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What Impact Do Supply and Demand Have on the Housing Market?

Economic variables, supply and demand, and transactions involving buildings and other properties are all interrelated in the real estate housing market. The conditions under which buyers and sellers interact are established by the law of supply and demand.

Real estate is a tangible asset made up of real estate and the land on which it is situated. Despite being immovable, real estate is nonetheless influenced by supply and demand just like other assets. As a result, just like with stocks and bonds, the price of a property is highly influenced by the law of supply and demand. When there is more supply than there is demand, prices tend to decline.

What kind of connection does this law have with the housing market, though? Learn more about how this economic theory functions and how it affects the real estate market by reading the information below.

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Principle of Supply and Demand in Real Estate Housing Market

A fundamental economic principle known as the law of supply and demand describes the interplay between the supply and demand for an item or service and how that interaction influences the price of that good or service.

Price increases occur when an item or service is in high demand. Price reductions occur when a product or service has a high supply but low demand. The explanation is that when there is a relative shortage, people will bid up the prices, and when there is an overabundance, there would be unsold goods.

Demand

According to the law of demand, when a good’s price increases, there will be a decreasing amount of consumer desire for it. Similar to how lower prices increase demand, cheaper goods are valued and bought more often.

Supply

According to the law of supply, manufacturers will increase their supply to the market if the price is higher. Similar to when demand exceeds supply, prices will increase as buyers compete for limited resources.

Real Estate Housing Market Demand and Supply

Because the Real Estate housing market also significantly depends on supply and demand, it is a highly watched indicator in the sector. Of course, a buyer and a seller are involved in every house transaction. The seller has the option to accept or reject the buyer’s offer to purchase the property.

The equilibrium price of a property is determined by the law of supply and demand. Bidding wars frequently happen when there is a shortage of home inventory or when prices are high. Multiple parties may be interested in the same property, and they may all try to outbid one another by raising their offers for the purchase price.

When the seller accepts one of the offers, which also removes a unit from the supply, the bidding war comes to an end. The cost of homes tends to increase when there is a high demand for properties in a given city or state coupled with a dearth of high-quality residences for sale.

On the other side, when there is little or no demand for housing due to a poor economy and an abundance of available homes, house prices tend to decrease.

Factors Affecting the Supply and Demand of Real Estate Housing

In the real estate market, it can be challenging to determine the precise ratios of supply and demand. This is due in part to the lengthy process involved in building new homes or remodeling existing ones before reselling them.

Similar to how it takes a long time to buy and sell homes and other properties, real estate is unlike other sectors. As a result, it may take a while for transactions to be completed, which makes real estate rather illiquid.

The demand for housing will be influenced by a number of things, including decreased borrowing costs or interest rates. People are typically eager to take on more debt when interest rates are low because they may reasonably afford more debt for the same monthly payment. In other words, because the amount of interest they must pay is less onerous at low rates, they could be able to finance the purchase of a home.

As more buyers enter the market, there is a corresponding rise in housing demand. Additionally, prices in a low interest rate environment can increase even further if there is a continued shortage of available housing stock.

The housing supply, however, is always changing. When people relocate, the inventory may rise since some may be downsizing, some may be trying to create more room for a growing family, and still others may be buying their first house. Similar to this, there might be more development and new housing construction, which would boost the supply.

 

On the other side, when there are natural calamities, like floods and earthquakes, or when existing homes are demolished, the housing inventory falls. Since land is a limited resource, there are often fewer new developments.

 

When Housing Market Crush

The collapse of the housing market was one of the primary reasons of the Great Recession that followed the financial crisis in the mid-2000s. The law of supply and demand is to blame for this.

 

The cost of borrowing was comparatively low for households in the years before the financial crisis. Mortgage interest rates started to decline, and banks were urged to loosen their lending criteria. People who previously couldn’t afford a home found themselves suddenly able to fulfill their ambitions of becoming homeowners. Despite having extremely poor credit scores, many of these buyers, also known as sub-prime borrowers, were able to secure a property with very little down payment.

During this time, speculative purchasers also started to enter the market, increasing demand for houses while concurrently reducing the supply. As a result, prices increased significantly.

Investors started speculating in the housing market to make some quick money by buying and flipping properties in a relatively short period of time because supply couldn’t keep up. However, as soon as the prices became too high, customers started to leave the market. Prices started to decline as well as demand. An excess of housing was produced as a result of the real estate market’s collapse in 2007, which was followed by a sharp decline in property values.

https://www.investopedia.com/ask/answers/040215/how-does-law-supply-and-demand-affect-housing-market.asp

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