If you are familiar with the basic principles of macroeconomics, you probably already understand supply and demand. Some people forget that these basic principles apply to real estate just like they apply to the U.S. stock market, so we wanted to offer a quick refresher on how to think about your local real estate market from a macro-view.
DEFINITIONS
Supply = The number of homes listed for sale; or the number of people ready and willing to sell their home at any given time.
Demand = The number of buyers with the ability and the need/desire to purchase a home at any given time.
IDEAL MARKET CONDITIONS
The relationship between supply and demand dictates price in an open market (like ours). Other markets or sub-markets may impose restrictions on price due to certain factors, like income brackets and employment. In the most basic terms though, ideal market conditions occur when both supply and demand reach equilibrium (*E). In this scenario there are adequate homes for sale to fill the needs/wants of all the buyers looking to purchase.
In Boulder County the market is often split between homes priced over $1,000,000 and homes priced under $1,000,000. People will refer to the "high-end market" vs the "entry-level market". Yes, we can take a moment to pause and laugh at the fact that a $900k home is still considered "entry-level" in some places.
OTHER MARKET CONDITIONS
Oversupply = If supply increases and demand remains the same, the housing market will destabilize because there will be too many homes for sale and not enough buyers, driving prices down. The same would be true if demand goes down and supply remains steady.
Undersupply = When demand is high and supply remains the same (is low) there are not enough homes available to fill the needs of buyers. Therefore, prices are driven up in a competitive environment. In other words, people are willing to pay more for the home they want, to outbid other buyers. *These are frequently the market conditions in the Boulder area.
DIFFERENTIATING FACTORS IN REAL ESTATE
In Real Estate there are a few differentiating factors to keep in mind that may affect these basic principals differently than in other supply/demand scenarios.
Land is Finite. Developers can use whatever land is available to create more places for people to live and more homes to be sold, but available land eventually runs out. Production cannot be increase, it cannot be duplicated, it simply exists until it doesn't.
Market Conditions are Local. Real estate cannot be moved around and re-located to balance demands in different areas. The conditions of any given real estate market are always going to be influenced by local factors first.
The product-type matters. When people look at the real estate market as a whole, this is a good indicator of how people are generally acting in any given region. However, it is easy to take these data sets for face value and assume they apply to everything in that particular market. To get a clearer picture, it is important to narrow the 'product-type' and look at micro-markets with regards to each category of interest (i.e. single family homes vs condos).
Want to learn more about the Boulder Real Estate Market- buying, selling or current conditions? Please reach out and we'd be happy to give you a free consultation!
As always, thanks for reading.
-The Baldwin Bain Group