Today, we’re going to talk about something a little different than what we usually talk about—the distinction between market price and market value. I wanted to do this as sort of a market update because I think it’s a really important psychology that you need to understand if you’re going to enter the real estate market, whether as a buyer, seller, investor, or renter. Right now in our real estate market, these two things are in a real big conflict, and it seems like one is a little bit out relative to the other.
Definition of Market Value and Market Price
Simply put, market value is what a commodity, a product, or an asset could be sold for, given a certain market that it’s in. In this case, it’s like what the comps or the price per square foot in a given neighborhood would suggest a three-bed, two-bath house should or could sell for.
On the other hand, the market price is what it is actually sold for. That means what someone actually paid for that asset, product, service or property, in a given market under a given set of circumstances.
This conversation of how much something will sell for over the comps is often the distinction we’re talking about in this market. In other words, we’re talking about the difference between a market price and a market value.
But why do we need to talk about it?
Now, I think that this is really important to talk about for a number of reasons. Some of those reasons you’ve probably already heard about from all these past market updates, from any other video in YouTube, any article you’re reading, or just chatter, in general, about the real estate market. Right now, the market is on fire as indicated by the following:
- It’s a seller’s market.
- Prices are at an all-time high.
- We’re well into the $700,000 median price here in California.
- Lastly, the average across the entire United States is at an all-time high as well.
So this is just poignant as it feels as if there’s an imbalance that we’re currently experiencing. People are clearly paying more for housing. Prices are over the ask, over the comps, and probably over what everyone expects them to be.
What I want you to really think about?
Thus, when you’re looking at how to value a property, when it comes to price per square foot, or the comps, think of that as the market value or the amount that the property could sell for. Use it as your basis. Then, go over to the market price because ultimately, that’s what you’re going to have to pay to get into the house right now. Think about the competition. Think about the livability of that house, the floor plan, the flow, the finishes, and the fixtures. Determine how much work is going to have to go into it. Ask yourself, “Does it have a work-from-home space or not?” Because ultimately, all of these kinds of stuff will contribute to how much the market price is going to add up to.
Why are people now valuing home very differently?
I’m finding that many people are now valuing home very differently from what they used to, historically. Before COVID, most of us went to offices. We commuted to other places during the day. And we didn’t spend nearly as much time in our homes after work because we’d be out at the bar, or at a ballgame, or the like. Then, we also go on trips or vacations during the weekends or holidays.
However, COVID has completely flipped that. We now work and spend most of our days inside our homes. As a result, I think that has really changed the way we view and value our homes. I think that has a lot to do with the market price too. Now, people are willing to pay more for a home they value for something else, aside from just a given set of numbers.
The factors that go into the market price
When you get down to it, you really just want to remember the market value, the comps, the dollar per square foot, the loan that someone could seek, and what that might limit the market price. (For example, when applying for a conforming loan or a jumbo loan.) Those are factors that go into what it could sell for.
But when you add on a layer of human emotion of what it could do for someone, how long they could see themselves in it, how many immediate repairs there are versus in five to ten years–that price they’re willing to pay today may actually exceed that. It’s especially true in this market where there’s a lot of cash and a lot of people with high incomes who can afford the monthly payments with the low-interest rates.
Therefore, what you have to do is get into your heart space.
Think about what number you are willing to pay for a home on a very core level and what you think your competition is willing to pay for it. There may be a big discrepancy there. Also, it’s possible that you may not love this house as much as someone else would, for various reasons. This is where going and seeing a number of homes, bidding in a lot of situations, and getting an agent who understands those nuanced differences in what is going to affect the buyer’s decision or not can really make a huge difference for you.
I also just want to say this: if you are a home buyer right now, and you’ve written five or ten offers, but lost them all, don’t be discouraged. After all, you’re not the only person out there who has that experience. In fact, almost everybody is writing twice as many offers as they were a year or two ago just to get into a home. Because the learning curve right now is so steep and the climb between market value and the market price has happened so abruptly, it’s therefore taken so long for us to calibrate and understand what is actually happening.
Frankly, it’s something that you have to learn and understand. It is not something that comes easy, intuitively, or immediately to anybody. Unless, of course, you’ll just throw a stupid amount of money at the wall and see what sticks.
One last thing to think about if you're planning to buy a house in this market
Lastly, when you’re talking about market value versus market price, you have to decide what the home is ultimately worth to you. Because at the end of the day, it’s going to go to the person who has the highest market price, not to the one who has the most accurate market value.
So, if you’re going to pay a high market price, make sure to go really deep into what it is you want, what it does for you, what are the flaws, what it’s going to take to fix those flaws, and realistically how long you want to be there. Lastly, on a grander scale, think about how you want to feel in this home. Make sure it makes you feel something. Because if it doesn’t, it’s probably best not to proceed because right now, that discrepancy is going to be so high, you may just find that it’s not going to be worth it.
I hope my blog on market price versus market value has helped you.
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