Robert Knakal in his StreetWise blog asks the question.

The title of this piece makes you wonder what is meant by “they should sell for”. What, after all, is value? Many people (particularly appraisers) feel that value is a very different thing than the price someone is willing to pay for a property. There are all types of qualifiers such as “an arms length transaction” between a “willing buyer and willing seller”, etc. As a broker who only represents sellers, I see value as the highest price that the most aggressive buyer will pay for a property. Whether the property is “worth it” or not is completely dependent upon the perspective of the buyer.

Arguments about value versus price versus worth can go on for quite a while. This column will not attempt to define the differences between these terms, but will merely look at the relative price levels investment properties are selling for today and try to figure out why.

One of the most evident trends in the investment sales market today is the acute imbalance between supply and demand. While I spend all of my time selling in the New York Metro area, it appears that these imbalances exit nationwide. Whenever I attend conferences across the country or speak with brokers working in major cities in the U.S., the story seems to be the same: Buyers are plentiful, there is a ton of capital on the sidelines and there is not much available for sale. Forget the infamous “bid / ask spread”. There is just not enough product on the market to meet existing demand.

Read the whole article here.

It all comes down to supply and demand. Sellers are not putting properties on the market now because they have expectations of getting higher prices at some future point in time than they can get now, or they are pricing their property above what most buyers are willing to pay. Buyers have expectations of being able to buy properties at a lower price than they have to pay today.

There is such a disparity between what the expectation of sellers are at this time, and what the expectations of buyers are at this time, that it is very difficult to find a basis for agreement on price.

Buyers, particularly institutional buyers have been pretty much out of the market for 18 months. As a result they have a lot of accumulated cash that they must invest. This oversupply of cash along with the undersupply of property to buy is keeping prices up.

As an example, there is a high-rise class-A newly-completed condominium project in Los Angeles. The cost to build the property was about $360,000 per unit (which includes the subterranean garage and all amenities). The loan on the property was about $275,000 per unit. The lender foreclosed on the property and put it on the market about a month ago. Buyers thought they would be able to buy the property around $250,000 per unit, or, at most, $275,000 per unit, which would make the bank whole. There were over 30 bidders on the property, and it will most likely wind up being sold for close to the $360,000 per unit that it originally cost. A lot of capital chasing a small amount of available property.

It will be interesting to see if some stabilization sets into the market this year. Stabilization would mean that the gap between seller expectations and buyer expectations would be close enough to get some transactions completed.

I’ll keep you posted.