Finding the true market value of a home is very similar to comparison shopping. Essentially, homes have have four factors that determine their value: External, Internal, Supply and Demand, and Location.
The most obvious external factor affecting a homes value is "Curb Appeal". If there are tons of weeds, broken concrete, and peeling paint, the value of a home goes down. If there is intact landscaping and a shiny exterior, a home looks well cared for and it's value rises. Other external factors include lot size, architectural style, sidewalks, street lamps, sewage and water systems, power lines, and road condition. A homeowner can control the curb appeal, but can't always control the rest. A buyer is the one to determine how the rest of the items affect the price of the home. The home buyer may not even consciously be aware that certain items are making them value the home lower or higher.
Internal home factors are what is most controllable by the homeowner. If a home looks well maintained from the inside, it instantly rises the value of a house. Fresh paint, clean flooring, updated fixtures, etc. all play a part in the psychology of pricing a home. Let's just say you were in the market to purchase an Easter dress for your daughter. A well-used garment from the thrift store would cost the least, a plain dress from Walmart would be a step up, a fancy dress from J.C. Penney would be the next expensive, and a designer dress from some fancy European brand would be the priciest. The same goes for the interior of a home. A dirty home has a hard time selling, a clean home does a better job, and an updated home sells the fastest.
As we've learned in the last 5 years, supply and demand is one of the largest determining factors of a homes value. This part is the hardest for anyone to figure out, as far as how drastically it can really affect a homes value. In 2004-2006 everyone wanted to buy, and almost everyone qualified for a loan. As soon as a home came on the market, it was getting an offer and being sold. Thus, values went through the roof because there was competition to get a home. Inventory was LOW! But then the crash came and suddenly people couldn't afford the homes they were living in. In 2007 there was a huge population moving out of their foreclosed homes and into rentals. Now all of the foreclosed homes were available to the market, but lending guidelines got stricter and fewer people had the money to buy a home. So home sellers got desperate. If they needed to sell, their home needed to be priced where a buyer could purchase it. It's kind of like a day old baked good. It needs to be sold before it goes bad, and in order to do that it needs to be extremely discounted. On the flip side, if the bakery is extremely popular (like Karen's Bakery in Folsom)then there are hardly any pastries left at the end of the day and they can price the pastries higher because they are highly DESIRED!
The final factor that affects a buyers decision for much they are willing to spend on a house is location. I can't tell you exactly why one location is more desirable than another. There are obvious factors: commute times to places of business, recreational access, and shopping. But then there is the popularity affect. A location becomes desired simply because others desire it. And once that happens, home values can go through the roof. Often times, popularity has to do with the overall lifestyle that a location is selling. If enough people want that lifestyle, but there aren't enough homes for everyone, then prices rise.
Home buyers are consciously and unconsciously taking all these factors into consideration when purchasing a home. Sometimes, if they are on a budget they may need to concede on one or more factors into order to become homeowners. On the flip side, home sellers know why they purchased there in the first place, they know what maintenance and upgrades they have done, and they always want to make more moola. And so the battle begins! :)