Tuesday, January 15, 2008

Straight Talk about the Law of Supply & Demand as it Applies to Real Estate

One consistent demand of a real estate agent’s marketing strategy is convincing a would be seller that in order to sell their home in a reasonable time period, the home must be listed at market value. Homes or land listed at market value or below sell; and those priced above market value do not. To understand this concept, it is important to understand what market value is and what it is not.

Market value is what a buyer is willing to pay in today’s market.

Market value is NOT

How much you owe.
How much your Cousin twice-removed who once sold a home says it is worth.
How much you need to net to buy your next home.
What you paid for the home.
The higher estimate received from the agent who is bidding on your listing.

This last Christmas my 14 year old Son requested a Nintendo Wii. This is one of the hottest game systems this year and is very much in demand. Last Summer, the basic unit could have been purchased at the list price of $249.00. As Christmas 2007 approached, it became increasing clear that the demand was considerably higher than supply. A search on e-bay (no retailer seemed to have them) soon revealed that you could get a system from anywhere from $400.00 to $700.00. Those with an inside track on the supply were making a bundle as most postings sold with multiple bids. Not one to buy at demand based pricing, I hedged and appealed to my Son’s economic reasoning. Sure enough, one could see that prices were already starting to drop the day after Christmas. I imagine that in a couple of months, the unit will be available everywhere at list price.

What does this have to do with real estate? Everything! Remembering the definition of what market value is, we find that parents were willing to pay the inflated prices to make sure Johnny was delighted on Christmas morning.
Does anyone recall the movie Jingle all the Way with Arnold Schwarzenegger who searched the whole movie for a Turbo Man?

Picture a street corner that has a gas station on each corner in your town. Rarely, do you find that the name brand stations are advertising the exact same price on gasoline. Without getting into an argument about which franchise has the best gas, gas is gas to most people. They serve the same purpose and fulfill the same need. They are equal.

Which of the four gas stations do you stop at assuming the all have equally attractive clerks? (As compared to each home having granite countertops or bathroom upgrades)

I believe that gas was approaching $4.00 a gallon in our area in 2007 as compared to the $3.12 I saw this morning. Can the gas station that was selling gas at $4.00 keep that price while others are now charging a little over $3.00 a gallon? Using this strategy, who will sell gas and who will not?

If you are not ready to list your home at market value, you are not ready to sell. There is a real estate saying that goes like this. Those that list at market value, move and those that list above market value, stay. Perhaps it is not the right time to sell your home.