Thursday, November 11, 2004

Madison Real Estate: Questionable Pricing Strategy

by Tom Bozzo

This sort of thing makes me wonder just how obvious it really is that demand schedules are downward sloping in price. From a listing on, the area's most prominent FSBO real estate site:

If no accepted offer through fsbo by Dec. 10 we will list with realtor and raise the price to cover realtor fees.

Brief disclaimer: I don't mean to pick on these people specifically -- they just happen to be advertising the 'FSBO now, higher priced conventional listing later' behavior.

In the course of spying on local housing market conditions in the wake of our early summer purchase, I've yet to see this succeed at anything but causing emotional distress for the sellers, as in the case of some former neighbors who turn out to have fared poorly. (1) While this may also be symptomatic of the local housing market (finally) topping out as interest rates work their way up, I'm mainly inclined to score this one for traditional demand theory.

The above pricing strategy assumes that a Realtor can find someone willing to pay $X+3% or $X+6% (depending on how the FSBO seller felt about buyer agent fees) when the FSBO listing couldn't locate someone willing to pay $X, which basically means that the MLS more completely disseminates the listing information.

This is a poor assumption for a couple of reasons. One is that practically everyone who can afford the $300,000-and-up prices prevailing Madison's more popular neighborhoods (including Middleton Hills) has internet access. (The most recent national data (PDF) from the CPS are aged, but even in 2000, 79% of households with income exceeding $75,000+ had it at home.) Another is that buyer agents all know about the FSBO resources, eroding informational advantages to the conventional listing. I'd guess it takes 2-3 weeks, tops, for the information to propagate to every current market participant.

Simple advice to sellers: if you can't get $X within a few weeks, adjust the price to $Y<$X. (2) Repeat as necessary.

(1) When we sold our old house, which took just under 48 hours, we got some mostly friendly guff from other neighbors for extracting an insufficiently high price. An almost identically small house a few doors down had been listed for an additonal $10,000 not long afterwards, as if to prove them right, but that house has since been reduced well below our transaction price. Plus, our buyers had posted a Kerry-Edwards sign this past election season.

(2) I hereby disclaim all responsibility for anyone else's choice of X or Y.
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