The Impact of Supply & Demand on the Housing Market

For some time now, we have attempted to shed light on the fact that pricing in today’s real estate market, as it is in the markets for every other saleable item, will be determined by the concept of ‘supply and demand’.

According to dictionary.com, “the relationship between supply and demand determines the price of a commodity. This relationship is thought to be the driving force in a free market.”

In real estate, supply and demand is represented as the current month’s supply of homes for sale (the number of homes for sale divided by the number of homes sold in the previous month).

Most real estate professionals know, or at least have a good idea of, the month’s supply of inventory in their market. But why? Because of its effect on pricing moving forward.

While there is no steadfast rule that will apply to pricing in every category of housing, here is a great guideline by which to go:

1. 1-4 months’ supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.
2. 5-6 months’ supply creates a balanced market. Historically home values appreciate at a rate a little greater than inflation.
3. 7-8 months’ supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.

When you discuss home values with either a seller or buyer, you should be prepared to show what the supply of, and demand for, homes is in the same category of home they are thinking of selling or buying. You should also be prepared to discuss any projected change in those numbers (such as a potential shadow inventory of distressed homes or a projected increase in demand because of a new plant opening).