Market Forces

As many of you know, this site provides a wide variety of valuable educational services. You may not know it quite yet, but this is in fact one of them now. When you’re done reading, feel free to mutter “now you know, and knowing is half the battle, yo Joe” quietly to yourselves.

As you might imagine, I get a lot of questions about the basic economics of the real estate markets in high-density Canadian urban centers. Being a man who is here to provide valuable and educational information out of the unbridled altruism of my pure heart, I am now going to answer them. Let me tell you about some subtle differences between the real estate market and most of the other markets that you might be familiar with.

In a typical marketplace, for transactions involving food, clothing, cars, boats, drugs, sex, rock & roll, cake, sheep, endangered animals, seawater, sand, playdoh, healthy human organs or pie, just a zillion different things, it works as follows: you decide that you want something, you go to somebody who is selling it, and either there is a fixed price for that item or a price is negotiated. Then you pay that amount, the exchange takes place, the vendor has your money and you have your item, whatever it is, and everyone goes home happy.

When you’re buying a house, a key difference is that there’s only one of that exact house, in that exact spot; unlike food, clothing, cars, boats, drugs, sex, rock & roll, cake, sheep, endangered animals, seawater, sand, playdoh, healthy human organs, pie and the rest of it, that house is unique, so how the process works is subtly different.

You start, having done your research, by spending half an hour looking at the place, to then decide whether or not you want it. The price listed does not have any relationship whatsoever to the amount the house will eventually cost, which in turn has no relationship at all with what the house is actually worth. It is instead intended to strike a balance between telegraphing the actual value of the house and drawing in a large enough group of bidders to provoke a bidding war.

You’re given approximately 36 hours to decide whether or not you’d like to spend somewhere between a third to half of a million dollars (more, if you like, because the sky is truly the limit) and you examine the “comps”, the comparable houses that have been sold in the area in the last six months or so.

On the day offers are accepted, you weigh the selling prices of those comparable houses against the number of competing offers, bearing in mind that everyone else making this decision also has access to all the same information you do.

So , and this is the key graf: you make an offer that seems reasonable, perhaps even aggressive, considering the number of competing offers and other sales that have take place in the area recently. Then you go home and sit around being wound up and nervous for two hours before you get a call from your real estate agent saying that some well-heeled lunatic showed up and paid between eighty and a hundred thousand dollars more than anyone has ever paid for any house in that neigborhood ever before. You swear a lot.

Then every single person in that area adjusts their expected selling price that same eighty to one hundred thousand dollars higher than they were thinking, which is even more frustrating and infuriating, so you swear a lot more and wonder why people with such obviously poor judgment are given access to such large quantities of money.

That enormously frustrating process is the real estate market. Now you know.

6 Comments

  1. Posted February 12, 2007 at 11:15 pm | Permalink

    Look for police auctions of former grow houses, meth labs, and brothels.

    You can’t go wrong!

  2. Posted February 12, 2007 at 11:25 pm | Permalink

    Are auctions the normal selling process up there?

  3. Mike
    Posted February 13, 2007 at 2:22 am | Permalink

    Auctions are normal in California, and it seems similarly in Canada, when it’s a seller’s market. In calmer times it’s more of a haggle process.

  4. Mike Hoye
    Posted February 13, 2007 at 8:02 am | Permalink

    In calmer times, yes! Sadly, now is not one of those times.

  5. Posted February 13, 2007 at 12:22 pm | Permalink

    If it’s any consolation, it only took dawn and I about 16 months to find a house. Of course, we went between a bunch of resets (first looking for a downtown condo, then an East York house, then an uptown condo, then an uptown house) but when we started bidding and stuff, it was about 5 months to finally get a place we liked.

    I wrote a post not unlike this one, in fact, over here: http://www.beltzner.ca/mike/archives/2006/10/24/buy_my_wibble.html

    Best of luck!

  6. Melanie
    Posted February 14, 2007 at 12:55 pm | Permalink

    I hear you. The alternative ending: your offer gets accepted at the height of the market value, and you find yourself needing to sell a year later when the market has “stabilized” a bit, and you lose hundreds of thousands of dollars you didn’t own in the first place.