The Relationship Between Housing Supply and Affordability
Everyone has heard the phrase “supply and demand.” This basic economic principle drives pricing in different industries, even real estate. But what does it really mean? How does it affect property prices in our area? Can working with Cape Coral real estate agents help you find affordable properties? To answer these questions, let’s first explore how supply and demand work and some of the factors that impact them. Then, we’ll take a look at how changes in supply and demand affect housing affordability.
Basics of Supply and Demand in Real Estate
The theory of supply and demand is a simple economic principle that explains the relationship between the available amount of a good or service and how many consumers want it. It also describes how the price of a good moves in response to changes in supply and demand.
When there’s a large supply but low demand, prices fall. But if there’s high demand for a particular product, such as new homes, the price rises. People will pay more when there’s relative scarcity. When demand exceeds supply, buyers compete for the available units. The competition causes prices to rise until the quantity demanded equals the amount supplied.
Supply and demand work against one another until they reach a point at which there’s price equilibrium. This is the price where supply is equal to demand in a market. However, equilibrium can only be achieved when every other factor remains equal.
The Law of Demand
The law of demand states that when the price of an item rises, people tend to buy less of it. Conversely, lower prices boost demand. Consumers purchase more when a service or good is cheaper. If you have ever bought something only after it has gone on sale, then you already have firsthand experience with this concept.
The Law of Supply
The law of supply states that when the price of a good is higher, producers tend to bring more of the product to market— they’re willing to produce more because they can sell their products for more money. Similarly, when supply is lower, prices increase as consumers aim to buy the scarce resource.
Real Estate Supply and Demand
In real estate, the law of supply and demand sets the equilibrium price of a property. Fewer properties for sale in a specific area may drive prices up. This often results in a bidding war, where multiple parties and their Cape Coral real estate agents try to outbid each other by increasing the price. The bidding war ends when the seller chooses a buyer and another unit is removed from the available supply. In cities or states where demand for properties is high, but the inventory of available quality units is low, prices typically rise. On the flip side, when a weak economy leads to low demand for houses, and there’s an oversupply of properties, housing prices usually fall. The same basic tenets are true in Cape Coral commercial real estate.
Factors that Impact Housing Supply and Demand
Real estate is a market unlike most others; it can be difficult to measure the exact value that supply and demand have on the market. This can be attributed to two factors: the length of time it takes to buy and sell properties and the time it takes to construct new houses or fix up old ones. There are also a few factors that influence supply and demand in a specific market, like interest rates, new property developments, and the mobility rate. Let’s review some of these factors:
Factors that Influence Demand
Interest rates and borrowing costs have a major effect on housing demand. When interest rates are lower, consumers are typically more willing to take on and able to afford more debt for the same monthly price. They may be able to purchase a property because they don’t have to worry about paying excessive interest on their loan. This results in more buyers entering the real estate market, increasing the demand for housing. And if there’s a low supply of housing in their city, housing prices may rise even more.
Factors that Influence Supply
The supply of properties is constantly changing. High mobility rates in an area can increase inventory. More open properties become available as people move from a region to somewhere new. Meanwhile, if a lot of people want to move to a specific city, there may not be enough houses on the market for everyone. New home construction and development projects can increase supply, too. Housing supply decreases when existing properties are demolished or damaged by natural disasters.
Housing Supply and Affordability
Housing prices are determined largely by supply and demand, just like everything else. If there is a supply shortage, the cost of housing can go up. This is because people who want to buy homes must compete with each other for available houses. This competition causes buyers to offer more money for houses than they otherwise would. In turn, sellers are more likely to accept these higher offers because they want their homes sold quickly and for as much money as possible.
To see how this works in practice, let’s look at an example from the current housing market: A house listed for $300,000 has five offers from Fort Myers real estate agents after just one weekend on the market — all of them at $330,000 or more. The seller accepts the highest of these offers because they want to finish the sale as quickly as possible. In this case, supply was limited to one house while demand was high due to the fact that multiple buyers wanted this particular house. With limited supply and high demand, the price increased.
When housing supply in a given area is not commensurate with the demand, housing becomes unaffordable. There are several factors that contribute to this phenomenon:
- The number of people who want to live there exceeds the number of houses available for purchase
- Many buyers compete for each house on the market, driving up prices and reducing affordability
- Existing residents feel pressure to sell their homes, seeing an opportunity to make more money from their homes and increasing average home prices in the area even more
Current State of the Housing Market
With mortgage rates rising to nearly 6% and median property prices increasing by 16.9% compared to June 2021, affording a house remains out of reach for many Americans. And experts don’t anticipate prices to drop significantly any time soon. Housing supply will remain low in 2022, and demand for housing won’t change enough to affect pricing overall.
But experts still believe buying can be a good choice. Home prices may be increasing, but so are rent prices; purchasing property can help you save money in the long term and avoid inflated rents. The key is finding one of the best Cape Coral real estate agents or commercial real estate brokers in Fort Myers to work with. They can help you navigate the market and find the best deals on quality properties. The supply of properties on the market is one of the biggest factors that impact affordability in the market. Low supply and high demand lead to higher prices, making it a challenge for many to afford their dream properties. Finding a quality property and negotiating on your own can be difficult with the right help. Whether you’re looking for a new home or you’re interested in Cape Coral commercial real estate, Fort Myers real estate agents can assist. For more information on finding an affordable property or working with commercial real estate brokers in Fort Myers, contact Alec Salameh at Lee County Real Estate.