Worth is a relative concept

When I speak with people about listing their homes for sale today the first question from them usually goes like this, "what's my home (or condo, or lot, etc) worth?" This is a situation in which words make a difference. Here's why.

When someone asks "what's it worth" they are really asking how much they can get for it if they sold it. In other words, the market value of the property. Why does it matter how the question is asked? Because words like "worth" have deep emotional connotations. By making the sale of the property deeply attached to individual identity and other emotional triggers property sellers (and buyers) are making a big mistake. How big? Well, if all of the overpriced (and I'll explain below what that means) properties on the real estate market today were removed tomorrow everyone would be better off. Including the seller's who want too much for their property. Please note. I'm not talking about people who really need to sell their property now. When foreclosure, illness or relocation prompt the sale of property motivations and needs are entirely different.

Let's use an example like gold to illustrate the difference. The market price of an ounce of gold today is somewhere north of $900. Several years ago that same ounce of gold only brought $400 or so. In the future the price will again drop. Now, in all of these periods the gold is exactly the same. Same weight, same number of atoms and molecules in an ounce, same color. The only difference is demand. You can argue the demand fluctuated according to any number of emotions or economic conditions, I won't disagree. The fact is that the market price of gold changes but it's still the same gold. There's no fundamental difference in the gold itself.

The same rules apply to real estate. When an owner asks me "what's it worth" I try to help them understand the real question is "what's the current market value"? Once we have an agreement on terminology the fireworks begin. A common reply is "that's crazy, I'm not giving my house away!". So lets take the gold example and apply it to the home.

Assuming no remodeling or changes to the home or neighborhood we know the house is the same today as it was last year and (allowing for normal wear and tear) the same it will be next year. So, if the house is the same but prices are different it must be attributable to demand. As we all know from Econ 101 demand drives price and lack of demand lowers price. The problem in the real estate market is when individuals want the economic model to work one way, as in "the market price of my house goes up when demand is great, but the market value of my house does not go down when market demand decreases". Unfortunately you can't have it both ways.

This is where the emotional triggers come in to play. To accept that the home you paid $500,000 for in 2005 only brings $350,000 today takes a bit of maturity. It requires one to accept the reality of the situation as a function of an impartial market at work and then decide to price the home at today's market or to realize that it would be better to wait.

Why would removing all overpriced properties from the market benefit everyone, including those who are overpricing their properties? Supply and demand. Let's say a neighborhood has 10 homes for sale. If those which are overpriced (not foreclosures and short sales, only those where the owner's attitude is "let's put it on the market and if someone pays my price I'll sell") were removed then the inventory of homes drops. As the available inventory drops, demand rises and prices increase.

We can repair the real estate market very quickly if those seller's who aren't really motivated to sell withdraw their property from the market tomorrow.