Supply and Demand in the Real Estate Market
Two characteristics of real estate govern the way the market reacts to the pressures of supply and demand: uniqueness and immobility. Uniqueness means that, no matter how identical they may appear, no two parcels of real estate are ever exactly alike; each occupies its own unique geographic location. Immobility refers to the fact that property cannot be relocated to satisfy demand where supply is low, nor can buyers always relocate to areas with greater supply. For these reasons, real estate markets are local markets. Each geographic area has different types of real estate and different conditions that drive prices. In these well-defined areas, real estate offices can keep track of the types of property that are in demand, as well as the properties that are available to meet that demand.
When supply increases and demand remains stable, prices go down.
When demand increases and supply remains stable, prices go up.
Factors Affecting Supply
Factors that tend to affect the supply side of the real estate market’s supply and demand balance include labor force availability, construction and material costs, and governmental controls and financial policies.
Labor Force, Construction, and Material Costs
A shortage of skilled labor or building materials or an increase in the cost of materials can decrease the amount of new construction. High transfer costs, such as taxes and construction permit fees, can also discourage development. Increased construction costs may be passed along to buyers and tenants in the form of higher sales prices and increased rents that can further slow the market.
Governmental Controls and Monetary Policy
The government’s monetary policy can have a substantial impact on the real estate market. The Federal Reserve Board (the Fed) establishes a discount rate of interest for the money it lends to commercial banks. That discount rate has a direct impact on the interest rates the banks charge to borrowers, which in turn plays a significant part in people’s ability to buy homes. The Federal Housing Administration (FHA) and the Government National Mortgage Association (Ginnie Mae) can also affect the amount of money available to lenders for mortgage loans.
Even apart from financing concerns, virtually any government action has some effect on the real estate market. For instance, federal environmental regulations may increase or decrease the supply and value of land in a local market. Real estate taxation is one of the primary sources of revenue for local governments. Policies on taxation of real estate can have either positive or negative effects. While high taxes may deter investors, tax incentives may attract new businesses and industries and bring increased employment and expanded residential real estate markets.
Local governments also influence supply. Land-use controls, building codes, and zoning ordinances help shape the character of a community and control the use of land. Careful planning can help stabilize, and even increase, real estate values.
Factors Affecting Demand
Factors that tend to affect the demand side of the real estate market include population, demographics, and employment and wage levels.
Population
Because shelter is a basic human need, the demand for housing grows with the population. Although the total population of the country continues to rise, the demand for real estate increases faster in some areas than in others. In some locations, growth has ceased altogether or the population has declined. This may be due to economic changes (such as business closings), social concerns (such as the quality of schools or a desire for more open space), or population changes (such as population shifts from colder to warmer climates). The result can be a drop in demand for real estate in one area, which may be matched by increased demand elsewhere.
Demographics
The study and description of a population is called demographics. The population of a community is a major factor in determining the quantity and type of housing in that community. The number of occupants per household and their ages, the ratio of adults to children, the number of retirees, family income, and lifestyle are all demographic factors that contribute to the amount and type of housing needed.
Employment and Wage Levels
Decisions about whether to buy or rent and how much to spend on housing are closely related to income. When job opportunities are scarce or wage levels low, demand for real estate usually drops. The market might, in fact, be affected drastically by a single major employer moving in or shutting down. Real estate professionals should stay informed about the business plans of local employers.
As you have seen, the real estate market depends on a variety of economic forces, such as interest rates and employment levels. To be successful, real estate professionals must follow economic trends and anticipate where those trends will lead. How people use their income depends on consumer confidence, which is based not only on perceived job security but also on the availability of credit and the impact of inflation. General trends in the economy, such as the availability of mortgage money and the rate of inflation, will influence people’s spending decisions.
Factors affecting real estate supply:
- labor force, construction, and material costs;
- government controls and financial policies.
Factors affecting real estate demand:
- population,
- demographics, and
- employment and wage levels.
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