How does the real estate market really work?

One of the main problems, if not the biggest problem a house seller has to face is putting an exact price on his house.

Why is it so difficult? Why can’t the home seller decide that his house is worth $139,650, and get what he asks?

The real estate market is not like the supermarket, where you just pay the sale price.

You’ve probably noticed that a house rarely sells for the asking price. Not only it is rare, it’s extremely rare.

As a rule, houses usually sell less, if not a lot less then the asking price.

So, what is going on?

Economics shows us that everything sold is either at a fixed price or at a market price.

Fixed price

When something is sold at a fixed price, the fixed price is based on the production costs, plus a selling margin (plus a number of other considerations that will not be discussed here).

For example, when a manufacturer makes a chocolate bar, he knows exactly how much it costs to make. He then adds a small profit to those costs and sells it to the retailer. The retailer does the same and attaches a sticker price to the chocolate bar.

You happen to go to that store with your 4 year old daughter, and you are then forced to buy the chocolate bar. You pay for the chocolate bar without questioning its advertised price.

Market price

Whatever the seller and the buyer agree upon becomes the market price. Discussions can go on and on and on.

If everything was sold at market price, you would still be waiting in line... at the supermarket.

In other words, the real estate market is market priced.

It’s like the stock market. A company’s shares fluctuate all the time. All that fluctuation is due to the asking and selling prices of the same stocks. Everything is negotiable.

However, the prices move in ranges. For example, over a certain period, ABC Computer stock prices oscillate between $60 and $80.

ABC computer prices example

If you were in the market to buy some ABC Computer stock, by looking at it’s sale history, you would know that it’s price range is between $60 and $80.

The house market works in the same way. House prices oscillate.

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