Who Makes up Prices?

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I read with interest a letter, printed in the Auburn Journal’s Opinion page, on Tuesday April 22.

What causes a $230,000 hike in price of home?

Who decides the price of 55-year-old home that is 900 square feet and in medium condition?

The house was built in 1953 and in 1995 was priced at $90,000.00 and was for sale in 2007 for $320,000.00.

What constitutes that amount of price hike for that house?

Do our Realtors decide the prices?

William and Norma Pullen Meadow Vista

Dear Mr. and Mrs. Pullen,

I thought your letter was a very good one.

I asked Kris Forster of Brockway properties to help answer your question. Kris has been a certified and active professional appraiser for over 25 years.

“Realtors do not establish home prices, buyers do,” said Kris.

Kris explained that real estate values are influenced by supply and demand. For example, a seller’s market (higher real estate values.) is created when buyers have very little to choose from. The shortage forces buyers to compete for the same properties resulting in higher prices.

“Our most recent experience was between 2001 and 2005. It wasn’t uncommon to see offers come in over asking price with the only contingency being able see the inside of the home!” continued Kris. “Homes were often sold within hours of hitting the market.”

Today is a different story. It’s a buyer’s market (lower real estate values.) According to Kris, we have an over supply in relationship to the demand. With so much inventory to choose from, buyers are taking their time. Sellers are lowering their prices in hopes of attracting buyers and homes are taking much longer to sell.

Areas that have offered a number of entry-level homes and have experienced a lot of new construction such as Lincoln, are seeing a greater decline in real estate values than the “move-up” areas such as Auburn where resales predominate. Auburn’s home values have held up to a much greater degree because the housing stock is more mature. There are also fewer foreclosures in the Auburn area.

The Downtown and Midtown Sacramento markets, according to Kris, are actually experiencing price increases because the supply and demand is right in line.

Today’s buyer’s market has also been complicated by rising fuel prices and a change in financing. Kris explained that in past seller’s markets, buyers would typically commute to out lying areas because of the affordability factor. High fuel prices have wiped that edge out. Last year’s $300 per month gas bill is now $600 per month and expected to rise! The higher cost of a commute comes right out of the buyer’s income and significantly limits their buying power.

The tighter qualifying guidelines for today’s buyers has had an enormous impact on demand. The hybrid stated income loans and 125% financing programs are a thing of the past. These changes have taken a lot of buyers out of the market. Fewer buyers equals lower price.

The entry level markets in Roseville, Rocklin and Lincoln seem to be revving up again. Multiple offers are being reported. Statistics indicate that the prices in these markets have hit the bottom. When investors show up it is a definite sign of a market poised for an eventual upturn.

I agree with Kris Forster. Buyers and sellers set prices. It’s the Realtor’s job to interpret the market and market trends. Understanding the forces that drive the market is a matter of good Home $$s and Sense.