02/19/2021
Are you trying to buy a house?
Do you refuse to pay more than the asking price (Listing Price)?
Do you refuse to pay more than what a home is worth?
If so, this post will explain everything to you in easy-to-understand language.
Feel free to share it!
I find that many home buyers, especially First Time Home Buyers, don't understand (or refuse to accept) how real estate pricing works.
Real estate pricing contradicts all your life experiences with buying goods and services.
It's the same with real estate inventory. This also contradicts all your life experiences with buying goods and services.
And it's the same with real estate features. This also contradicts all your life experiences with buying goods and services.
*Real Estate Pricing*
When you go to a store and see a shirt on sale for $10, you know you can buy that shirt for $10.
There's no bidding war for that shirt.
If there are no more shirts available or no shirts in your size, you simply wait a little bit until the store gets more shirts.
Then you go back and buy one for $10.
But that's not the case with homes in this market. Many people are competing for very few homes, which drives up the price of each home. 
*Real Estate Inventory*
The store has lots of shirts for sale: Big shirts, little shirts, T-shirts, sweatshirts, etc.
If you don't see a shirt you like, you can buy a different kind or simply wait a little bit until the kind of shirt you want is in the store.
But that's not the case with homes in this market. There are very few homes of any kind available for sale. 
*Real Estate Features*
The shirt supplier can supply a virtually-endless amount of shirts to the store that are all identical.
Perhaps you really want a blue shirt with a pocket on the front. And you want the pocket to have a special kind of stitching.
So if you don't see the exact shirt you want, you know that there will be a new shipment of that shirt next week. And you can buy the shirt for $10. 
But that's not the case with homes.
There aren't multiple, identical homes. There's only one example of any particular home.
And if a particular home sells, there will never be another one exactly like it. Ever.
Unlike shirts, if a house sells you can't just wait around for another house like it to be available for sale.
Even if the new owner puts the house on the market a few years from now and you want to buy it, it will no longer be the same house anymore. The home will be older. And the roof might be older, the HVAC system might be older, the seller might've changed the paint, etc. Maybe there will be lots of wear and tear. The house may or may not be as attractive to you as it is now.
Even if there's currently another model of that home for sale in the same neighborhood, it has different updates, features, exterior and interior colors, orientation to the sun, etc.
Maybe the first house is on inclined street and the other is in a cul-de-sac.
You can't squeeze in an exact duplicate in the same cul-de-sac. Even if you could, it would have to be built first. But even then, it's not an exact duplicate because it's newer than the other house. And maybe it's on a smaller piece of land because it was squeezed in.
See?
All homes are different. They can be similar, but they are still different. No two homes are identical.
*So how does all of this affect pricing?*
Unlike shirts, in this real estate market there aren't enough homes to go around. There's more demand than supply. This affects pricing.
Unlike shirts, in this real estate market the homes that are available vary in features. No two homes are identical. This affects pricing, too.
So here's how you're affected:
1. You want to buy a house, but there aren't many homes of any kind available for sale.
2. Ideally, you want a 3-bedroom detached house with a finished basement. But there's only one house like that available for sale.
3. Other buyers who have been looking for homes a little longer than you haven't had any luck. Every time they find a house they love, they end up being an unwilling participant in a bidding war. And they lose the house.
4. Out of desperation, these buyers start looking at homes they don't really love. Maybe homes that are their third or fourth choices.
5. Perhaps these buyers prefer 4-bedroom detached houses with finished basements. But out of desperation, they decide to look at 3-bedroom houses too. 
6. What do they find? The 3-bedroom detached house with a finished basement that you fell in love with.
7. So now these buyers make offers on the house you really like. So that's why there are multiple offers on that house.
*But why are prices so high?*
You have so many buyers competing for homes of any kind. They're desperate to buy homes because of low interest rates, growing families, unhappiness with their current living situations, etc.
And when you have 30-50+ people competing for every house, human nature kicks in. The seller wants to see how high they can get the price.
But many home buyers don't understand why a seller won't accept an offer at Listing Price. After all, isn't Listing Price the price the seller wants?
Why would a seller put a price on their house and then refuse to accept an offer at that price?
It's because in this hot seller's market, the Listing Price is largely an arbitrary number. It's a placeholder. It's a temporary number to generate buzz.
