Supply and demand determines any and every real estate market.... period. It's not hard to find an article that blames the current meltdown in real estate on the cheap and easy loans available and I somewhat agree on this but in a different light.
Cheap money enabled new home builders to build developments with the demand that was caused that would not have sold in a normal real estate market. Corners were cut, building lots were diminished, and some questionable real estate was developed with the intent of builders squeezing the most homes that they could on the amount of land they had according to zoning guidelines. I personally have talked to builders and asked them why they developed a piece of land the way they did and the answer was so they could squeeze more units in. The art of thoughtful development was put on the back burner and replaced with creating more supply for an artificial demand.
Las Vegas is a perfect example of this. In the 1980's you had developers building Spanish Trail. In the early 90's you had a community called Summerlin being developed which includes some extraordinary real estate. In the late 1990's you had an incredible community called Lake Las Vegas that was planned out. These were carefully planned developments during normal real estate markets where a lot of thought went into the design of the entire master planned community and some incredible real estate was developed.
There are probably examples of this in several communities across the United States. In Barrington, you can spot some incredible developments such as the guard gated Jack Nicklaus designed Wynstone community in North Barrington (planned and developed in the late 1980's) that to this day is some of the most incredible real estate you will find in all of Chicagoland.
During the days of high demand, there were several subdivisions planned and developed that were being purchased simply because speculators were taking advantage of the cheap money available and developers were more then happy to take advantage of this by building as much as they could on whatever piece of real estate they could purchase. At one point, it seemed like it did not matter what was built because it would sell.
When you start seeing headlines in the National media about outrageous appreciation rates, it's time to get out. Stocks, real estate, gold... whatever... once the media starts reporting how great something is doing, it's time to be careful and to not let excitement get in the way of common sense.
On the flip side, when the media reports how bad something is, it's time to take a closer look and to start finding the great deals available.
I've come across several people who's main source of advice is a newspaper and that's scary. They read something about how well a particular real estate market is doing and they want to jump right in along with all of the other new real estate experts and purchase anything that is available.
On the flip side, they read the sensationalized stories of how bad the real estate market is and they want nothing to do with it despite the fact that some of the best real estate available to purchase at the best prices in a couple of years is now available.
The psychological effects the media has plays an important part of any market but the reality is any market is based on supply and demand. I don't think it's too hard to debate the fact that in some real estate markets, the demand for housing was artificially created which drove appreciation rates to levels that just did not make sense. In a rush to meet the artificial demand, builders overbuilt and created too much supply.
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