In Real Estate supply and demand continually interact in the market to create and maintain price levels. Fundamentally, when supply goes up, prices drop as more sellers compete for buyers, when demand increases, prices increase as more buyers compete for the product. When both supply and demand increase, Real Estate prices tend to remain stable. Although no one can accurately predict changes in real estate values, understanding what causes prices to go up and down can be helpful to the real estate practitioner. The level of activity in a Real Estate market is influenced by the changes in the economic and demographic factors that underlie demand and supply. Market analysis is basically and examination of these factors to forecast the impact of their changes on the price and the quantity outcomes in the market. When the level of demand increases, and this increase is accompanied by a relative smaller change in supply either and increase or a decrease, the analyst can forecast an increase in price as well as an increase in the number of units offered for sale.
Demand can be defined “as the amount of goods consumers are willing and able to buy at a given price during a given time period. In real estate, demand is based on the benefits that can be derived from using land for a specific purpose. For example, an investor who buys a corner lot in a business district to construct an office building buys the land for the rental income it will generate” (“Liberal Economy”). The local demands for housing, retail, and office space are determined in part by the economic growth of the community. Market analysts seldom prepare detailed and complete analyses of local economic conditions. Instead they generally use studies prepared by planning commissions or other public agencies. The output of such studies usually includes current employment and population estimates and forecasts which encompass changes in employment and population. Such data are basic inputs to the analyses of local housing, retail, and office space needs. (“Liberal Economy”).
Some factors that have a tendency to affect the demand for Real Estate include population, demographics, and employment and wage levels.
Refuge is a basic human need. As population grows the demand for housing grows along with it. As housing needs to increase, the demand for industrial and commercial areas should also increase. 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, however, growth has ceased altogether or the population has declined. This may be due to economic changes (such as plant closings), social concerns (such as the quality of schools or a desire for more open space), or population changes (such as shifts from colder to warmers climates). The result can be a drop in demand for Real Estate in one area, matched by an increased demand elsewhere”
Demographics: “The study and description of a population is demographics. The characteristics of the population in a community are major factors in the quantity and type of housing in demand. Family size, the ratio of adult to children. The number of retirees, family income, lifestyle, and the growing number of single parent and empty nester households are all demographics factors that contribute to the amount and type of housing needed” (“Silve Oak Managing Partners, LLC”).
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 plentiful, wages are competitive, and an employee feels secure in a job, demand for housing is likely to increase. 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’s moving in or shutting down. Therefore, licenses must be aware of the business plans of local employers (“Silve Oak Managing Partners, LLC”).
Supply can be defined “as the amount of goods offered for sale within the market at a given price during a given time period. To be a part of the available supply, land must be readily adaptable to the desired purpose at a price market will bear” (Hassem Nadji). Some factors that have a tendency to affect the supply in the Real Estate market include the labor force, construction costs, and government controls and financial policies.
Construction costs and the Labor Force: When a shortage of skilled labor and building materials occurs, or when there is an important decrease in the amount of new construction; There is an impact in labor supply and price levels depend on the degree to which higher costs can be passed on to the buyer in the form of higher prices. As technology advances, materials become less expensive and more efficient; this may counteract the increase in prices. (“Silve Oak Managing Partners, LLC”). The distinguish feature is that the supply of new housing units is affected primarily by construction costs. As the prices of the factors of production (land, labor, equipment, loans, and materials) increase, the supply in the new housing market decreases. On the other hand, the supply in the Real Estate market for existing units offered for sale is affected primarily by the size of the existing stock and the expectations and aspirations of the owners of Real Estate. In addition, economic and demographic factors affect the owner’s willingness to sell their existing housing units.
Government controls and financial policies. “The government’s monetary policy can have a substantial impact on the real estate market. The Federal Reserve Board establishes a discount rate of interest for the money it lends to commercial banks. That rate has a direct impact on the interest rates the banks in turn charge to borrowers. These interest rates play a significant part in people’s ability to buy homes. 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. High taxes may deter investors. On the other hand, tax incentives can attract new businesses and industries. And, of course, along with these enterprises come increased employment and expanded residential real estate markets”
