Homebuyers in Pricey Markets Are Now Scared to Dream (BusinessWeek)

Rising home prices in large cities have put a damper on the aspirational online real estate search.

Rising home prices in hot housing markets are robbing buyers of a favorite pleasure: looking at pictures of homes they can't afford. Or at least, that's one way to read a blog post published today by real estate brokerage Redfin.

Traditionally, buyers browsing online listings have looked at homes that cost more than they are planning to spend, said Redfin. That dynamic has held true in such cities as Philadelphia and Chicago, where prices have remained stable in recent years. But in cities such as San Francisco and Boston, where inventory is scarce and prices have increased sharply, buyers are starting their searches at lower price points.

Denver is another good example. In 2014, the median price for listings viewed on Redfin was $359,000. That was 26 percent higher than the $285,000 median listing price for the city. So far this year, the difference between viewed listing prices ($379,000) and median listing prices ($337,000) is 13 percent. 

There are a couple reasons buyers may start their search by aiming high. We all like to look at stainless steel appliances and killer views, whether or not we can afford them. More practically, it’s smart pricing strategy. If you want to spend $300,000 on a house, you might shop for homes that list for $330,000 and make a lower offer. The research looked at nine large U.S. cities to see whether real estate searchers were using that logic. 

Why would buyers target their search below the local median listing price? Eric Scharnhorst, the Redfin data scientist who compiled the numbers, thinks it's more likely that buyers are adapting their pricing strategies to hot markets where bidding contests have become the norm. "In a city where you need to compete, you start looking at homes for $280,000 with the exception that you'll wind up spending $20,000 more," he said. A simpler theory: In these markets, more people want to buy relatively cheap homes, even though few are available. Whatever the reason, homebuyers in the most competitive markets seem to be abandoning the urge even to peek at the high ceilings, Italian appliances, and outdoor kitchens of their fantasies.