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.

My theory?

Sellers hear that home prices are rising . . . and overdo 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.

Of course, such Sellers also have to endure more showings, inconvenience, etc. in the interim.

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 four months of market time on a $500k home lops at least $20k off the home’s price.

Annually, that translates into a 12% rate of depreciation.

By contrast, the Twin Cities housing market is up about 4% the last year.

Last time I checked, 12% was greater than 4% . . .

See also, “Perils of Overpricing.”

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

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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