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Today’s Talking Point 10/29/09

Determing Price in this Market

As a Realtor in today’s new economy, your role has changed dramatically from decades’ past. As recent as just a few years ago, most people viewed Realtors as information providers. Today, any person with an Internet connection can access the majority of the information they need to know about the real estate market and how much their house is “worth.”

The word “worth” is in quotation marks because that is where your new role comes into play. Due to the sophistication of today’s consumers, Realtors must have an increased insight and expertise of the real estate industry. In other words, while buyers and sellers may have the real estate information in front of them, they do not always fully understand its meaning. Therefore, your job as a Realtor is to be the expert in the industry and show your clients that worth is so much more than the value of their home today; it also includes what the value will be in six months and why.

To be successful in today’s market, use these questions to help sellers understand the current market and how it should affect their course of action.

1. Why are the prices of homes dropping substantially in today’s market?

Sellers need to realize that prices are dropping today because of the anomaly that occurred prior to the market booming. Professor Carl Case, a contributing author of the highly esteemed Brookings Papers, looked closely at the appreciation of median home value over five year increments dating back to 1980 . According to his research, home value appreciation averaged at about 26.5 percent each five years for the entire 20 year period. But in the six-year increment that followed through 2006, appreciation skyrocketed to a monumental 89 percent. Prices in today’s market are adjusting to the inconsistent growth that occurred during the first six years of this decade. In other words, today’s market is not on the decline; rather, it is moving in the direction toward stability, which will mean a healthier and more sound real estate industry in the future.

2. How do I determine the direction of pricing in my market?

While there are no steadfast rules to determine future pricing, your month’s supply of inventory (total inventory divided by the number of houses sold per month) is a great guideline to determine the direction of pricing. A normalized market has five to six months of inventory. For example, if 100 houses sell a month in your marketplace, there should be 500 to 600 houses in active inventory. Based upon this principle, if you have one to two months of inventory, double digit appreciation will occur. The lack of supply will cause potential buyers to clamor over the few homes that are for sale, which in turn drives prices higher. On the other end of the spectrum (which is where most markets are right now), there is somewhere between seven to eight months of inventory on the market. This over-abundance of supply causes prices to drop because there are simply not enough buyers to support the number of homes for sale


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