Well it took me little time to decode whats going on in the last lines but via logic we can understand and decode this easily without even getting into core meaning .
Lets DECODE
1)In some countries, real estate agents negotiating with prospective clients who want to sell their houses all recommend initial asking prices that are as high as the current market permits. = so I am owner of my house and I wish to sell my house .My agent told me (recommended) to keep initial price max permitted price as per current market . Yeah I want best price thanks agent.
2)They(AGENT) do this because potential sellers are more likely to entrust their houses to the agent who values them highest. = yeah this agent is gonna make me richer. I am already impressed with the recommendation . So we have agreed to sell my house for 4 MILLION DOLLARS.
3)In a housing market with falling demand, =when demand for purchase of house falls
4)the predictable result is a sharper drop in the number of houses sold than the
drop in demand alone would account for.= normal demand should be at rate of 40 % (lets assume) ,but actual demand DROPPED by 80% . Well I want to sell my house for 4 million dollars coz my house is worth this amount .Now if demand for houses go low and I know market is down but I won't sell until the market comes up because I am in no hurry , my house is valuable and I ain't gonna sell it for fewer than 4 million dollars . and if other SELLERS too think my way then they too won't be selling their houses which would force the already low NATURALLY LOW DEMAND to fall more because no seller is ready to lower the price and no. of houses available for sale are not enough .
Option A vs E
In some countries, real estate agents negotiating with prospective clients who want to sell their houses all recommend initial asking prices that are as high as the current market permits. They do this because potential sellers are more likely to entrust their houses to the agent who values them highest. In a housing market with falling demand, the predictable result is a sharper drop in the number of houses sold than the drop in demand alone would account for.
Which of the following, if true, best explains the result described as predictable above?
(A) A drop in demand for houses depresses prices disproportionately if earlier strong demand stimulated much new construction.
NOW no info about new construction is given . We always have to choose BEST answer and E is better than this .Moreover the drop in demand depresess prices but still thsi option fails to tell us why there is sharp decrease in demand for houses .
(E) For many sellers of houses, the initial asking price comes to represent the true value, below which they will not sell.
This is exactly what we were thinking . IF SELLERS DONT SELL THE DEMAND WILL SHARPLY GO DOWN . its called forced downward push on demand (thats not official name I just gave it this name in case you wanna use this logic in other relevant CR)