Why It's Always About Supply And Demand In Real Estate

a few points about the theory of supply and demand in real estateToday's post was inspired by a recent viewer comment on the Joe Manausa Real Estate YouTube Channel. If you haven't seen our videos, you should check them out as they are full of housing market reports and answers to real estate frequently asked questions.

The viewer felt that one particular video's conclusion relied too heavily on the supply and demand for homes in the US, and I felt his comment made for an excellent learning point for our readers (and viewers).

I've shared his comment below, as well as an extended response that you should understand if you have a stake in the US housing market. First, I've included a list of the current supply of homes for sale in Tallahassee.

Current Supply Of Homes For Sale In Tallahassee

937 Properties
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Why It's Always About Supply & Demand

Viewer Says There's More To It Than Supply & Demand

Here is a copy and paste of our viewer's comment:

There's more to it than just supply and demand. Homes are not necessarily "widgets" in accounting & finance or a supply curve in economics. The housing market is already showing signs of softening in many parts of the country (even in some CA counties) and no its not due to seasonality. Unlike the stock market ... the forces that impact housing market is a slow grueling process not an event or headline. This could take many months or even years to play out.

Overall, I agree. And I disagree. Here's why.

Let's start with a few points about the theory of supply and demand from Investopedia:

  • The law of demand says that at higher prices, buyers will demand less of an economic good.
  • The law of supply says that at higher prices, sellers will supply more of an economic good.
  • These two laws interact to determine the actual market prices and volume of goods that are traded on a market.
  • Several independent factors can affect the shape of market supply and demand, influencing both the prices and quantities that we observe in markets.

The housing market is no different than any other market, and it adheres to these points completely. But it is the fourth point that I think our viewer was really trying to make, in that the housing market's supply and demand dynamic is influenced by multiple factors.

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Supply & Demand Rules The Housing Market (Too)

I have produced hundreds of videos and thousands of articles over the years, and it is rare that I cover the market completely in any given piece. But I do cover the independent factors that affect the shape of the market supply and demand often and consistently.

For example, if you saw my recent US Housing Market Forecast For 2022 (video below), then you know that before I gave my forecast, I addressed such topics as population growth, mortgage interest rates, the economy, new home construction, foreclosures & forbearances, home prices, rental rates, mortgage rates versus the fed funds rate, equity versus debt in the housing market, loan delinquencies, and inflation. These would be most of the "independent factors" for the US housing market overall and they are the market forces that will impact the supply and demand for homes.

But I think the bigger picture here is what do YOU, the reader (or viewer) really want to know when you are consuming real estate market information? Do you want to become an expert, or do you want expert guidance on what to expect from the housing market? My assumption is that it is the former, as the latter would require much more time than our typical customer chooses to spend.

And that is why, as a real estate consumer, all you really need to do is monitor the trends in the supply and demand for homes if you want to see the changes coming to a local market or the US market overall.

Most importantly, pay attention to the trend in the relative supply of homes and you'll always be several steps ahead of the curve. Our viewer was right when he stated that the housing market is a slow grueling process, and there is no better way to watch that process unfold than to monitor the monthly changes in the relative supply of homes.

Relative Supply Of Homes For Sale In Tallahassee

By way of example, let's look at the relative supply of homes for sale in Tallahassee (the months of supply of homes or the supply, relative to the current rate of demand).

The relative supply of homes for sale in Tallahassee (the months of supply of homes or the supply, relative to the current rate of demand)

There is a lot of activity in the graph above, and I will explain it all, but all you need to do is to look at the gray line as it tracks the non-seasonal relative supply of homes for sale in Tallahassee. Incidentally, the US graph would look very similar.

This graph serves to help us monitor the real change in the supply and demand dynamic every month. As our viewer reminds us, it is a slow grueling process, so observing a directional change here could very well give you more than a year’s head start in understanding a major market shift. Here’s how the graph was assembled and how you can use it.

The graph plots the number of listings each month in red and the number of homes sold each month in green, both measured on the left vertical axis. The resulting months of supply of homes is plotted in blue and recorded on the right axis, which reveals the relative supply of homes for sale in Tallahassee.

The blue lines form a wavy pattern because home sales are seasonal, but the gray line plots the one-year average of the relative supply, thus removing the seasonal impact. Currently, the non-seasonal relative supply of homes has dropped to an all-time low of 2.7 months of supply.

The gold band in the graph shows where the market would be considered balanced at 6 months of supply, so you can see just how extremely undersupplied the current market has become.

The gray trend line is heading downwards, and as a consumer, that's all you really need to know unless you want a deeper understanding of the long-term future of the housing market. This descending trend means it is harder today to find a home than it was a year ago. It also means that there is more pressure on prices to rise than there was a year ago and that the pricing pressure in the market is likely going to push home prices higher at a faster rate than last year. So if you thought last year’s 11.4% appreciation rate was crazy, expect it to be higher this year!

In real estate, unless you sell homes for a living (or want your Ph.D.), just keep up with our reports on the supply and demand for homes and you'll be able to best prepare yourself for whatever your goals require. We publish them monthly and we often discuss supply and demand in our Weekly one-page special real estate report. I’ve included this link if you would like a free subscription to our Weekly Special.

Supply is incredibly low, demand remains strong (though not near past market highs), so until we see some vigorous change in the independent factors that influence the supply and demand for homes, you should have a great understanding of what to expect from the housing market: Scarcity and higher prices. Remember, it’s always about supply and demand in real estate, so focus on the relative supply of homes for sale and you’ll be sufficiently informed to do very well in the housing market.

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