Supply and Demand – Why it Matters for Homebuyers
For the last decade, the housing market has consistently made headlines, giving both sides of the buying and selling line interesting trends and topics to consider before making a real estate move. As the economy continued to climb out of its recession slump, many were, and now continue to be, interested in the current state of the housing market. Buyers want to know if now is the right time to make homeownership a reality; sellers want to know if they are able to get top dollar for their home in the moment. The strength of the housing market drives the answers to these questions, but you may be wondering what drives the housing market to begin with.
There are a handful of factors that create a strong housing market, either for buyers or sellers. The most often misunderstood catalyst revolves around the theory of supply and demand. As potential or current homeowners, recognizing how supply and demand works in real estate can help you make the most of your next home purchase.
The Concept of Supply and Demand
Many of us faintly remember a brief mention of supply and demand in an intro economics course in high school or college. Apart from that distant memory, the concept of supply and demand may seem complex or irrelevant to the homeownership discussion. However, it plays a crucial role in where the housing market stands for both buyers and sellers.
Supply and demand is a relatively simple economic principle. When there is an ample supply of a certain product or service, but consumer demand for that particular item is low, prices are low. When demand is high, but supply is scarce, prices increase.
In the housing market, this principle impacts home prices directly. If residential properties are in high demand but there are few available homes to purchase, sale prices tend to increase, creating a sellers’ market. Buyers have fewer options which leads to potentially paying more for a home. In a buyers’ market, demand is low due to too much supply. Sellers, then, may accept a lower price for their home.
Other Driving Forces in Real Estate
While the idea of supply and demand may be straightforward, the factors that influence real estate supplies and consumer demand can be more complex. Several driving forces impact the housing market, and therefore, buyers and sellers, including:
Interest rates
Most home buyers take out a mortgage to fulfill their dream of owning a home. A long-term home loan makes homeownership more affordable for most, but interest rates play a significant role in just how affordable a mortgage is. When interest rates are on the rise, securing a mortgage with a manageable monthly payment may be less feasible for some buyers. This ultimately weakens demand and, when extended for a long period, creates stagnant or decreasing home prices. The opposite is also true. In a low interest rate environment, home prices may increase as consumers feel homeownership is more affordable over the long term.
Economic growth
The strength of the economy also plays a part in supply and demand in real estate. When unemployment rates are low and wages are increasing, demand for homes trends upward. Similarly, weak economic environments, where unemployment is high and incomes are stagnant or decreasing, lead to less demand.
Mortgage availability
While interest rates and the broad economy impact supply and demand in the housing market, the availability of mortgage loans may contribute the most. If potential homeowners are unable to get a loan due to a tight credit market, where lenders have more stringent requirements for approval, demand wanes. This leads to lower prices over time. However, when mortgages are readily available, and with low down payment requirements and flexible eligibility criteria, demand for homes increases.
Why It All Matters
If you’re gearing up to purchase your first home, or in the market to sell your current residence, supply and demand will have an impact on you in some way. When home prices are high due to increased demand and low supply, it can seem like purchasing a home is not in your best interest. The same may be true if you are planning to sell when demand is low and supply is overflowing. However, don’t let these ongoing issues stop you from pursuing your ultimate goal.
Supply and demand, and the factors that drive each, are always in flux, but it is important to understand that they are influenced heavily by local markets. What is happening on a grand scale across the country may not have a significant impact on your neighborhood. Also, it can be difficult to tell which direction these drivers of home prices are headed with complete accuracy. Instead of fretting about rising interest rates, the current state of the economy, or other supply and demand powers that be, focus on your needs and wants when it comes to homeownership first. Understand what you can afford in a new home, the strength of your credit, and your ability to secure an affordable mortgage that meets your needs.
The qualified Snapfi mortgage advisors are available to chat and help you determine the best options for your specific goals and needs.