Imagine this: Prices are decreasing in your local market. You set the price of your house at today's fair value. But two months down the line, when you're dealing with make-it-or-break-it interest, your house is overpriced. You're behind the curve. At that point, if you cut the price to market value, you'll be behind the curve again as prices erode beneath you. And cutting the asking price is a signal of desperation that makes buyers wonder what's wrong with the house.
Chasing declining house prices is a bad, bad place to be, but it's one you can easily avoid by looking into the future and pricing your house accordingly. In a market declining by 1 percent each month, knock 3 percent off your fair price to make the house competitive three months from now.
However, the same is not true in an increasing market. If you overprice your house, listing it at what you imagine it will be worth three months in the future, you doom yourself to missing the all-important interest in your fresh listing. By the time your price is competitive, your house will most likely have been on the market three months and will look like a tired listing.