What do you think about the current real estate market in Phoenix?

How can you rationalise consumer behaviour in a market (like real estate, for example) where the behaviour of an irrational minority prejudices the sensible behaviour of a rational majority?

• I'd like to illustrate this question with a real-life example. Let's take a very competitive real-estate market. Locally, there's significant demand for properties and it is a 'seller's market' with more buyers than properties available. Recently, I've encountered many properties which are ridiculously over-priced, where the vendors are being 'greedy' and where the value of a property isn't tied into any kind of rational model. As a home-buyer, I've deliberately walked away from properties where the vendor is clearly being greedy and where the house price is 'hot'. You know the situation: "Yes, I really liked the property, but we just disagree on the price...I really don't think it's a realistic price given the exact same property next door sold for 10% less only last month". If everyone took the same attitude and viewed the facts rationally, the house wouldn't sell and the vendors would either have to accept their inability to sell, or else price the property more realistically. However, given that there is always an irrational minority who are prepared to pay more than a house might really be worth; a minority who don't make decisions rationally, it means that vendors CAN get away with opportunistic pricing because some fool - even if it's the 1% of viewers - will pay what is being asked even if what is being asked is unrealistic. I accept and understand that one answer to this question might be: the fact that someone is willing to pay that means that the price is not unrealistic, but I'd like you to divorce that concept of 'realistic' from the concept of 'reasonable'. Let's give you a more specific, real example: There's a house locally that I like (let's call it House A), which is listed for sale for $305k. It is a bit dated and in need of a bit of work. The exact identical house next door (House B) - which is in pristine condition - was put on the market only 1 month earlier and sold for $297k. The thing is, House B was only purchased 3 months ago by the vendors, for $270k. So, essentially, they're now trying to sell it 3 months later for $35k more, without doing anything to the property. This is in a market locally where prices have decreased 1.2% in the past 3 months. It's clear that the owners of House B are 1) trying to recoup their moving costs, given they only moved in 3 months ago, and 2) have seen that next door has sold for $297k and therefore think that's what they can get for their own, more run-down property. In the cold, hard light of day, House A is not worth $305k. The owners paid $270k for it and only 3 months have passed since then, during which time prices locally have decreased. The house next door is better and sold for less. They're being greedy. So, in essence, what I'm asking is: if everyone took a cold-nosed hard approach to this market, the buyers would be in a position of strength and properties would sell for a fair value, but because some buyers don't act rationally, it allows vendors to sell for an unfair, inflated value, knowing that the minority will always be on hand to snap up their properties. For me, this has two really negative effects. More broadly, it inflates prices unrealistically across the market. More locally, it means it's incredibly difficult to find a house if you're a rational, level-headed person who assesses properties correctly and calibrates value against price. If you don't want to over-pay more than a property is really 'worth' you end up losing out - and suffering longer-term because properties end up priced unrealistically beyond your budget (relatively). SO....long story short, the question is: Is it ever possible to rationalise the irrational minority so that one side of the market (e.g. buyers) are united in their thinking, thus giving power back to buyers?

• Answer:

  Can you buy a stock for the price it sold yesterday just because it was the exact same stock? The value of the property is tied to a very rational model: how much the buyers are willing to pay for the property can you afford to wait for the asking price Even if everyone were "rational", a seller is not forced to sell if he can afford it. Once lower priced alternatives are exhausted and there is still a need for the good, the buyers have to pay more if they want the good. There is no intrinsic "worth" of the property if sellers and buyers are free in making their decisions to buy or sell. It is based on supply and demand. You are not entitled to buy for what you think is the right price. You do have an option to buy when the seller's price is what you think is the right price or not to buy otherwise. No amount of cold-nosed approach will change the fact that a single person who is selling and can wait for a long time, when pitted against a number of buyers who cannot wait for a long time will win every time.