Supply and Demand in Real Estate

The amount of "inventory" determines real estate prices

Realtor showing couple paperwork outside house
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Real estate prices depend to a great extent on the laws of supply and demand. When the demand for property is high but property is scarce, prices skyrocket and it becomes a seller's market. When the number of available properties increases to glut the market, prices typically drop.

Supply and demand in real estate isn't easy to balance. Creating more real estate takes time, considerable work, and effort, and it's not possible at all in some cases.

Even if it is, it might 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, and allowing for it can help real estate brokers and agents as well. 

Land Parcels Are Finite

You cannot fill a real estate supply shortage by manufacturing more units of land. It is a finite supply, not a manufactured commodity. You might be able to create more units, such as condos or townhouses, within a given space, but the land itself is unique and cannot be duplicated to accommodate a short supply.

Real Estate Cannot Be Moved

If a shortage of land for homes exists in a given area, you can't simply move in more land to alleviate the shortage. Real estate is where it sits. It will always be a local commodity influenced by local conditions.

Over-Supply Means Lower Prices

You can usually expect a drop in prices when there is an over-supply of homes or land in a given area.

You can't move the overage to another area to keep prices stable.

Under-Supply Means Higher Prices

If there isn't enough land, or if there aren't enough homes in a given area, the scarcity will cause prices to rise. Even if land is available on which to build more homes, the time it takes to construct those cannot meet immediate property needs so demand will remain constant or rise.

Real Estate Is a Local Business

Trends in interest rates, national home prices, new housing starts, and many other economic indicators can influence real estate markets as well. Real estate professionals and investors can benefit from keeping up with this information, but keep in mind that real estate is a decidedly local business. Many forces influence local markets that might have little or no impact on other regions and vice versa.

Pay attention to the factors that influence your local market if you're a real estate broker. If you do business in a market that has jobs and many workers relocating to that 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—might include local weather trends, an aging population, the financial markets, and investment trends. Those trends that impact discretionary income have more of an influence on this type of market than others. 

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