The terms “seller’s market” and “buyer’s market” describe the party most likely to benefit from a real estate transaction in certain conditions. These terms derive from the basic economic principle of supply and demand. Put simply, when more houses are listed for sale than there are buyers willing to buy those houses, prices will go down. The opposite is also true. Here’s why.
Where There’s Choice, There’s a Price Drop
When the Apple Macintosh computer — the world’s first affordable computer — was released in 1984, it cost $2,495. In today’s money, that equates to almost $5,500. How many people today would pay over $5,000 for a computer? Walk into a tech store and you can pick any number of models for a fraction of the cost.
The thing that has changed is competition. Basic economic theory suggests that if you have a large supply of something, its value will go down. When there are more products for sale than buyers willing to purchase those products, suppliers must drop the price to attract the buyer and encourage a sale. In the real estate market, a large supply happens when there are more houses listed for sale than buyers willing to buy those houses. Buyers with multiple real estate options can bid down prices. More often than not a seller will accept a low ball offer because it is the only offer he will receive.
House values are determined by reference to the sale prices of comparable properties in the neighborhood.
Over time, an oversupply will cause values to drop across the board.
New Construction Increases Housing Supply
Housing inventory is in a constant state of flux. Each year, thousands of homes in the nation are demolished or wiped out by natural disasters such as hurricanes or earthquakes. We don’t see too much of that here in Las Vegas, fortunately. New construction, conversion and renovation add to the housing stock.
These fluctuations happen at the local, regional or national level. For example, the housing may be in short supply across the state but a popular city within that state might experience an oversupply of new development. All things being equal, a glut of new construction property in your neighborhood will increase supply and depress property prices. But supply is only one side of the equation. The concept is meaningless unless you also consider buyer demand.
Factors that Affect Housing Demand
Multiple factors affect demand for housing. The primary factor is population. If a neighborhood experiences a population boom, demand for housing will increase. This frequently happens when a new employer moves to an area or a school district boasts outstanding results.
In this scenario, new construction is needed to meet the demand for housing. As long as demand keeps pace with supply, the value of local properties will not fall. In fact they will probably rise, particularly if the new development boosts the desirability of the area or signals that the neighborhood is on the up.
Another factor that affects housing demand is the buyer’s purchasing power. In a growing economy, workers typically experience greater job stability and rising wages. Homebuyers are more likely to qualify for mortgage finance, especially if interest rates are low. Existing homeowners find themselves with the cash to trade up, and people who previously rented can finally place their feet on the property ladder.
The opposite is also true. In a falling economy, wages stagnate. If inflation is high, true wages fall. Home seekers may struggle to get mortgage finance and demand for housing is typically weak. Listed properties may linger on the market without a sale. Over time, reduced demand will cause prices to fall.
New construction in a neighborhood may raise prices, reduce prices or have no effect at all. The outcome depends on the number of buyers and homes in the market, the quality of the subject property and external factors such as interest rates and attitudes to lending. The only way to figure out the true value of your property is through a comparative market analysis, which takes account of supply and demand factors in your local market. A good real estate agent can prepare this for you.