No matter what industry you look at, supply and demand always plays a large role. This is especially true of real estate and home prices. When there is a large inventory of homes for sale, pricing declines, while a lack of inventory will drive up pricing. This is usually how supply and demand works.
However, there are times when a large supply of highly desirable inventory is paired with a large demand. When this happens, pricing may also rise. There are many factors that can play into this, such as the location of the homes. The more desirable an area, the more people will want to buy a home there, and even if there is a large amount of inventory, there will still be competition to buy the best of that inventory.
Another influence on supply and demand in the housing market is the type of people who are sellers and buyers in that market. Buyers reduce the supply of homes available, while sellers increase the supply.
Recently, John Burns of John Burns Real Estate Consulting defined the six categories of primary buyers and the eight categories of sellers. He found that categories 1 through 6 related to each other, while those in categories 7 and 8 were outliers who could have a significant effect on supply and demand. In these outlier categories, supply tended to outweigh demand.
Buyers Versus Sellers
Buyers tend to fall into six categories, including first-time buyers, divorcees, people new to the area, investors, those looking to buy their second home and those looking to add a second home to their investment portfolio.
The eight categories of sellers included, newlyweds (where the couple each own a home), people moving to a new city, those about to retire, second home sellers, people who want to return to renting, investors, banks with foreclosures or short sales and homebuilders.
Throughout the different categories, imbalances were noted. For instance, first-time buyers always tend to out-weigh people who are about to retire home ownership. In other words, there are more people looking to make their first purchase than there are looking to no longer be homeowners.
An imbalance was also noted between those looking to buy a second-home and those looking to sell a second-home. This is especially noticeable among those in the 40+ demographic, where affluence is on the rise. The more money this group makes, the more interested they are in purchasing a second-home as an investment. The balance does shift during a slower economy, with more sellers looking to save money by selling their second home.
After the real estate bubble burst, a new imbalance among investors emerged. In many areas where there was a large influx of distressed homes, investors, most notably foreign investors, swooped in to acquire these properties. During this time, there were more buyers than sellers. Some of these investors fixed up the homes and turned around and sold them, but most of them turned them into rental properties. Whenever there is an imbalance in this category, either more sellers than buyers or vice versa, the market can experience significant impact.
As mentioned above, those in the seller categories of 7 and 8, banks and homebuilders, have a huge influence on supply. Banks typically sell 400,000 homes per year, but with the growth of foreclosures, they have sold at least three times as many in the last few years. Homebuilders have always had a huge influence on supply and demand. The more homes they build not only affects home appreciation levels, but they can also have the unique ability to be able to increase supply when demand is needed.
The Impact of Imbalance
Upon concluding his research, John Burns noted that between 2011 and 2013 the normal balance of supply and demand was altered in several ways. He found that the imbalance was the result of investors buying up significant amounts of distressed properties, a reduction in bank sales and a lack of new construction.
During this time, buyers had the upper hand, which caused the value of homes to rise. Overtime, as the supply began to decrease, the price of homes increased. As the prices continued to rise, along with mortgage rates, the change in the supply rate caused home appreciation to slow.
For the time being, there are still more buyers than sellers, which will most likely cause price appreciation to continue. However, this does vary in different markets.
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I am the CEO of EquiAlt: real estate based alternative investment firm with activities in equity, debt and private equity. Since 2008, EquiAlt's management has demonstrated a high level of competence in hundreds of distressed asset transactions, recapitalized companies while lending on landmark Las Vegas projects.
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