Accelerating housing prices often imply that homes are selling for far more than their list or asking prices, which leaves prospective buyers and real estate professionals at a loss when it comes to knowing what to bid.
Coming up with a reasonable offer is even more complicated when home sales turn into auctions. Homes in high-demand markets are being sold with an offer date, forcing prospective buyers into first-price, sealed-bid auctions (also known as blind auctions) where buyers simultaneously bid without knowing what others have bid.
Some dwellings in these markets, such as the cottage country north of Toronto, have sold for as much as twice the listing price. Recently, a residence in Toronto sold for more than $1 million over the list price.
Many believe that the increase in housing demand, low supply of new listings and favourable mortgage rates are why homes are selling for so much. This would be true if you believe that home sellers are a poor judge of their property’s worth in high-demand market conditions.
“The list price used to be one of the most important factors when listing a home, as it signalled the seller’s expected price to prospective buyers,” noted Mustafa Abbasi, founding president and chief revenue officer of Zolo, a digital real estate marketplace.
An alternative explanation is that homes are being deliberately listed at lower prices than recent comparable sales to attract a larger cohort of buyers. Such a move can generate exposure with more prospective buyers. Abbasi also noted that “a realtor today will often list a property below market value to encourage more bids.”
The bidding process involves two steps. Prospective buyers must register an intent to bid by a specific time and subsequently submit that bid before the deadline. Real estate agents offer a general rule of thumb: add five per cent to the list price for every registered bid intention. For example, if a home is listed for $999,000 and eight bids are registered on the property, an enthusiastic buyer might be tempted to bid 40 per cent more than the list price.
Housing markets have not displayed such frenzy and speculation in the past. American economics professor Joel Horowitz, writing in the Journal of Applied Econometrics in 1992, noted that dwellings “routinely sold at prices below, but rarely sold at prices above, their list prices.” He further stated that list prices acted as “price ceilings.”
The support for Horowitz’s findings is found in Toronto sales data for low-rise housing in 1995, when less than two per cent of homes sold for more than their list price. The average sale-to-list-price ratio (SLR) was 99 per cent.
Of course, seller and buyer expectations drive the market. John Knight, a finance professor in the United States, and others noted in a 1994 paper that list prices are higher when they represent the seller’s intent. By comparison, list prices lag sale prices in “a market driven by buyer willingness to purchase.”
Perhaps current market outcomes are a manifestation of buyers’ uninhibited willingness to buy. Recent research confirms the hypothesis that buyers’ bidding behaviour leads to a wider gap between list and sale prices, and that behaviour differs by market cycles. University of Ulster professor Stanley McGreal and coauthors observed in a 2010 paper that two quarters before housing prices peaked in 2007, list prices in the U.S. were 12 per cent higher than sale prices. After the peak, sale prices led list prices.
The Canadian experience in housing price dynamics is similar to the one observed in the U.S. March 2021 sales data for the Greater Toronto Area reveals an SLR of 107 per cent, with a property taking an average of 13 days to sell. Similarly, right before the market peaked in Toronto in March 2017, the SLR was 111 per cent, and properties on average transacted in 10 days.
The SLR in a market past its peak is significantly lower. Consider the weak housing market in August 2017 when the SLR declined to 98 per cent in Toronto from its peak observed just a few months earlier.
Where do these stats leave a buyer today? The willingness and commitment of some buyers to outspend everyone else imply that homes in high-demand markets will transact at prices much higher than what they are listed for.
For homebuyers who need mortgages and appraisals, caution is the operative word. Economic theory or a realtor’s experience is of no help in markets where homes sell for hundreds of thousands of dollars more than listing price. Waiting for the right property and the right time when supply catches up with the demand is the prudent approach.
Financial Post
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