “pinball listing” – a property that is unrealistically high in its price, creating the perception that homes in the area are priced higher than they actually are.

After showing that high-priced property, the agent shows the clients a different property in the same area, one with a lower asking price that now seems extremely appealing compared to its pricier brethren.  Pinball listings can be good for other properties and agents, but not if the pinball listing is your listing. When your seller insists on a price that you think is unrealistic, and they don’t agree to lower the price after a few weeks, it might be better to let the listing go.

However, the absence of active inventory can be difficult. Gaikowski is actively following up on leads, and sending notes to past clients and his referral base asking for leads on anyone looking to sell.

But, while the increased market prices are  a good thing, they are meaningless if appraisals are not comparable.