How many times have you heard that this year? What does it really mean? That buyers dictate the price of a home? Truth is it is always a buyers’ market. The price of a home is whatever price an able buyer is willing to pay.

So what makes the difference between the prices of the boom years and the current “bust” year? And, why do we analyze comparable sales, if it is going to be dictated by the whim of a buyer anyway? There are several ways to approach these questions. Lets start with comparable sales –

Realtors and mortgage appraisers both look at recent sales of homes that are similar in style, size, location, and condition in the same township. They will typically try to compare within the same school districts, and use the most recently closed sales. In a declining market, recently closed sales are useful only if they were really recent i.e. within a month or two. Prices are likely to have declined from older sales in this market. The difficulty is predicting how much the decline is – depends on the trends in your local real estate market. But that is the topic for another article later. Buyers also look at comparables and trends in the local market when they make an offer.

In boom year, when prices are trending higher, buyers are willing to pay more than the recent comparable sales. In a bust year, when prices are declining, buyers expect to negotiate lower prices. During the recent boom years, buyers were competing with each other to buy – and hence multiple bids on many homes each one higher than asking price. Results – every sale was higher than the previous comparable sale.

In that market, buyer sentiment was that if they waited, they would end up paying more for the next purchase attempt. Higher prices later might push them over their already stretched limit. The low inventory of homes made for fewer choices. It was simply low supply and high demand – leading to buying frenzy.

In a bust year, when prices are declining, there is no competition among buyers. There are more than enough homes on the market for everyone. Buyers are cautious about prices declining further and are unwilling to pay asking prices. There is no urgency – buyer sentiment is waiting might lead to lower prices and hence a better financial position for them. It’s a market with high supply and lower demand.

There is one exception – when the asking price of a home is clearly excellent value for the money. Buyers buy by comparison. In this less than urgent market, they have probably looked at many of the competing homes. When a home is priced to be great value – taking into account any updates, upgrades, and amenities – buyers will recognize it. There is pent up demand – a pool of able buyers – that will make offers for such a home. Results? Multiple bids from competing buyers leading to the best price possible in this market. Now, realize that best possible price may be close to or slightly higher than asking price in this market. But, it will most likely be a better price than if the home had been listed for a higher asking price and then reduced over time. We’ll discuss this phenomenon in another article.

A final note. Buyers market does not mean the seller must accept a low offer – however ridiculous it may be. The seller always has the choice of refusing any offer. So if you are serious about buying at a value price, make sure you and your realtor make a reasonable argument for the price you are offering. So let me reiterate my initial statement with a caveat: The price of a home is whatever price an able buyer is willing to pay and the seller is willing to accept.

Ulka Rodgers,
REMAX Competitive Edge
908-343-9996 (cell)
908-730-8282 x 25 (office)
Ulka@UlkaRodgers.com
UlkaRodgers.com