Whether buying or selling a house, what is probably foremost in everyone’s mind is the matter of reasonable and fair price of a home. By reasonable and fair price here, I do not mean the estimated home value prepared by a real estate agent. Of course, past sales prices are considered but estimated home value tends to be somewhat subjective since it depends on the agent’s opinion of the market as to the likely price that the house will sell at that moment in time. Whether or not AI is involved in the estimation process, it relies a lot on the interest rate levels, supply and demand dynamics, and fiscal policies prevalent at that point in time. The reasonable and fair price of a home that I refer to is the “rational value” of a home from a medium to long term timeframe under normal circumstances.
As I have written in one of my earlier blog articles, the easy money policies of the central bank, including negative interest rates and price-supporting purchases of securities, have distorted the markets and, under these abnormal conditions, transaction prices of various assets have overshot the realm of rational value. This is why the word “bubble” is increasingly being heard and the voice is getting louder by the day. Despite this abnormal environment, end-users, being possessed by FOMO (please refer to my blog dated March 1st ), take the plunge in the stock market and the real estate market, even at inflated prices, believing that the “market is always right.”
If they had a better idea as to the asset’s rational value, they might have chosen to take a wait-and-see approach. True, financial assets are relatively liquid so one could theoretically unload before the markets fall too deep. On the other hand, real estate is an illiquid asset and market prices could fall a lot before a buyer could be found. Therefore, it becomes crucial to make your purchase when the market price is as close as possible to the property’s rational value. In that case, if the personal situation allows, “to wait” could be a wise option.
Next week, in Part 2 of this blog, I would like to write about my way of thinking as to how best to arrive at a reasonable and fair price, which I call rational value.