There are so many distractions that can lure us away from our study of the real estate market and finding the direction of the market. With inaccurate reporting, hype, and media blitzing, it is a wonder anyone really knows what’s going on at all.
But don’t worry, it really isn’t that hard to tell where the real estate market is heading. All we need to do is take a quick re-examination of Economics 101 and realize that Supply and Demand actually do matter in the Tallahassee real estate market.
Real Estate Supply and Demand
The real estate market operates under the same pressures and forces that guide the rest of the markets. The Law of Supply and Demand dictates that prices are pressured towards an equilibrium point (as we see in our graphic above) that is defined by the intersection of the supply curve and the demand curve. So what does this graphic tell us?
- If Demand increases, then producers can raise prices (builders and home owners)
- If Demand decreases, then inventories build (Supply increases)
- If Supply increases, producers must do something to increase demand (and/or stop producing)
Tallahassee Home Inventories Are Too High
Basically, the above “Law” and the subsequent bullet points are a snapshot history of what has occurred in the Tallahassee real estate market. Demand increased, due to many factors. Producers (home builders and developers) increased production to meet the demand. In 2006, producers did not notice the rapidly cooling market (decreased demand) and thus inventories started building. Now, builders are building less and the supply is coming down. Hopefully, with new lower interest rates, we can consume the inventory back down towards Market Equilibrium.
Normal Months Of Supply of Homes Is 4 to 6 Months
Most housing markets view market equilibrium when supply hits 4 to 6 months worth of homes. If the inventory level drops to 4 months of homes and below, we refer to this as a “Sellers Market.” If inventories build to 6 months and beyond, we refer to this as a “Buyers Market.” As you might have figured out, the Tallahassee real estate market is definitely a Buyers’ market with 13.1 months of supply of homes.
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Unfortunately you’re using the wrong graphic to make your point. The graphic tells us nothing about changes to supply and demand. It simply tells us at a given price and quantity buyers or builders / sellers are receiving a surplus.
If you wanted to make a point regarding “changes” to supply and demand you would have used the graphic in this description…
http://en.wikipedia.org/wiki/Supply_and_demand
showing shifts in the lines themselves, which is what is happening in the real estate market today. At a specific price, buyers are willing to buy much less inventory than they were in the past. This is shown by an entirely new demand curve, not a movement up or down the curve.
This post has been featured on the 89th Carnival of Money Stories at Retire at 40.
I guess that no matter what the market is, the fundamentals never change!
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