Supply and Demand

Supply and demand in impacts home prices in several ways that can present opportunities for home buyers.

Excess Supply

• Supply in the housing market works the same way that it does in any other market: when there is a lot of supply available, prices tend to fall because sellers must compete with one other to make sales. For instance, if there are a large number of homes for sale in a certain neighborhood, sellers might reduce asking prices in order to attract buyers. If builders construct new homes, it increases the housing supply which can put further downward pressure on housing prices.

Low Supply

• If the supply of housing is low in a certain area, the prices of houses tend to be high in that area because sellers face little competition. For example, if only one home is for sale in a certain neighborhood, the seller might not feel pressured to lower his asking price because buyers interested in the area have only one option.

  

  High and Low Demand

• Consumer demand for housing influences the prices of homes because sellers are more likely to attract buyers when demand is high. If many people are interested in buying homes in a certain area, sellers have more opportunities to sell their properties will tend to set higher prices. When few buyers are interested purchasing homes, sellers may feel pressured to reduce prices to attract more potential buyers.

Considerations

• Housing supply, demand and prices can be influenced by underlying factors. For example, if banks make it harder for buyers to get mortgages, fewer people can afford homes, so the demand for housing falls. When the economy grows and wages rise, people have more money to spend so demand for housing may increase, resulting in higher home prices. On the other hand, a recession can lead to high unemployment, falling wages and a rise in home foreclosures, which reduce demand for homes and increase supply.