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One of the hardest things a home seller has to do is lower the asking price. Not only does it mean making less money on the sale, but it also shows weakness in an increasingly competitive market. A price reduction is often a red flag to home buyers that the seller is in no position to negotiate and that further reductions are possible.
Despite the economic and psychological pain, accepting a price reduction—even a sizable one—may be the only way to sell a house in this market. For sellers who can afford to ride out the downturn, the smart move is to take your property off the market. For everyone else, it's time to get real.
Of course, that's great news for potential home buyers who are benefiting from more affordable prices. "There's so much inventory that sellers need to market their listings effectively. The best way to market is to lower the price to make it attractive," says Pete Flint, chief executive officer and co-founder of San Francisco-based real estate Web site Trulia.com.
BusinessWeek.com teamed up with Trulia.com to rank the nation's largest cities with the most discounted homes. Topping the list was affluent Scottsdale, Ariz., where 37% of listings have had at least one reduction and the average discount is 12.9% off the original asking price. Other cities in the top 30 include Tampa, Saint Paul, Los Angeles, Honolulu, Columbus, San Francisco, and New York City.
Of course, a reduced price isn't always a bargain. The owner might not have dropped the price enough or might be lowering it because of some other reason (maybe the house is just plain ugly). But markets with large numbers of listing-price drops are also places where properties are lingering on the market and where sales prices are falling fast.
That's certainly the case in Scottsdale. Dave Messner, founder of RE/MAX Fine Properties in North Scottsdale, said homes on the lower end are selling but sellers of new luxury homes are having to discount heavily. The problem is that sellers are competing with banks that are putting foreclosed homes on the market for bargain-basement prices.
"Buyers are looking for absolute steals and that's what's selling," Messner said.
Heidi Majidi, a Realtor with RE/MAX, said that one seller cut the price of a $2 million Scottsdale listing in half only two months after putting it on the market. "It's pretty scary stuff," she said.
Homeowners in New York City are facing a more sudden change in the market, which was in pretty good shape until the Wall Street meltdown about six months ago. In New York City, which ranked No. 25 on our list, 29% of listings are now below their original asking price, according to Trulia.com. The average asking-price discount: 13.7%.
Home prices in New York dropped 21% in the first quarter compared with a year ago and sales have dropped off almost 57%, according to Jonathan Miller, chief executive of real estate appraisal firm Miller Samuel. Home sales picked up in March, but they are concentrated in the lower end of the market. High-end homes, as in much of the country, are taking a long time to sell because wealthy buyers have lost jobs, bonuses, and investment income, and jumbo loans are difficult to get.
"In Manhattan, specifically in the last two quarters, we've seen a big jump in listing-price discounts," Miller said, adding that sellers had to adjust quickly to the sudden drop-off in demand.
Sellers are sometimes behind the market because the home price reports they consult lag behind the market. The reason is that these reports are based on property closings, which happen months (and for new construction, even a year) after buyers sign contracts, said Gary Malin, president of Citi Habitats, a Manhattan residential real estate broker. To properly gauge the market, it's important to look at what's currently on the market rather than what has closed and consider how long those listings have lingered there, he said.
Buyers tend to think that properties that have been on the market too long are undesirable, but a significant price reduction can help to spur activity, Malin said.
"It does get a second wind when it's priced appropriately," he said.
But Mollie Carmichael, senior vice-president of John Burns Real Estate Consulting in Irvine, Calif., said it's better to start out with a competitive asking price than to make adjustments later. In a market where prices are falling, an asking price that is 5% above other listings at the beginning could be 20% too high a few months later. The longer it takes to sell a home, the more prices would have fallen, Carmichael said.
A lower price will generate more interest and could even trigger a bidding war, she said.
"If you close fast and sell fast, you have a better opportunity to retain value," Carmichael said. "I know you might love this or that about your home, but price it to the market. Premiums are very, very difficult to achieve in a market like the one we have today."
Click here to see the biggest cities with the most discounted homes on the market.
Gopal writes about real estate for BusinessWeek in New York.