Walking Austin’s hike and bike trail around Ladybird Lake on a recent glorious day, my husband and I ran into an acquaintance, Tom, and got into a discussion of the local real estate market. “This market’s really inflated,” he said. “Realtors are driving home prices up so they’ll get bigger commissions.”
“That’s not exactly right,” I said.
“Of course it’s right,” he said. “The commission’s based on a percentage. If you sell the house for more money, you get a bigger commission.”
“That’s true,” I said. “But even if a Realtor saw this as an incentive, she can’t charge more than the market will bear. It’s the market, not the Realtor, that determines the price.”
“But Realtors inflate the market by charging more for homes,” he said.
At that point the conversation was circular. The idea that Realtors can influence market values is embedded in buyer psychology. But we generally can’t produce a sale, however hard we market, if a home is priced too high. We advise a price range based primarily on an analysis of comparable homes that have sold recently, which tells us what people are willing to pay. We also look at what’s currenlty listed, to get a sense of the competition, which is a factor in determining the market.
A good Realtor won’t suggest the highest possible price, but will suggest a range, and relate it to a time factor. If you have to sell quickly, price at the low end of the range; if you have more time, price closer to the high end.
What if a seller wants to price a home well above the high end? A good Realtor may not take the listing. Why? When the property is priced well above market, it won’t sell, no matter how hard or creatively we market. We therefore won’t earn a commission, try as hard as we might, and yet we put hours of time and hundreds of marketing dollars into the effort.
That’s why Tom’s logic doesn’t work. If Realtors were persistently pushing for higher prices, they would almost certainly get fewer commissions. Pricing is as it is because of supply, demand, and specific property features. In a market where prices are truly “inflated,” few homes are selling. That won’t last. If homes really are selling for higher and higher prices, that suggests not Realtor shenanigans but an increasing demand and/or decreasing supply.
Realtors prefer a balanced market, which is good for everybody.
Put another way – under a six month supply of homes (absorption rate) and the real estate market is generally moving and balanced. Over a six month supply and it’s stagnant, a buyer’s market with lots of homes for sale and stable or falling prices.
When it gets much less and is definitely a seller’s market, we see lots of activity, multiple offers on homes and rising prices. Luckily for all of us, the market is self-correcting and attempts to stabilize itself, setting its own prices depending on very localized conditions.