Real Estate Supply and Demand

The amount of inventory determines real estate prices

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Real estate prices rise and fall based on the laws of supply and demand. When the demand for real estate is high, prices skyrocket. When the number of available properties increases, prices usually drop. Supply and demand in real estate isn't easy to balance. Making more takes time, and it may not be possible for supply to increase in time to meet consumer demand. Understanding this basic economic principle can help consumers decide the best time to buy or sell property.

Land Parcels Finite

You cannot fill a real estate supply shortage by manufacturing more identical units of land. Each parcel is different and there is a finite supply. Land is not a manufactured commodity. Though you might be able to create more identical units, such as condos or townhomes, in a given space, the land itself is unique and cannot be duplicated to accommodate a short supply.

Real Estate Cannot Be Move

If there is a shortage of land for homes in a given area, you cannot move in more land to alleviate the shortage. Real estate is where it sits. For this reason, it will always be a local commodity influenced by local conditions.

Over-Supply Means Lower Prices

Because of the first two items above, you can usually expect there to be a fall in prices when there is an over-supply of homes or land in a given area. You cannot move the overage to another area to keep prices stable.

Under-Supply Means Higher Prices

If there isn't enough land, or if there are not enough homes, in a given area, prices will rise.

Even if land is available on which to build more homes, the time it takes to construct them cannot fill immediate property needs, so demand will remain constant or even rise.

Real Estate Is a Local Business

Trends in interest rates, national home prices, new housing starts and many other economic indicators influence real estate markets.

Real estate professionals and investors can benefit from keeping up with this information. However, keep in mind that real estate is a local business. There are many forces influencing local markets that have little or no impact in other regions, and vice versa.

As a real estate broker, pay attention to the factors that influence your local market. If you do business in a market that has jobs and many workers relocating to the area, watch local businesses and make note of upsizing and downsizing trends. If you do business in a resort area that includes vacation homes, factors that can greatly impact supply and demand -- and your business by extension -- may include, but are not limited to, local weather trends, an aging population, the financial markets and investment trend Trends that impact discretionary income have more of an influence on this type of market.

In short, keep up with the big picture, but regionalize your primary focus. Supply and demand in real estate will always be a local issue.