Early Warning: Ask/Close Spreads

Posted by Dave Fratello on Wednesday, February 27th, 2008 at 3:33am.

The national news this week is again full of tales of home price reductions. Whether you go by median prices or the Case-Shiller index, sales that are happening so far in 2008 are coming in at lower prices than last year.

Today let’s look at recent MB sales from a different angle: what some call the ask-close spread. Basically we’re looking how much recent sellers got, compared to their own starting prices.

The short version:
  • Recent Sand Section sales fared best, with most sales closing within 10% of their start prices.
  • In the Hill Section, a small sample of 4 sales saw 3 close with cuts of 15% or more.
  • In the Tree Section, resales had spreads of 11-16% off their start prices, with most at the higher end of that range; most new construction took cuts of about 15%, and a few builders lost money on their projects.
Now, what you make of this data – we’ll dump the whole lot of it on you in a moment – depends largely on what you think start prices mean.

We tend to agree with the view expressed the other day by Blake Roberts on his local RE blog, that setting a list price is more of an art than a science. It has to be, with so many variables in play.

Still, listing agents are looking at many of the same factors in coming to judgments about the right start prices. There’s a collective wisdom expressed in the advice they give as to what the market will bear. Sellers, of course, make the final call.

Sellers who are unrealistic about price, but later get religion and make a deal, are going to be responsible for some big, big ask-close spreads, if they sell at all. Sellers who are very aggressive on price will have tiny spreads, or may sell above asking.

We think most sellers fall in the middle, and, for this reason, asking prices, and ask-close spreads, truly do provide useful information.

In the samples provided here, almost uniformly, the start prices were substantially too high. To make a deal, sellers needed to come down 10% or more, often substantially more. These cuts, while they only compare against the same homes' start prices – not any broader trend in the market – nonetheless provide a possible early warning that prices are correcting significantly.

Dollarwise, the cuts are occasionally drastic, in the many hundreds of thousands of dollars. Indeed, our cocktail-napkin calculation shows that buyers saved almost $8 million in total on just the selection of homes listed below.

We should emphasize: MBC is not cherry-picking data here. We’re looking at all of the most recent sales of SFRs west of Sepulveda that were listed on the MLS. Our goal was to pull the 5 most recent sales in each region under study, but we went a little further or shorter in a couple of cases. We’re excluding only lot sales – a different market.

All of the following recent sales are organized by the date of closing. Sales are separated by region (Sand, Hills, Trees) and we’ve subdivided the Tree Section to show new homes separately. Also, note that some homes may have re-listed before selling, confusing the issue of what their start prices were – we’re going with the original price, naturally:

Sand Section

  • 2008 Highland (4/3, 2325, newer) – start: $2.295m • DOM: 32 • close: $2.175m (11/20/07)
Reduction: -$120k / -5%
  • 209 19th (3/4, 3350, remod) – start: $3.95m • DOM: 153 • close: $3.675m (11/20/07)
Reduction: -$275,000 /-7%
  • 209 42nd (3/4, 1950, new) – start: $2.3m • DOM: 403 • close: $1.835m (11/21/07)
Reduction: -$465,000 /-20%
  • 1312 Manhattan Ave (4/4, 1650, remod) – start: $2.85m • DOM: 420 • close: $2.6m (1/15/08)
Reduction: -$250,000 / -9%
  • 117 Highland (3/2, 1500, remod) – start: $1.449m • DOM: 250 • close: $1.275m (1/08)
Reduction: -$174,000 / -12%
We’re excluding teardowns in general, but we note that 129 6th started at $3.9m and sold for $3.625m (2/20/08), a reduction of $275k / -7% after only 20 DOM.


Tree Section – Resales

  • 3011 Elm (5/5, 3600, newer) – start: $3.095m • DOM: 196 • close: $2.650m (12/7/07)
Reduction: -$445,000 / -14%
  • 1732 Pine (4/2, 1550, dated) – start: $1.295m • DOM: 114 • close: $1.130m (12/23/07)
Reduction: -$165,000 / -13%
  • 3300 Blanche (5/5, 3375, newer) – start: $2.659m • DOM: 38 • close: $2.360m (1/8/08)
Reduction: -$299,000 / -11%
  • 637 13th (3/2, 2000, dated) – start: $1.585m • DOM: 110 • close: $1.335m (1/9/08)
Reduction: -$250,000 / -16%
  • 2623 Palm (3/2, 1950, remod) – start: $1.599m • DOM: 76 • close: $1.350m (1/16/08)
Reduction -$249,000 / -16%
  • 725 12th (3/2, 1300, remod) – start: $1.4m • DOM: 104 • close: $1.187m (1/18/08)
Reduction: -$213,000 / -15%
  • 2413 Elm (4/3, 3300, remod) – start: $1.799m • DOM: 149 • close: $1.575m (1/31/08)
Reduction: -$224,000 / -12%
  • 561 35th (6/5, 4350, remod) – start: $2.199m • DOM: 172 • close: $1.850m (2/12/08)
Reduction: -$349,000 / -16%
  • 2311 Poinsettia (5/3, 3400, remod) – start: $2.149m • DOM: 200 • close: $1,850,000 (2/17/08)
Reduction: -$299,000 / -14%

Tree Section – New Construction

  • 2310 Palm (5/3, 3150, new) – start: $2.699m • DOM: 443 • close: $2.2m (12/3/07)
Reduction: -$499,000 / -18%
  • 2807 Elm (5/5, 3550 , new) – start: $2.899m • DOM: 139 • close: $2.1m (12/14/07)
Reduction: -$799,000 / -28%
  • 648 35th (5/5, 3600, new) – start: $2.45m • DOM: 142 • close: $2.075m (12/27/07)
Reduction: -$375,000 / -15%
  • 2612 Poinsettia (5/5, 3200, new) – start: $2.399m • DOM: 482 • close: $2.199m (2/8/08)
Reduction: -$200,000 / -8%
And while we don’t have a closed price on 2100 Flournoy (4br/5ba, 3600, new) yet, we’ll note that it began at $3.2m, spent 162 days on market, and, if it closed for the rumored sale price of $2.75m, it will show a reduction of $450k / -14%, quite consistent with the other newbies listed above.


Hill Section

  • 844 11th (5/4, 4500, remod) – start: $3,175,000 • DOM: 540 • close: $2.5m (11/28/07)
Reduction: -$675,000 / -21%
  • 601 Larsson (4/4, 3850, remod) – start: $2,695,000 • DOM: 239 • close: $1.710m (12/27/07)
Reduction: -$985,000 /-37%
  • 853 6th (6/4, 4925, new) – start: $4,795,000 • DOM: 198 • close: $4.5m (1/11/08)
Reduction: -$295,000 / -6%
  • 911 Duncan (5/6, 3700, new) – start: $3,770,000 • DOM: 226 • close: $3,190,000 (2/25/08)
Reduction: -$580,000 / -15%
In the Hill Section, we’ve eliminated 3 recent teardowns/lot sales. One sold for asking, one sold off the MLS and one sold within 3% of its list price.
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