"Bid-Ask" Spread

Paying Tomorrow's Prices Today

You can't read tomorrow's newspaper today, or see tomorrow's sports scores today, but it is possible to pay tomorrow's real estate prices today -- at least in many Buyer's markets. Huh? The explanation has to do with the "spread" between what home sellers are currently asking, and what home buyers are offering.

Normally, "bid-ask" spreads are associated with things like stocks and pork bellies. However, the housing market is also characterized by a bid-ask gap -- and now it is historically wide. This is captured by one statistic in particular: sales price as a percentage of original asking price. (Of course, when the gap between buyers and sellers widens, sales volume drops -- another characteristic of today's market.)

In a hot Seller's market, homes fetch close to 100% of their asking price -- higher if multiple offers become commonplace. However, in a Buyer's market, sizable discounts become the norm. Currently, the reported sales-to-asking percentage for recently closed sales in the Twin Cities is in the low 90's (and I'm seeing anecdotal evidence that it may be headed lower still).

Before discussing the significance of that number, three caveats.

One, I can personally point to any number of houses that ultimately sold for 75% or less of the original asking price that shed absolutely no light on market conditions: the seller simply wanted too much (and waited a long time to get it!). Second, the reverse is also true: any dummy can sell $1 for 95 cents. Price a house far enough below market value -- even in a dreadful market -- and you, too, can get 100% (or more) of your asking price.

Three, there are other variables besides market conditions that affect how much the ultimate selling price is below the original asking price. For example, in Richfield, where the housing stock is quite consistent and the average house sells for $200k, homes historically sell for much closer to asking price than areas which have more upper bracket and/or unique housing (like around Lake Minnetonka).

That said, it still means something when, out of thousands of homes sold market-wide, the average selling discount has expanded to 8%-10%.

Shrinking Discount

For Buyers, perhaps the most important -- if somewhat counterintuitive -- insight is that even though the market as a whole may not have bottomed, you may actually be able to buy for less today than in a future market with lower-but-firmer pricing.

For example, somone selling a $500k house now may consider taking $450k or even less --perhaps even paying $10k of the Buyer's closing costs. However, once the market is widely perceived to have bottomed, Sellers' resolve is likely to firm, too. So the same $500k homeowner, now asking $475k, may only be willing to slice 3%, or $15k, off their sales price.

Of course, once the market sees a $450k sale less $10k in seller-paid points, followed by a $460k sale with no points, it will likely take notice. Eventually, someone with a $500k house will decide that conditions warrant bumping their asking price to $529k -- and they'll get it! Voila! Goodbye Buyer's market, hello Seller's market (and no more $500k houses for $440k!).