The only relevant number is Market Price, which is the highest price a buyer is willing to pay for the house.
Let's pretend Jane lists her house for $300,000. But because of limited supply, there are 30 buyers who want her house.
Let's say one of the buyers offers $375,000 for her house. This is the highest price that any buyer offered Jane.
The Market Price for Jane's house is now $375,000.
Listing Price: $300,000
Market Price: $375,000
In the average buyer's mind, especially a First Time
Home Buyer, they think the house sold for $75,000 more than it was worth.
Is that what you're thinking, too?
That's the disconnect.
The average home buyer in this market just can't wrap their heads around the idea of a home being listed for $300,000 and selling for $375,000.
And that's because they're thinking the Listing Price is the real price.
But the Listing Price is not the real price.
The real price is the Market Price. The Market Price of a home is the highest price a buyer is willing to pay for it.
In this example, the buyer didn't overpay for the house. The buyer paid Market Value for the house.
The Listing Price is irrelevant.
All that matters is the Market Price.
In a balanced real estate market, we have roughly 6 months of supply. That means if no more homes went on the market at any given point in time, it would take roughly 6 months to sell all the inventory that was currently on the market.
In a balanced market, there are enough homes for buyers to buy. There's enough supply to meet the demand.
So in a balanced market, the Market Price is close to, or equal to, the Listing Price. 
But in this market that we're in now, we have less than a month's inventory. Really, we only have a week or two of inventory, if that.
That means if no more homes went on the market starting today, it would only take a week or two to get all the homes that are currently on the market under contract.
So because there's so much demand for homes, it drives up the prices of homes.
"OK Manoj, then why don't sellers just list their homes at Market Price to begin with? Why get our hopes up at a lower price if they really want a higher price?"
Great question.
It's because we don't know for sure what Market Price is until the house is on the market.
We could think it's roughly $350,000. So we list the house at $350,000.
But let's suppose a young couple have a baby on the way. And they have two dogs. And their apartment has noise and maintenance issues. They are desperate to find a house and fast! So they offer $375,000 for the house. 
That's how it works.
The other reason is this: If the Listing Price is too high, then the house might not appear in some buyers' searches.
Or if it does, a buyer might immediately disregard the house because of the high price.
So the pool of potential buyers is now smaller.
But when the Listing Price is set artificially low, the home appears in more buyers' search results.
And now the pool of potential buyers is larger.
And this creates a bidding war.
"But why are buyers offering so much money for these homes?"
Well, it's a known fact that when people are emotionally invested or emotionally attached to something, they'll sacrifice more, pay more, etc.
So let's go back to Jane's house.
Jane's house is listed for $300,000. You can afford that monthly mortgage payment.
You've already envisioned life in that house. You've envisioned raising your family there, having family dinners, playing in the backyard, having cookouts with neighbors, etc. You've created a whole life in your mind.
You are now emotionally attached.
As you are preparing your offer, you learn that there are 20 other offers on the house already.
Now you're in a dilemma.
What do you do?
You could go forward with your offer of $300,000 but you know there has to be at least one other buyer offering more than that.
Are you prepared to lose the house?
Start from scratch and look for houses all over again?
Get your hopes up all over again?
More than likely, you'll make some sacrifices to strengthen your offer.
You'll pull more money out of your 401(k) or 403B. Now you can make a bigger down payment, pay a bigger deposit or pay all your closing costs.
Perhaps you'll cut out some personal expenses so you can afford a bigger mortgage payment.
So you talk to your lender, look over your budget and decide to increase your offer to $330,000.
It's more than you wanted to pay, but you make it work. After all, you've envisioned a whole life in this house and you want a shot at beating the other 20 offers (and counting).
See, if Jane had originally listed the house for $330,000 then it might've never appeared in your search results because you were looking at homes up to $300,000.
Or even if you did see it, you would've dismissed it because it was seemingly out of your budget.
But look how things change when you've already grown attached to the house...
Now you're willing to pay $330,000, get rid of Netflix, get rid of cable, reduce your retirement contributions, etc. You're doing all sorts of things to get the house that you've fallen in love with.
So there you have it. Now you know why Listing Prices are set lower than Market Prices and why Market Prices are so much higher than Listing Prices.
Remember: When you pay more than the Listing Price, you aren't overpaying for the house; You are paying the Market Price.
