Price cuts moderate during spring bump, with more to come

Following a year of mortgage rate hike adjustments which reduced buyer purchasing power, sellers had a moment of greater confidence in Spring 2023. But trust us when we say: any confidence gained during this meager seasonal boost is premature.While the share of listings with a price cut diminished to near zero during the strained pandemic-era housing market, this share of sellers reducing prices has recently jumped. Nationally, 21% of listings had at least one price cut, down just slightly from 23% a year earlier — when home prices began to fall — and level with pre-pandemic pricing conditions.Critically, these traditional year-over-year comparisons lack usefulness today due to the uncharacteristically steep rise in sales volume and prices that occurred during the chaotically disruptive pandemic economy. A better judgment tool is to compare today’s level of price cuts to the last pre-pandemic year: 2019.Here in California, the share of listings with a price cut in June 2023 compared to 2019 is:

• 15% in Los Angeles, down from 22% in June 2019;
• 19% in Riverside, down from 21% in 2019;
• 20% in Sacramento, down from 25% in 2019;
• 17% in San Diego, down from 25% in 2019;
• 16% in San Francisco, down from 18% in 2019;
• 15% in San Jose, down from 25% in 2019, according to Zillow.

While mid-2023 price cuts are less frequent than pre-pandemic levels, they have recently begun to inch higher in an unseasonable bump. This activity indicates more home price declines are in the near future, according to Zillow.Related article:

California home sales volume: June 2023 sees an end to seasonal bump

Sellers tethered to sticky pricing

Home prices reached an historic peak in May 2022, at which point leaping mortgage interest rates and spiraling sales volume quickly took over the real estate markets, dragging down property values in the highly leveraged home sales segment. This coincided with a leap in price cuts.Classically, home sellers are slow to adjust to market dynamics — especially when the result is lower prices. Called the sticky price phenomenon, this tendency to anchor mentally to past price expectations results in sellers listing at yesterday’s (higher) home prices. It’s not until they acknowledge the reality — how much buyers are able to pay as primarily controlled by the mortgage market — that they allow a price cut.But by then, it might be too little too late as pricing continues it downward path. Without a realistic initial listing price, their homes sit for longer on the market — gaining a sticky stigma as a market worn listing — and eventually undergo a price cut or are simply pulled from the market.Ultimately a waste of time for the sellers agent, these sticky price sellers also jam up the broader real estate market.Related article:

Press Release: Despite steady gains, Q2 2023 Buyer Purchasing Power Index still negative

Price it right the first timeTo set an appropriate listing price, earnest sellers will trust their agent to identify the home’s present value.To achieve this, the agent prepares and presents the seller their broker price opinion (BPO), documented by a comparative market analysis (CMA). [See RPI Form 318]The seller may take some convincing to accept data on their property’s present value before agreeing to price the listing accordingly. But using a CMA to document real-world sale numbers will help disassemble the seller’s money illusion and dissuade the agent from taking on an interminable dead-end listing.Further, when a seller needs to sell, today’s prices present the best time to list for the next three-to-five years.True, home prices experienced a minor plateauing effect to boost seller expectations in Spring 2023. But there is zero momentum behind the short burst for pricing. With mortgage interest rates elevated, sales volume in decline and recession fundamentals taking hold of the broader economy, home price cuts are expected to accelerate heading into 2024, not slowing to find a bottom until 2025.Real estate agents determined to prevail in the current housing market recession will turn their focus to working with buyers who are willing to sign offers during a downturn. This includes investors and buyer-occupants ready to purchase:

• homes at trustee’s sale — foreclosures;
• short sales; and
• real estate owned (REO) properties.

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