Understanding Supply and Demand As It Relates to Real Estate

Understanding Supply and Demand As It Relates to Real Estate

So often in our business we use terms or phrases and just assume that the general public completely understands them. The concept of supply and demand and how that affects prices is very critical for people wanting to buy or sell real estate.

Let's start with a very easy example so I can make sure that you understand the concept. Pretend you want to sell chocolate chip cookies in front of your house. You only have 10 cookies but there are 20 people waiting in line to buy those cookies. Do you think that you will need to mark the price down on any of those cookies in order to sell them? No and there is a good chance you might even raise the price a little bit to increase your profits. More buyers than you have product… That means the market is out of balance. In this cookie example, it's favoring the seller. Now let's say you had 50 cookies to sell, but only five buyers looking for cookies. The chances are good you'll have to drop the price on those cookies and do quite little bit of dickering in order to get them sold. That too is a market out of balance, but this time it favors the buyer.

It's easy to see how that applies to houses but now we will add the concept of absorption rate or number-of-months  supply of homes for sale. Absorption rate is the period of time it would take to sell every home in a certain price range that is currently on the market at the current rate that buyers have been purchasing over the last 12 months in that particular price range. We like to say that a six-month supply is a market in balance and an absorption rate that is less than that would be a sellers’ market and if the absorption rate is longer than that it would be a buyers’ market. This may vary a bit around the country. You can see how absorption rate is a function of both supply and demand.

Now how can you use that information to be of benefit to you? If you are a seller, if at all possible, you would like to price your property in a price band where it is considered a sellers’ market. If you are a buyer you would like to buy in a price band that is considered a buyers’ market. This information is not typically found on the MLS forms, but rather, it would need to be computed by your Realtor.

 Does this help you at all? Whether you are a newer real estate agent still learning the trade or a part of the buying and selling public, I would be happy to help you understand this important concept. Please feel free to give me a call and I will be pleased to discuss these concepts in greater detail with you.

This is a modified repostingfrom my main blog located at Durango Real Estate Blog