If theories behind how markets work, like supply and demand, make your eyes glaze over, that’s OK. Read on, I’ll try to make this interesting and practical. I love the topic, which is one reason I’m the real estate agent here!
I think it’s important if you’re buying or selling a home to understand a little of the dynamics of the marketplace. You don’t have to stay awake thinking about these things—that’s my job! But having a basic understanding of market economics will help you achieve your goal, whether that’s to buy a house, or sell one.
The first thing in this simplified tutorial is supply. What is supply? In the context of real estate, it is synonymous with the word “inventory.” Inventory just means the total of all homes on the market (or vacant land, commercial property, or whatever category you are looking at).
This is the supply of “product” i.e. homes that is available to purchase. Supply can go up and down in several ways. First, developers can build new homes and put them on the market. That adds to the supply, or inventory of homes for sale. Second, homeowners can put existing homes on the market. That also adds to the supply.
How does inventory get reduced, you ask? Obviously, one way is that homes get purchased and naturally come off the market. But that’s not the only way.
Sometimes they are pulled off the market before they sell. Perhaps the seller was asking too much, and the home didn’t sell in the timeframe they wanted. So they gave up and took it off the market. Or maybe they received offers, but it fell out of escrow and frustrated the owners enough that they pulled it off the market. Anytime homes come off the market for any reason, this reduces inventory.
Supply can be measured, not just by how many houses are on the market, but by how many months of supply there is. That may not make any sense at first—how could the number of houses on the market be measured in months? This stat is calculated by comparing the raw number of homes in the MLS with the current pace of sales. This gives us how many months of supply (or what fraction of a month, in some cases) there is available.
If supply stands at .6 months of inventory, that means the current number of homes on the market would typically be sold in .6 months (18 days). The smaller that number, the tighter the supply is.
This is a really useful statistic to understand the balance between supply and demand.
So now let’s jump into a simplified breakdown of demand.
Demand is simply the amount of people and dollars chasing the existing supply, or inventory of homes. When tons of people and/or cash is chasing a small number of products, prices go up. This is when you have fast-rising home prices and bidding wars, and is called a seller’s market. That just means sellers are in the driver’s seat, and can often get the price they want if it’s not too much over comparable properties.
But it’s not just the number of people in the market for homes that constitutes demand, it is the number of dollars. This is harder to quantify, of course, because no one knows for sure how much money a particular group of buyers is willing to spend on housing. What we can say generally, though, is that a bunch of buyers with a lot of cash will drive up prices faster than a bunch of buyers with limited finances.
Cash buyers (typically people who have sold their home in another more expensive market and are buying here) don’t have to rely on traditional financing through banks. Banks will typically try to tap the brakes on rising home prices, because they don’t want to lend more than a home is worth. They do appraisals to determine how much they are willing to lend, and if comparable sales don’t support the asking price, they won’t lend that much money. That slows the pace of rising home prices.
On the other side of the coin, if there are more sellers than there are interested buyers with the funds to buy a house, this puts downward pressure on prices. That would be a case where demand has fallen to a point where it could become a buyer’s market, meaning buyers are in the driver’s seat. In that case, they could typically offer less than asking price and get an accepted offer, because sellers wouldn’t want to let an interested buyer slip away.
So how do all these dynamics work for or against you? Well, that’s where I could bore you to tears with detailed explanations, but I won’t do that. Suffice it to say that I watch the market closely and look for opportunities to give my sellers or buyers any advantage they can get to achieve the outcome they are looking for. Sometimes that means recommending a lower price than a homeowner thinks their home is worth, or recommending a buyer be willing to offer more than they want to.
Supply and demand make up an intricate and constantly changing balance between two sides of the market. And if you don’t like the balance of things today, tomorrow might be different. You might think I’m exaggerating here. Market’s don’t change day to day, do they? Actually, they do, on a very important level. The emotional level. A buyer who two homes they liked yesterday, after one of them went pending today, now only has one home on their radar.
Boom—that’s when you can make that sale if the market hasn’t been cooperating with you as a seller. On the flip side, a seller may have had a buyer back out of a deal, or have financing fall through right before you. This could change the market for you on a micro-level, making that particular buyer more open to a lower offer from you. And that’s why I study supply and demand. Because the more I understand how the market is behaving, the better I can help my clients achieve their home buyer or selling goals.