Supply & Demand: Shortage, Surplus, and Housing Prices

While the term "supply and demand" wasn't coined until the last 500 years, the foundational laws of supply and demand have influenced human economies for over 10,000 years. They have operated since the dawn of the Agricultural Revolution in Mesopotamia, when humans first produced food surpluses and established trade, specialization, and marketplaces.

Supply and demand are the foundational economic models that explain how prices and quantities of goods are determined in a free market. The two forces operate inversely to guide market prices. Supply and demand continue to play a central role in modern markets, including the real estate housing market. One of the hallmarks of the American capitalistic economy is the free-market system, allowing the laws of supply and demand to play out as they will and thereby guide market prices.

The Laws of Supply and Demand

Here is how these laws work in the housing market:

The Law of Demand: As the price of housing increases, consumer demand decreases (and vice versa). People generally buy fewer homes when they become more expensive.

The Law of Supply: As the price of housing increases, the supply increases (and vice versa). Homeowners want to sell more houses when they can make a higher profit.

If Demand > Supply (Shortage): Prices go up. When many people want houses, buyers compete for them by offering more money, driving the price higher.

If Supply > Demand (Surplus): Prices go down. When sellers have too many houses and not enough buyers, they compete for buyers by lowering prices.

Finding Equilibrium

Eventually, these two forces meet at a sweet spot called the market equilibrium. At this exact price, the amount consumers want to buy perfectly matches the amount suppliers want to sell, leaving no leftover product and no unmet desires. Of course, no market is ever in perfect equilibrium but rather in constant flux and change as a result of enormously complicated human behavior.

Aaron's Insights

One of the most surprising aspects of supply and demand is that there are always exceptions to the overall trend. For example, a property that is positioned well and priced accurately will outperform other comparable properties that are not positioned well and overpriced. The overall trend might be unfavorable (oversupply), but it is possible to foresee this difficulty and plan for it, or watch it happen in real time and strategically re-position a property to be the best option. The death knell for any property sale in a changing market is to assume a shortage of comparable properties and hope for an oversupply of buyers.

Douglas County Market Update

For the overall Douglas County housing market on the scale between "Shortage-----x-----X-----x-----Surplus", we are somewhere past the halfway mark leaving the shortage and approaching surplus side. This is happening very slowly and has caused local housing prices to remain relatively flat for almost 4 years. Over the last 24 months, the supply of homes for sale has grown by 30-50% with no corresponding increase in demand from buyers. If this continues, even slowly, we could eventually begin to see broad downward pressure on housing prices. Understanding how supply and demand work in the housing market is critical to having accurate expectations when purchasing or selling real estate.

The dial currently reads 20, still technically a seller's market but only barely above balanced territory. The record high was 77 in April 2022; the record low was 5 in June 2009. Average and median days on market now sit at 79 and 44, respectively, both higher than a year ago. A precise home valuation matters more than ever when prices look flat at the headline level but vary widely by condition and location.