Do Agents Set Prices?

Dear Pat,
I have a bone to pick with you. You Realtors have made the prices go so high that now many of my friends can't afford to buy in their own neighborhood. This isn't fair, since they have been part of this community for a long time. Why don't you try to help, instead of just leading the parade of yuppies who can still afford to buy?
---Steamed

Dear Steamed,

I've heard variations of your question (or accusation) several times this year, and I'm sure many other Realtors have, as well. This seems like a good time to address your concerns, as we turn the corner on another year of double-digit increases. Let me say that I am also concerned when prices rise so fast that the people renting in a community are unable to purchase a home when they're ready. And let me say that I would slow it if I could. Prices rising too fast, for too long, will ultimately create a harsh world for us all: renters who can't find anything to buy, sellers who can't afford to move up unless they get a record price, and Realtors who can't move their too-expensive listings. In a word, gridlock. We're not there yet, largely because low interest rates still make it possible for so many first-time buyers to get in the game.

So who's responsible for these rising prices? First, let's look at how an agent determines value. Agents use the same methods as an appraiser to arrive at the right selling price for a home. They look at similar homes that have sold recently in an area, then they calculate the value of the individual features and amenities, plus or minus, that differ from the sold comparable. Thus, they recommend a market price to the seller based on precedent. Precedent is pushed up a bit from January through March, when it is assumed that a buyer might pay more than the previous year; after that most pricing falls in line with the prices established during those early months.

Sounds orderly, does it not? No runaway inflation here, just a healthy optimism that things are going to be worth a little more each year. So why is the real market so much goofier than the sane picture I've just painted? One word: demand. For example, let's say I price a home to go on the market in January at a price perhaps 5% higher than it might have sold for in the previous year. And by the end of the first day I might be surprised to receive in my office some three offers, the highest being 10% over the asking price-that's a 15% increase over the previous year. Am I responsible for that, or is it the product of rabid demand stemming from great interest rates and a small supply of available homes in January?

And so it goes: agents might price similar homes the rest of the year based on that sale; sellers expect at least that price for their home (which of course is much nicer!). For-sale-by-owners with nothing but their own high opinion of their property as a measure of value, out-of-the-area agents who haven't done their homework properly, a few agents who "buy" a listing, sellers who are caught up in a gold-rush mentality-all these can have some influence on the market, but buyer demand is the real price-setter. You'll be cheered to know, Steamed, we've seen the market make its normal seasonal transition the past few months, and a slowing of demand has created a bigger inventory and eased the prices a bit. Tell your friends, it's a great time to buy!