There is a normal tendency by homeowners to overestimate the value of their house because it’s very hard to be impartial to the house. Let’s face it, as a homeowner, we’ve lived in it for many years, made improvements to the house, invested our hard-earned money in it to make it better and more comfortable, and now we feel that it’s a great home to live in and anyone looking to buy it should see that. And because homeowners have such a stake in the outcome of the sale, it’s sometimes hard to accept some cold hard truths.
The most difficult concept for homeowners to understand when considering how to price a house is the concept of Supply and Demand. When there is high demand for a product, and not a lot of supply, the product is scarce and so people are willing to pay MORE for the product. Because they’re willing to pay more, the product is worth more. When the demand for a product is low, and there is a large quantity of the product up for sale, the price people are willing to pay will be much lower because they can easily get their hands on the product of their desire.
The same concept applies to your house. When the number of buyers looking for houses is greater than the number of houses available for sale (or the supply of houses for sale), the demand is greater than the supply and homeowners will be able to get a higher price for their house. When there are more houses for sale than there are buyers, the supply exceeds the demand, so prices will be forced lower. A good way to measure supply and demand of housing in your area is to ask a local realtor about the absorption rate for your area. The “absorption rate” is a measure of the local area’s ability to “absorb” the supply of houses on the market and is calculated by dividing the number of houses on the market for six months and dividing it by the number of houses that sold during the same period. For example, if there were 1200 homes for sale over the course of a year, and 100 homes sold every month, it will take 12 months to sell all of the homes currently for sale. If the absorption rate indicates that it will take 6 months or less to sell the available supply of houses on the market, the demand is said to be greater than the supply, and it is termed a “Seller’s Market”. Conversely, if absorption rate indicates that it will take more than 6 month to sell all of the houses on the market, then the supply of housing is greater than the demand, and a “Buyers’ Market” will be in place. A Buyers’ Market leads results in homeowners having to accept lower prices for their homes in order to sell them.