What people don’t buy about prices

When people shop in North America they usually go to a store, pick out an item, walk over to the cash register and pay the bill based on the price noted on the item. One might get the idea that the price is fixed. Yet the consumer knows they could get the same item for less if they drive a bit further to the big box store. They know there will be surcharges if they go to specialty grocers or convenience stores, whereas there could be sales at outlet malls.

And still, they don’t really feel like a participant in the market. They don’t feel that price is the result of their choices in concert with all the other participants.

A sense of market pricing dynamism emerges in the home-buying process. In a low inventory market, as the one we are now experiencing, a well-appointed house will draw more than one suitor. Buyers must put their best foot forward and compete on price and terms in with a blind bid. At first buyers are conservative with how much over asking price they are willing to write. Most participants in the market will go through several attempts in a multiple bidding process to know how high they must reach with the price (and terms) in order to win out over the other buyers.

But that’s not the interesting part. What is fascinating is to sit with a seller as the offers arrive. Most always they are very close. Remember these buyers do not know each other. They may have viewed many different houses before they chose to write an offer on the home in question. Yet when it comes time to put pen to paper, to commit earnest money, and to agree to pay for an inspection, buyers in a blind bid situation will often produce very similar offers. The knowledge acquired through the process of shopping has made buyers attuned to how much they need to pay and not more.

There is an important virtue in this that is underrated. Trust. People don’t like to feel duped. They are less likely to deal in a market they feel is staked against them. When open market transactions lead to unrelated people making the same concessions they feel like they can trust the system. If they don’t pay X, someone else will.

Buying and selling homes is a rare occasion for most people. It isn’t very often that they feel the camaraderie of other market players. Today is about trusting prices. Tomorrow I bring you the math of attributes.