Marc Cuniberti: There is no housing shortage
I always get a kick out of hearing prognostications for a continued shortage in the residential housing market in Nevada County.
Not only in Nevada County, mind you, but in many places in the country.
The high demand is contributing to what I call the “musical chairs” of homebuyers, brought about by a plethora of issues, which includes but are not limited to, the COVID work-at-home craze, wild fire dangers and political refugees fleeing perceived party-saturated areas.
In a capitalistic system, there can be no ongoing shortage of anything unless the “thing” referred to is at zero quantity or close to it. Residential real estate has thousands of houses in existence in Grass Valley, let alone in the entire county.
So why are so many under the impression the housing shortage will continue?
Simply put, it’s the ignorance of how free markets operate and the subsequent failure of those responsible for setting the selling price of a home.
Capitalism functions on supply and demand, and the very nature of how capitalism works will eliminate shortages and excesses in short order. Ongoing shortages or excesses only exist through the failure of market participants to respond to what the capitalistic mechanism is telling them. Unfortunately, this failure may be costing homeowners big money in the process, and in some cases, tens of thousands of dollars.
A shortage of something means demand exceeds supply. In a free market, a shortage means sellers can raise prices until such a time a balance of supply and demand is reached and the so-called “shortage” is eliminated.
For a shortage to continue means those pricing the asset (homes) are failing to respond to what the system is telling them. Someone once asked me if I could solve the housing shortage after attending one of my real estate seminars. I answered, “Yes, I could solve the shortage in one day”.
The answer? Double the price of every home in Nevada County over the listed current market value.
Wha-la. Housing shortage solved.
In fact, by doubling the price, we could easily have a housing glut. Simply put, shortages in a free market means prices are too low for the demand environment. Shortages in free markets are usually corrected quickly by proper pricing. This means those setting prices are failing to respond to market conditions. They are mispricing homes too low.
Sale prices set too low in relation to demand will continue the perceived (and incorrectly so) the so-called shortage. Quick sales are an indicator prices could be too low.
This failure to price correctly also means sellers may not be getting top dollar for their homes and could be leaving thousands of dollars on the negotiating table.
Whereas a glut of homes means prices must drop, a shortage of homes means prices should rise. That the shortage continues means the mispricing continues. This sadly may be robbing sellers of dollars they could be due.
I always chuckle just a bit when I hear someone rave about their realtor that sold their house in three days. Since recent data from realtor.com suggests the median home takes about 65 days to sell, selling times less than probably means prices are too low, and perhaps way too low. Praises that a realtor sold a house in a few days is misguided and its unfortunate for sellers they do not understand market dynamics.
The question is why would those responsible for setting selling prices continue this flawed mispricing practice despite the fact that prices may be able to be raised to meet the imbalance in demand that is causing the so-called shortage?
Either those determining sale prices do not understand free market dynamics or are purposely setting prices too low to facilitate a quick sale. Considering many responsible for setting sale prices are forecasting a continued housing shortage, I would lean more toward the former than the latter. That home sellers are perhaps missing out on much higher revenues from selling their home because of a lack of understanding, or a conflict of interest brought about by a quick sale, is unfortunate.
My suggestion is if you are selling a home, to multiply the suggested selling price by 120%. You might have to wait a little longer, and argue a bit if using a realtor, but in the case of a $500,000 initial suggested price, is it worth the extra $100,000 to wait a few more weeks?
Me thinks so.
Marc Cuniberti holds a B.A in Economics with honors from San Diego State University and is the host of Money Matters carried on 66 stations nationwide. California Insurance LIc# 0L34249. Call him at 530-559-1214 or visit http://www.moneymanagementradio.com
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