What Happens When Housing Supply Meets Demand

So often I am asked if I think home prices are going up or down. I remember in 2004 sitting around a big conference table with my private equity partners answering this same question (we financed large condo projects and bought raw land parcels to resell to home builders). And even with the 30%+ drop in housing prices in America from their peak in 2006, my then most unpopular answer has not changed, its still “down”.

According to the National Association of Realtors total housing inventory at the end of April rose 8.8 percent to almost 3.97 million existing homes available for sale. So how do these inventory numbers equate to price? Well, even if you didn’t major in economics, at some point you were taught that supply must meet demand to establish a true market price; or a price where the product will sell. For example, in the stock market, a stock price is continuously reset up or down in order for supply (sellers) to meet demand (buyers) for a stock.

In contrast, sellers of houses are asking one price (we are assuming they are truly sellers) and buyers are demanding another; so supply is increasing without regards to demand, and thus true price remains undetermined. However, we can definitively determine that as large inventories remain, home prices must go lower for supply to meet demand. So how much lower? 

Well imagine if all 3.9 million homes currently for sale were forced to sell in real time, like in the stock market or any other fluid or liquid market. Imagine if home supply met demand and a real price in real time was actually established. Yes, every home for sale in Florida, Southern California, Arizona and Nevada and every luxury condo with a “For Sale” sign (again, we are assuming they are truly sellers) scattered across America had ONE DAY to sell regardless of the price. Imagine…

That price, determined in that one day, is where supply meets demand. How low would the sellers have to go to meet the prices demanded of buyers in order to liquidate all 3.9 million homes? Whatever that number is, it represents the real market value and thus real market price of our homes. 

So as you can imagine, prices still have a long way to fall before supply meets demand.

Related Posts

comment_status) && ('open' == $post->ping_status)) : // Comments and trackbacks open ?> comment_status) && ('open' == $post->ping_status)) : // Only trackbacks open ?> comment_status) && !('open' == $post->ping_status)) : // Only comments open ?> comment_status) && !('open' == $post->ping_status)) : // Comments and trackbacks closed ?> ", ""); ?>

Post a Comment

Your email is never published nor shared.
All comments are held for approval and will not appear immediately.
Links and paragraphs are formatted automatically.
Some HTML is allowed… <a>, <strong>

(will not be published)

Subscribe to Comments

Subscribe without commenting