Supply and Demand in Real Estate

09/16/2012

Real estate economics is cyclical. There are booms and busts, rises and falls. Every year the housing supply is reduced by natural events, demolitions, and abandonment, while at the same time new housing goes up with construction and redevelopment. As mentioned in the article below, because land cannot be moved, it is a local commodity influenced by local conditions. Making more units take time, and there may not be room to develop more in a given area. When there is an over supply, lower prices are usually expected. On the other hand, a shortage in supply usually means higher prices. Although more real estate may  be in construction, the time delay is often too great to fulfill the demand and prices will rise.

http://www.thetruthaboutrealty.com/real-estate-supply-and-demand/

See the article and video posted directly below. To keep supply at a good pace, new construction should account for about three percent of the current housing supply. Anything about three percent could result in a bust, while anything below could cause a boom. The cost of construction often runs closely with the cost of real estate. For this reason, it is a good way to measure the condition of the real estate economy. As construction costs rise, the price of homes typically rises accordingly. Furthermore, as the cost of construction declines, further development is stunted.

Without buyers, the supply of housing is meaningless. Demand also affects the price of real estate, causing it to change as it fluctuates. Population affects demand in that as the population grows, supply is diminished and prices rise. Demand is dependent upon the purchasing power of potential buyers. There must be qualified buyers to have strong demand and meet supply. Typically, if disposable income rises faster than inflation, demand for housing should be strong.

http://www.thetruthaboutrealty.com/real-estate-supply-and-demand/

The video below discusses how foreclosures affect supply and demand. In general, and increasing number of foreclosures causes prices to drop. This is consistent with the law of supply and demand in that as supply goes up, demand goes down and prices fall. When foreclosures are decreasing as banks sell of inventory, prices will rise.