How much is that house? At least 10% below the asking price

10/08/2009 10:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

When sales of existing homes fell in August--for the first time since March--home sellers jumped into action, slashing the asking price on their properties.

The average discount from asking price to sale price was 10% as of October 1, according to Trulia, a provider of real estate pricing date. The total hit? A $28.4 billion price cut in an effort to attract buyers.

So where was the worst damage? And what does this discounting mean for future home prices?

The biggest price cuts came on houses listed for more than $2 million. Owners in that segment received an average of 14% less than their original asking price.

Half of the 10 states with the highest percentage of discounted homes were in the Northeast: Massachusetts, Rhode Island, Connecticut, New Hampshire and New Jersey. New York, California and Florida accounted for 35 percent of the total value of price cuts across the U.S. market. 

Among the 50 largest U.S. cities with the biggest percentage discounts: Memphis, Minneapolis, Portland,Indianapolis; and Baltimore. Trulia's data excluded all foreclosed properties and undeveloped land.

Exactly the kind of discounting you'd expect as the rate of existing home sales drops and the inventory of homes for sale stays stuck at high levels. 

Anyone looking for an end to the decline in home prices--which would help stop the erosion in family net worth that's feeding the current recession--has to be disappointed in the news.

Continued discounting leads buyers to expect future discounts on asking price and that leads to further falls in home prices. And to another wave of discounting.

Declining prices for existing homes put pressure on the prices of new homes. To compete, home builders have to cut the prices of newly constructed houses.

If this sounds exactly like deflationary expectations have taken over the housing market, you're exactly right. In deflation, people put off buying today because prices will be lower tomorrow. Their decision not to buy today then leads to falling demand that guarantees prices will keep on dropping.

To break this cycle you need something to encourage buyers to buy today. The $8,000 credit to first time buyers did exactly that--but that incentive expires at the end of November. Rising employment and rising incomes would do the trick too but those still seem like wishes on a distant horizon.

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