According to a recent first tuesday poll, 64% of our readers see sellers leading price negotiations on the sale of a home. Poll results from March 2018 yielded a more decisive answer, with 76% of readers believing the seller controlled the price in negotiations.
Leverage bends with the market
This viewpoint aligns with conventional wisdom — sellers are the ones with property to sell, so they typically have more leverage in price negotiations.
But while sellers often control the conversation with regard to individual negotiations, consider that sellers’ asking prices are contingent on the state of the market. In other words, if buyers aren’t buying, or if they can’t match the prices sellers are asking for, sellers can’t or won’t sell.
Buyer purchasing power is derived from buyers’ income and mortgage interest rates. Homebuyers who are able to borrow more have greater purchasing power — and when this becomes a trend, home prices increase. As interest rates rise, buyers’ purchasing power is reduced, a drag on home prices, as well as sellers’ leverage.
The “sticky price” delusion
When interest rates go up, the price sellers believe their homes are worth and what those homes are actually worth (i.e. their fair market value), are often in conflict, known as a money illusion.
The appraisal of a home takes into account the market landscape, including the value of comparable properties. But often a seller’s money illusion leads them to keep prices higher than the fair market value of their homes when buyer purchasing power is low. This is called sticky pricing.
Even though low buyer purchasing power nominally takes price control out of the hands of sellers, many of them stick to their price points for longer than practical — typically anywhere between 9 and 12 months after home sales volume falls.
However, as a result of gradually increasing mortgage rates, buyer purchasing power is currently slowing down. In spite of this, home prices are rising — a clear indication of sticky price delusions, among other factors. But as home sales volume continues to struggle, sellers’ leverage is disappearing. If sellers want to sell, they’ll have no choice but to meet the market where it is.