Sunday, May 21, 2006

Flipper vs. Market, Round 1: Pricing Psychology

Finding which houses are being sold as flips is easy. You just compare current listings with recent sales. What is not easy, is breaking out any pricing differences between flips and the market as a whole.

There are just too many variables to control for when you try and compare homes. Zip code and size are just two factors that determine price. Also, flipper inventory varies widely by zip code:



So rather than compare prices directly, I have chosen compare performance over time between flippers and the rest of the market. In other words, if a house doesn’t sell, do they lower the price, and by how much?

The answer is shown in the following chart. The chart compares houses on the market as of May 20 that were on the market in the past. The right axis plots the percent of inventory on market at the time that is reduced today, and the left axis plots the magnitude of the reduction:


What did not come as a surprise was that flippers were much more likely to reduce their price if a house didn’t sell. Flippers are 20% more likely to reduce after 30 days without a sale than the rest of the market.

What did surprise me was the magnitude of the reduction. Flippers were only willing to drop prices by an average of 2.5% after around 30 days, while the rest of the market was willing to come down nearly 3%.

Another interesting thing to note is how price reductions and the willingness to reduce both level off by 30 days on the market. Between 29 and 41 days on market, there was almost no change. In fact, between May 18 and May 20, there was a 0.5% increase in prices!

So, this leads to some questions:

· Why aren’t flippers willing to lower their prices as much as the market? Are they not able to do so, or do they think the market will go up again?

· How much room do the flippers have to reduce before they become a “Flipper in Trouble”?

· If flippers continue to follow market trends rather than lead, should they really be considered “smart money” after all?

Clearly, a game is afoot here.

Max

2 comments :

Anonymous said...

>> Why aren’t flippers willing to lower their prices as much as the market? Are they not able to do so, or do they think the market will go up again?

I think the reason is that there are 3 "stages" in a correction:

1. Disbelief
2. Acceptance
3. Despair

I believe that we are still in the first stage. That's why the sellers have not reduced their prices significantly. But that will change.

Anonymous said...

What happened to all the other discussions?