Like the stock market, the prices of homes depend largely on the law of supply and demand. But just what kind of relationship does the housing market have to this economic theory? Keep reading to learn how supply and demand works and how it impacts the real estate market.
The law of demand dictates that lower prices drive demand, which means consumers usually value and are more likely to purchase something when it’s less expensive. Meanwhile, when it comes to the law of supply, prices will drop when there is an increase in the supply of something in the market. When the price of a good increases, the number of goods tends to drop. That’s because it usually costs more to produce and sell goods at a higher price.
The housing market relies on supply and demand. Each transaction involves a buyer and a seller. The buyer places an offer on a house, and the seller can accept or reject the offer. The law of supply and demand determines the equilibrium price of a property.
A low supply can drive prices up, which is what can happen when bidding wars occur. A specific property may be in demand by several potential buyers who try to outbid one another by increasing their offer. The bidding war ends when the seller accepts one of the offers, which also further depletes the supply of houses.
When properties in a particular area are in high demand, a lack of supply will cause real estate prices to rise. Similarly, when a weak economy and an oversupply of homes in an area leads to low demand for housing, prices will usually fall.
Supply and demand in real estate are a constant balancing act. Creating more properties that sell takes time and effort. In some cases, it might not be possible for supply to increase in time to meet consumer demand.
Understanding this principle of supply and demand can help homebuyers or sellers decide the best time to buy or sell their properties.