Supply and Demand in Real Estate

The concept of supply and demand is essential to understanding how the real estate market functions. In this article, we will explore how this economic principle affects the real estate market and how buyers and sellers can use it to their advantage.

Supply and Demand Explained

At its core, supply and demand is a simple concept: the price of a good or service will be determined by the balance between the amount of that good available (supply) and the number of people willing to buy it (demand).

The Principle of Supply and Demand in Real Estate

In the real estate market, this means that the price of homes will fluctuate based on the number of homes available for sale (supply) and the number of buyers looking to purchase a home (demand).
When there is high demand for homes and a low supply of available homes, prices will typically rise. This is because buyers are willing to pay more for a home when there is increased competition for a limited supply.

Conversely, when there is low demand and a high supply of homes, prices will typically fall as sellers compete to attract buyers in a crowded market.

It’s important to note that supply and demand is affected by a variety of factors beyond just the number of homes on the market and the number of buyers. Interest rates, economic conditions, government policies, and population growth patterns can all have a significant impact on the real estate market and the balance between supply and demand.

For example, low interest rates can make it easier for buyers to secure financing and increase demand for homes, leading to higher prices. Conversely, economic downturns can decrease demand for homes and increase the supply of homes on the market as people become more cautious about making large purchases.

Supply and Demand is more accurate with a longer term outlook

It’s important to keep in mind that every economic theory on real estate is not 100% correct 100% of the time. For example, while the theory of Supply and Demand is an excellent gauge of how the market will do in the medium to long term, it’s more difficult to use it as a benchmark for how the market will perform in the short term.

For example, the COVID-19 pandemic caused significant disruptions to the real estate market in 2020, with many buyers and sellers putting their plans on hold due to uncertainty and economic turmoil. However the market soon rebounded in many areas such as Florida because there was still a lack of supply of homes for the demand from the market.

It’s important to remember that these short-term fluctuations are just that – temporary changes in the market that are often driven by external factors. Over the medium to long-term, the principles of supply and demand become more important in determining real estate prices and activity.

Over time, changes in population growth, demographics, and urbanization patterns can be a much better indicator of how the market will perform in the long run. For example, a rapidly growing population may lead to increased demand for housing, which in turn can lead to higher prices and increased construction activity.

Factors to consider when trying to gauge the future performance of a real estate market.

Remember, real estate should not be looked at in the same light as a stock, and if you’re a buyer in today’s market, you should always look at real estate as medium to long term investment. As a rule of thumb, I always say be prepared to live in the home you purchase for 5 years or more and that will generally be enough time to smooth out any ups and downs in the market.

Factors to pay attention too on Supply Side:
• Current housing inventory levels
• Number of new construction projects
• Building permits and zoning regulations
• Land availability and development potential
• Average days on market for current listings
• Rental vacancy rates
• Aging housing stock and potential for renovation or redevelopment

Influences on Future Demand:
• Population growth and demographic trends
• Job growth and employment rates
• Interest rates and mortgage availability
• Housing affordability and rental prices
• Migration patterns and inbound/outbound migration
• Consumer confidence and economic outlook
• Quality of life factors, such as schools, amenities, and safety

Despite the sensational headlines in the news, the principle of supply and demand remains a key concept to understand when analyzing the real estate market. By keeping an eye on the balance of supply and demand, buyers and sellers can make more informed decisions about when to buy or sell a home.

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