Supply And Demand…Which Is More Important In Real Estate?
October 28th, 2009 categories: Buyer Resource, Personal Notes, Seller Resource
In the current time of seemingly limited supply, we often get questions about Supply and Demand. People seem to be a little confused about the importance of each, and which is more important.
Supply And Demand is key to Real Estate…and also the backbone of a Free Market Economy. Let’s discuss, at a high level, this basic economic concept that is so important to free trade and capitalism.
The Law Of Demand states that the quantity demanded will increase as prices goes down, and decrease and prices go up, ALL ELSE EQUAL.
The Law Of Supply states that the quantity supplied will increase as prices go up, and decrease as prices go down, ALL ELSE EQUAL.
The point at which Supply and Demand intersect is called Equilibrium. I am going to keep this fairly basic and not go into substitute goods, opportunity costs, supply shifts, demands shifts, game theory, and of course the ever important idea of the rational consumer.
In Real Estate terms, equilibrium is widely believed to be about 6 months of inventory on the market. So what does this actually look like? Let’s take a look.
It is not as easy to discuss Real Estate equilibrium as it appears. In every different price range, the activity levels can be vastly different, as is the current case here in Sonoma County.
In the Entry Level Market (Homes under $300,000) things are moving extremely quickly. We cannot seem to find enough inventory for all of the buyers we currently have. This is leading some buyers to become frustrated, and look at homes in areas that are not necessarily their first choice. (Ex: Santa Rosa entry levels homes)
In the Mid Range Market (Homes From $300,000 – $700,000) things are moving well. The inventory is roughly at equilibrium in Sonoma County. (Ex: Rohnert Park and the different “sections”)
In the High End Market (Homes Above $700,000) things are moving fairly slowly. The inventory is measured in greater than 12 months, and as the economy tightens, and white collar jobs are cut, we see no short term relief. (Ex: Fountaingrove in Santa Rosa)
There is also the Ultra Lux market (Homes well into the millions of dollars) however this market is so fragmented, by area, price range, square footage, land amount, land use, etc. that we have not considered in this article. (Ex: Mayacama Country Club, and many custom homes through Sonoma County).
Given that high level look at Sonoma County Real Estate Supply and Demand, it is fair to note that some other people may sub categorize even further, perhaps even looking at a single city with any number of price ranges. Ex: many people seperate Petaluma into East and West, West into Walkable to downtown, and not walkable, and new constructiona and old construction, all broken down further into price ranges.
So which is most important…Supply or Demand? Neither is more important than the other, they work hand in hand with each other. Depending on where you are looking, and in what price range, you may feel the effects of one over the other, but this can change at any time.
If you have any questions about Supply and Demand in your area, please feel free to ask us.
Hey, that post leaves me feeilng foolish. Kudos to you!
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