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Simple Questions, Simple Answers, and Home Values

By
Real Estate Agent with Keller Williams Realty

I have been in various aspects of real estate a long time. I represented builders for 11 years, was a mortgage broker for 4 years, and have been a Realtor@ for 6 years now. I've learned a lot in my time and yet everyday I get asked questions that cause me to step back and think. Not that the questions in and of themselves are difficult. My challenge comes in trying to keep simple answers simple.

A perfect example made itself clear to me the other day. I had a referral from an agent in Florida. The person they referred to me wanted to buy "foreclosures" in Carmel Indiana. When I contacted the potential buyer he told me his intention was to buy a home or two in Carmel and that he wanted to spend 10-15K for each (Carmel is a very affluent suburb north of Indianapolis). When I asked a few more questions, I found out that he was basing this thought process on someone else who was buying foreclosures in downtown Indianapolis for that same price. Somewhere in the process it dawned on me that this buyer didn't understand what drives home prices. In review I realize we really have this type of conversation all the time with potential buyers and sellers alike.

The simple answer to what drives home prices is supply and demand economics. If demand exceeds supply, prices go up. If supply exceeds demand prices will always go down. There, a simple answer to a simple question. In utopia we could use this simple answer and never have to delve deeper.

This however is when it is difficult to keep simple answers simple. For example, there is no such thing as a national real estate market. Real estate markets are local, sometimes as small as a specific street or neighborhood. Our buyers are beseiged with national statistics that may or may not apply to a local real estate market. If you ask me how the real estate market is in Carmel Indiana, I may ask you what price range you would like to know about because again, there are different answers.

Worse yet is when demand for homes is falsely modified. What happens when we completely relax lending standards and nearly everyone qualifies?  We have a false demand for homes and 3 things happen: 1) Existing home prices rise dramatically; 2) Builders build homes to this new false demand; and 3) Eventually the housing values will crash hard until they again reach the natural balance of supply and demand. That is exactly what happened up until around 2005 when prices peaked, the market was appreciating and building to a falsified or accelerated demand, so now we are trying to again find that balance between supply and demand. That is unless you believe that tax incentives and first time buyer tax credits are creating a new wave of false demand...we'll know the answer to that in 5 years or so.

How can you use this information?  If you're an agent, make it a priority to understand the laws of supply and demand economics and the factors that influence both supply and demand in your area. For buyers and sellers, don't rely on national media for local information. Ask your local real estate experts about the local market(s) conditions. They should be able to tell you what is happening and why. If they can't, they aren't experts and you should find another agent who can better help you.

So what happened to the 10-15K Carmel foreclosure buyer? There is no such market so we're trying to decide between location and price. Again, supply and demand!!

Posted by

                    

The Matt Borushko Team - Carmel Indiana Real Estate

Keller Williams Realty

Certified Distressed Property Expert

www.realestateproindy.com

317-843-8739

 

 

Comments (2)

Ken's Home Team LLC. | 360.609.0226 | Portland, OR & Vancouver, WA Real Estate Team
Ken's Home Team LLC. - Vancouver, WA
- SOLD IS OUR FAVORITE 4 LETTER WORD -

Great Post, Thank you! you make a great point!  it is a local market, I had a call the other day from a woman that said her home value is based on Detroit, i tried to tell her that homes sales are based on local market not national. 

Mar 18, 2010 04:49 AM
Matt Borushko
Keller Williams Realty - Carmel, IN
Carmel, Fishers and Noblesville Realtor

Thanks Ken. Sometimes it is easy for us to misunderstand where our clients are coming from. As I learned in training, there are over 4 billion points of view in the world and they are all right!

Mar 18, 2010 12:37 PM