Tag Archives: listing price

The Evidence is in on the Choice of a Lockbox

Does the choice of a lockbox matter? Do the older type lockbox systems influence the final transaction price or the marketing time of property? These questions are often pondered by real estate professionals. Older key and combination systems are low tech, easy to employ, and less costly to the broker. Newer electronic lockboxes are often more complicated, provide additional information by way of technology, and are slightly more expensive than their low tech counterparts. The trade-off is therefore between ease of use, information, and cost of operation.

If the different lockbox systems do not influence transaction outcomes (price and marketing time), then the choice of the lockbox system can be left up to the broker without costs to the sellers of property. On the other hand, if one system produces either a pricing discount or extended marketing times, then brokers need to be aware of these differences in order to better serve their clients.

Recent research by Benefield and Morgan answer these questions.[i]. The researchers directly test for the impact of lockbox type (newer electronic versus older systems) on property price and property marketing time. After controlling for other difference in listings such as location, age, size, seller motivation, and quality, Benefield and Morgan find that older lockbox systems, on average, do not influence the time it takes to market property. Property pricing, however, is another matter. Specifically, Benefield and Morgan find a negative impact on price from the use of the older lockbox system. More to the point, older lockbox systems appear to not influence marketing time but result in lower selling prices. The pricing discount was a staggering seven percent on average.[ii].

IMPLICATIONS
There is now statistical evidence (not just professional speculation) that indicates the inferiority of the older lockbox systems. Therefore, wherever financially practical, brokers should stop their use of older key and combination lockbox systems in favor of the newer electronic systems. It now appears that these newer electronic lockboxes lead to a better sharing of information and feedback between listing and showing brokers resulting in better prices.

ENDNOTES:


[i]. Benefield, J. D. and J. M. Morgan, Ease-of-Access, Home Prices, and Marketing Times: The Choice of Lockbox Type, Forthcoming in the Journal of Housing Research.

[ii]. The authors believe that at least part of this discount is related to the type (mostly lower priced, lower demand) properties on which the older systems are employed.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

A Simple Measure of Market Liquidity is a Better Indicator of Market Health than Pricing

What is the definition of a healthy housing market? Is it a housing market in which home prices are decreasing? Few would agree with this. Is it a market in which home prices are increasing? At first glance, many would agree with this definition. However, increasing prices cannot be used to diagnose a healthy housing market. If increasing prices indicate market health, then in 2005 housing markets were “very” healthy, and we know that this is not true.

If pricing does not indicate market health, then what does? The answer is simple, it is market liquidity and not pricing that indicates the health of a housing market. Liquidity has been defined in many ways but it basically boils down to: can an individual seller, at a time of their choosing, successfully market their property at or near market value? We often hear of rates (turn-over and absorption) that are related to this concept. Unfortunately, these measures are difficult to estimate and they all have something to do with outstanding inventory. What really matters, regardless of outstanding inventory, is the likelihood that a property will close. This is the most basic meaning of market liquidity and it can easily be proxied.

All of the data necessary to proxy a particular market’s liquidity (and thereby its health) is available on the daily “hot sheets” of almost every MLS in the country. Since liquidity is really just a batting average, all that needs to be done is total the successful transactions (closed properties) and divide these by the failed listing transactions (Expireds + Withdrawns + Cease Efforts + Cancelled)[i] [ii]. The resulting number is a very close approximate to the probability that any given property listed in that market will close and an increasing trend in this number indicates improving market health.

CONCLUSION

Pricing trends do not indicate the health of a housing market. Keep in mind. For almost every sell in an increasing market, there is a repurchase at a higher price. For almost every sell in a decreasing market, there is a repurchase at a lower price. Thus, pricing is a “double edged sword”. Gains/Losses on a sell are almost always accompanied by higher/lower repurchases. Thus, pricing trends can never indicate the health of a particular real estate market. Instead, it is market liquidly, which can be easily proxied, that actually indicates market health. After all, the real goal is for a seller of property to be able to transact at or near market value with a high degree of certainty. Fortunately, most MLS’s around the country have the information at their fingertips to estimate the health of their particular market.

It is liquidity (not price) that matters.

ENDNOTES


[i]. Different MLS’s have similar but not exact designations for these various categories. The goal is simply to divide successes by failures.
[ii]. The timing of the calculation will depend on the number of outcomes each day on a particular market’s MLS hot sheet. The goal is to avoid a mathematically undefined estimate. Thus, larger markets might do this average daily, while smaller markets might only calculate this average on a monthly basis. If interested, any MLS needing assistance in setting up this estimate may contact me.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author..

The Costs of Flood Zone Uncertainty

The cost, in terms of final transaction price, of being in a flood zone is established. Specifically, it appears that being in a flood zone reduces the final transaction price of a property between 4.1% and 4.3% on average [i], [ii]. These estimates assume flood zone status is clearly denoted in the MLS. However, what happens when the flood zone status of a property is unclear during the marketing process of a property, which is very often the case as flood zone mapping, is notoriously inaccurate? Are there any indirect costs such as a lower likelihood that the property will close? Concurrently, does flood zone uncertainty create a lower probability of a broker earning a commission?

This question is answered in Chang, Dandapani, and Johnson (2010)[iii]. In this study, the authors investigate for a lower chance of a closing due to uncertainty over a listing being located in the 100-year flood zone. In this particular study, properties in the MLS where listed as either: (a) property is definitely in the 100-year flood zone, (b) property is definitely not in the 100-year flood zone or (c) it is uncertain if the listed property is in the 100-year flood zone.

