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How Market Conditions Affect Price

Posted July 6th, 2010 under smart selling.

(This is the second in a series of six articles discussing the factors that influence the selling price of your home. For the first article, read 'Five Factors That Influence Your Selling Price'.)

In the housing market, like everywhere else, the balance of supply and demand affects how much people are willing to pay to buy something—or, looking at the other side, how much people are willing to accept to sell something.

On any given day, if there is a house for sale and several potential buyers are interested in it, the seller can choose the buyer who offers the highest price. However, if there are several similar houses for sale, and only one buyer looking, that buyer can pick the lowest-priced house.

When supply and demand are in equal proportion, the market is stable. But, when either of the scenarios above repeats itself over a period of time, a market trend is set. Market trends can sometimes accelerate very suddenly, especially when they are fuelled by the media.

For example, in October 2009, the average selling price in our neighbourhood was $284,000. Shortly afterward, the supply of homes dwindled to half its normal level, and interest rates remained extremely low, creating a pent-up demand. In a short time, the average selling price rose rapidly, and by the end of February it had reached $317,000! By the end of March it was even higher at $329,000.

However, by this time the supply had returned to normal levels, which prompted a levelling-off of prices. By the end of April, prices had barely increased, reaching only $330,000.

To illustrate just how important trends are, here is the true story of two similar homes on the same street in Brampton.

The first home was listed in the middle of March for $349,000. At that time, the average price was increasing rapidly. The home sold in under two weeks! An average wait is six weeks, implying that this home could have sold for more. The seller failed to take the trend into accont.

The second home in our true story was listed at the end of April for $364,000. By this time, as we've seen, the upward trend was over. The asking price for this home was too high, and as of this writing, it remains for sale at a reduced price of $348,900. Notice that this is now less than the asking price of the first house, which sold in only two weeks—even though average prices have increased every month since!

This demonstrates the importance of trends: it's not just what your house is worth now, it's what it will be worth in future.

Check back for the next article in this series when I discuss the influence of affordability: average income versus interest rates.

Want to know more about current trends and conditions? Just ask me, I'll be happy to help.