Market Appreciation vs. Home Depreciation

“In all cases in which work is produced by the agency of heat, a quantity of heat is consumed which is proportional to the work done.”

–Rudolf Clausius, first law of thermodynamics

“An overpriced, “For Sale” home depreciates in value faster than an appreciating housing market rises.”

–Ross Kaplan, first law of real estate

It’s strictly anecdotal, but I’d guess that there’s more — not less — overpricing in a rising housing market than in a falling market.

icarusMy theory?

Sellers hear that home prices are rising . . . and over do it.

Result:  their home sits, accumulating damaging market time, and not infrequently sells for less than what they would have gotten if they’d set a more realistic, initial asking price.*

Effect of Rising Market

That’s true even in a rising market.

The explanation is that an overpriced home sitting on the market depreciates faster than all but the most feverish housing markets rise.

The following example illustrates the point.

Assume (as I do) that six months of market time on an average-priced Twin Cities home (about $200k) lops at least 10% off the home’s price.

Annually, that translates into a 20% rate of depreciation.

By contrast, the Twin Cities housing market is up 10% – 15% the last year.

See what I mean??

See also:  “Perils of Overpricing.

P.S.:  for those stumped by the graphic (above):  it’s Icarus flying too close to the sun.

*In real-world terms, a Seller who lists for $425k and gets 95% of that (about $400k) is better off than one who lists for $500k and ultimately gets 70% of that ($350k).

Even if the $500k Seller ultimately nets 80% of that, or the same $400k that the $425k Seller got, the latter will typically get their deal much faster, having endured a lot fewer showings, inconvenience, etc.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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