Listing Price, Time on Market, and Ultimate Selling Price: Causes and Effects of Listing Price Changes

By Knight, John R. | Real Estate Economics, Summer 2002 | Go to article overview

Listing Price, Time on Market, and Ultimate Selling Price: Causes and Effects of Listing Price Changes


Knight, John R., Real Estate Economics


Information about price changes during a home's marketing period is typically missing from data used to investigate the listing price, selling price, and selling time relationship. This paper incorporates price revision information into the study of this relationship. Using a maximum-likelihood probit model, we examine the determinants of list price changes and find evidence consistent with the theory of pricing behavior under demand uncertainty. Homes most likely to undergo list price changes are those with high initial markups and vacant homes, while homes with unusual features are the least likely to experience a price revision. We also explore the impact of missing price change information on estimating a representative model of house price and market time. Our results suggest that mispricing the home in the initial listing is costly to the seller in both time and money. Homes with large percentage changes in list price take longer to sell and ultimately sell at lower prices.

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Sellers of homes consider carefully the initial price at which to list their homes, as this listing price affects not only the ultimate selling price, but also the length of time the home may remain on the market before a willing and able buyer comes forward. Sellers wish to sell their homes at the highest possible price in the shortest possible period of time. These seemingly contradictory objectives complicate the selection of an appropriate initial listing price. Pricing the house too high reduces the pool of potential buyers and may result in higher holding costs because of extended market duration. Pricing the house too low may result in a quick sale but at a price lower than might have been achieved with a more selective pool of buyers. The list price decision is not necessarily final, however. A home seller has the option to set an initial listing price, observe market reaction to that price, and then adjust the listing price in response to what has been learned about market demand for the home.

That there is a relationship connecting the listing price, the speed of sale, and the magnitude of ultimate selling price is clear. Data problems, however, have complicated previous attempts to empirically identify the nature of this relationship. Typically, information about price revisions that occur during the selling process is unavailable. Instead, only the most recent listing price and the corresponding time on the market, or the initial listing price and the corresponding time on the market, are considered. The lack of price change information impairs our understanding of the home sale process and poses potential measurement problems when estimating models of house price and time-on-market.

This paper considers the causes and effects of changes in list price on the list price (sales price) time-on-market connection. We use a cross section of housing transactions that includes not only the initial listing price and date, but also information relating to the size and date of a change in listing price. This permits us to explore the characteristics that make a home more or less likely to experience a price revision during its marketing period. It also allows us to gauge the significance of measurement error on the parameter estimates of typical house price and time-on-market models.

Our study provides an empirical test of the theory of pricing behavior under demand uncertainty. It also facilitates a richer understanding of the search theoretic relationship between pricing and market time. Beyond its academic motivation, the study conveys practical information, particularly to real estate brokers tasked with helping home sellers evaluate initial listing price and alternative price revision strategies during the listing period.

The paper is organized as follows. In the next section, we describe two separate but compatible theories that guide our empirical investigation. …

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