The study finds that properties listed as uncertain if they are in the 100-year flood zone are, on average, marketed 1.22 times before a closing actually occurs. Thus, uncertainty over flood zone status in the MLS leads to a 22% greater likelihood that the seller will not close their property during a given typical listing period. This, of course, directly translates into a 22% greater chance that the listing broker will not earn a commission or, in the case of a relisting, the listing broker will have to work 22% more to earn the same commission.

Implications

In general, the results from Chang, Dandapani, and Johnson (2010) indicate that ambiguity in information entered into an MLS is not harmless. Thus, great care needs to be taken over the accuracy of MLS data entry. Basically, uncertainty is costly to both the listing broker and the seller of property. In particular, the results strongly suggest the need for an updating of the flood maps currently employed to determine flood zone status as clearer and more easy-to-understand maps expedite the selling process, thereby reducing the costs to sellers and brokers alike.

ENDNOTES


[i]. Harrison, D.M., G.T. Smersh, and A.L. Schwartz, Environmental Determinants of Housing Prices: The Impact of Flood Zone Status, Journal of Real Estate Research, 2001, 21, 3-20.

[ii]. Guttery, R.S., S.L. Poe, and C.F. Sirmans, An Empirical Investigations of Federal Wetlands Regulation and Flood Delineation: Implications for Residential Property Owners, Journal of Real Estate Research, 2004, 26, 299-315.

[iii]. Chang, C.H., D. Dandapani, and K.H. Johnson, Flood Zone Uncertainty and the Likelihood of Marketing Success, Journal of Housing Research, 2010, 19:2, 171 – 184.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

What is in a Subdivision’s Name?

The Research

What is in a subdivision’s name?  Is there any pricing effect based on the name of a subdivision?  All else being equal and at first glance, there might not appear to be any relationship between the values of properties in a subdivision and the name of a subdivision.  However, housing is unlike other financial assets (stocks and bonds) where only expected returns affect price.  Housing is simultaneously an investment and a consumption good.  This dual role can lead to strange pricing results. Therefore, a subdivision’s name might convey extra value for reasons of prestige and conspicuous consumption.

Zahirovic-Herbert and Chatterjee (2011)[i] investigate this very question.  Specifically, they examine for the impact on property price for the terms “Country” and “Country Club” in subdivision names in Baton Rouge, Louisiana. After controlling for location, property age, property size, and a host of other property characteristics typically found in housing price studies, they find that buyers assign a pricing premium of 4.2% for “Country” and an additional 5.1% for “Country Club”. The authors argue that these findings are a result of buyers’ willingness to pay for added prestige from the ownership of properties in these subdivisions.

Implications for Practice

Practicing real estate professionals have been making this conspicuous consumption argument for years to their clients.  It is abundantly clear to agents and brokers that this phenomenon exists.  However, it is hard to persuade buyers that there is reasoning behind this argument because they know that a higher commission is at stake.  Said another way, they think the agent is providing this prestige based argument in order to make a higher commission.

After reading this brief piece, however, agents can point to the science behind conspicuous consumption, subdivision names, and property prices.  Clearly certain subdivision names (that may vary by location across the country)[ii] convey additional prestige from ownership, which leads to slightly higher prices for properties within these areas.

It is no longer an agent trying to explain their experience and knowledge to skeptical clients.  Now, there is science (statistical evidence) to support the conspicuous consumption effect in certain subdivision names.

ENDNOTES


[i] The concept of conspicuous consumption is clearly present in housing prices.  Unfortunately, the naming that creates extra prestige is unclear and most certainly varies across the country.

[ii] Zahirovic-Herbert, Velma and Swarn Chatterjee. (2011).  What is the Value of a Name?  Conspicuous Consumption and House  Prices.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

Are There Harmful Effects from Changing Property Listing Price?

The Research

Are there any negative effects from changing the listing price of a property?  This question haunts Brokers/Agents as well as sellers of property every day.  At present, there does not seem to be a consensus answer to this question within the professional real estate community.  Fortunately, this question was scientifically investigated in 2002 by John R. Knight – Knight (2000).  Unfortunately, few know the results of  Professor Knight’s research.

In Knight (2002)[i], the impact of changing a property’s listing price is investigated.  Additionally, the types of property that are most likely to experience a price change are also estimated.  The findings from this research indicate that, on average, properties which experience a listing price change take longer to sell and suffer a price discount greater than similar properties. Furthermore, bigger price changes are found to experience even longer marketing times and greater price discounts. Finally, as for which properties are most likely to experience a price change, Knight finds that the greater the initial markup, the higher the likelihood that any given property will experience a listing price change.

Implications for Practice

Sellers as well as Brokers/Agents should therefore be aware of the critical necessity of getting the price correct from the start.  Sellers wanting to overlist will ultimately take longer to sell and will sell their property for less, on average, according to Knight. Brokers/Agents’ desire to take a listing and get the price right later will ultimately lead to their working harder according to Knight, and they are not doing their sellers any favors. Thus, an initial and detailed CMA is much more critical than many originally thought.

Interestingly, I have found in my own research that the direction (up or down) of the listing price change does not matter.  A listing price increase and decrease both lead to similar results found in Knight’s work – longer marketing times and lower prices.  Therefore, get the price right from the beginning.  It is best for all.

ENDNOTES


[i] Knight, John, R.  (2002).  Listing Price, Time on Market, and Ultimate Selling Price: Causes and Effects of Listing Price Changes.  Real Estate Economics.  30:2, 213-237.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.