Residential Real Estate Economics 101

As a real estate agent one is often asked what kind of market conditions exist for residential home buyers and sellers. When supply is low and demand is strong as it is today in many markets, it creates a situation that economists often refer to as a “seller’s market.” In a seller’s market, there are more buyers looking to purchase homes than there are homes available for sale. This dynamic has several effects on the housing market:

Price Increase: With a limited supply of homes and a high number of interested buyers, the competition for available properties increases. Buyers are willing to pay more to secure a property, which drives up home prices.

Bidding Wars: In a seller’s market, bidding wars can occur, where multiple buyers compete by offering higher and higher prices for a single property. This intense competition can lead to properties being sold above their listing price.

Faster Sales: Homes tend to sell more quickly in a seller’s market due to the high demand. Properties may receive multiple offers soon after being listed, leading to faster sales processes.

Less Inventory: The lack of available homes for sale can limit choices for buyers, making it more challenging for them to find suitable properties.

Higher Prices for Comparable Properties: The high demand and competition can lead to “comparable” properties (similar in size, location, and features) selling at higher prices than they would in a balanced market.

Pressure on First-Time Buyers: First-time homebuyers can face particular challenges in a seller’s market, as they may have more difficulty affording properties that are rapidly increasing in price.

It’s important to note that a seller’s market is not sustainable indefinitely. Over time, higher prices can lead to increased supply as more homeowners are motivated to sell, and some buyers may be priced out of the market, reducing demand. These changes can eventually lead to a more balanced market or even a buyer’s market, where supply and demand are more equal, and price increases slow down or reverse. In the end, it’s a simple matter of economics based on where the overall demand and supply curves are in relationship to each other for residential homes.