affected by several factors, price is the clearest example.

Level 13: Valuation and Pricing - Chapter 2: Supply and Demand Flashcards

Demand Factors: PriceAs I mentioned earlier, demand can be defined as a

consumers' ability and willingness to buy a good or service at a certain price. Though the demand for real estate is affected by several factors, price is the clearest example.When real estate costs more, fewer people are willing to buy.The price of a particular piece of real estate is also influenced by many factors. Prices can increase because of increases in construction costs, the cost of financing, and property values.Additionally, the price of purchasing real estate can be affected by the prices of other commodities.For instance, if the cost of leasing an apartment is low, the cost of purchasing a house might also decrease to attract more buyers.Supply and Demand Affect PriceThe impact of supply and demand differs when applied to value and the market, respectively. If the supply of real estate and the demand for it are proportional, values will remain stable. If there is an under-supply, prices will increase. If there is an over-supply, prices will decrease.So, supply and price move in opposite directions.Demand and price move in the same direction. As demand increases, the prices increase, and as demand decreases, the prices decrease.Demand Factors: ExpectationsFinally, a buyer's expectations of their future financial situation, and of the economy as a whole, will affect the demand for real estate. Consumers are less likely to buy a

home if any of the following situations apply:They expect

their income will decrease in the near futureThey expect the price of housing will decrease in the near futureThey expect the price of housing will decrease at the time they expect to sell their current house

SupplyNext up: supply. Supply is an economic term for the

available amount of something. In real estate, it's based on the willingness and ability of sellers in a given market to sell their property.Several factors affect supply:Selling price: As the price of housing increases, owners become more

willing to sell.Loan price: As the price of a loan increases -

that is, as the interest rate goes up - lenders become more willing to lend and buyers become less willing to take out loans.

The Demand CurveThe demand for any commodity, such as real estate, can be illustrated using a demand curve. You will notice that as price increases (vertically), the amount of real estate that buyers are willing to purchase (horizontally) decreases.

The opposite is also true: As price decreases, the quantity

demanded increases. (We'll cover the equilibrium in a moment.)Demand for real estate and average price are correlated, although there are other factors that keep this

from being a perfect 1:1 relationship.

The Makeup of a MarketSupply and demand are the basic forces that control all markets. But what's a market? A nice place where you can stroll around and pick up some seasonal vegetables? Yes, but for our purposes a market is a theoretical construct that isolates the selling and purchasing of any one particular commodity from the economy as a whole.

Demand Factors: EmployersCities experience significant changes in supply and

demand when a major employer sets up shop or closes down.A new major employer will stimulate the local economy and lead to an increase in population. This will result in less supply and higher prices.If a major employer closes or moves away, the local economy takes a hit.People will tend to move away, resulting in more supply and lower prices.Supply Factors: Cost of ProductionThe supply of real estate is also affected by the cost of its production.If construction costs go down, it is cheaper to build houses, apartments, and office buildings, so more of them will appear on the market.If the cost of construction goes up, there is a greater expense to builders and new housing becomes scarcer.An increase or decrease in the price of raw land has a similar effect. However, because real estate is a long-lasting commodity, there is usually an existing supply (on the market) of houses that have already been built.Supply Factors: ExpectationsFinally, expectations affect supply as much as they affect demand. If sellers expect the price of real estate will go up in the near future, they will be less likely to sell right now. If sellers expect the price to go down soon, they will be more likely to sell right away.The case is similar for lenders when an interest rate is expected to increase or decrease.

However, lenders are much like apartment managers: they

cannot afford not to receive interest for any significant period of time. Similarly, market expectations only sway sellers if they have the luxury of a flexible schedule.Seller's MarketWhat is that, Ace?Well, a seller's market is a market condition in which the number of properties for sale does

not meet the demand (number of people looking to buy).The pricing and negotiations of a transaction are typically in favor of the seller (hence the name) - though this is not a

hard and fast rule.Seller's market example: If there is high

demand for a certain area and relatively few homes on the market, the seller probably will not have to lower their asking price or give concessions to a buyer. Yay seller!

Buyer's MarketA buyer's market is the condition of having fewer buyers than the supply of homes for sale in an area. In a buyer's market, there is relatively low demand for real estate.Prices and negotiations in a buyer's market will tend to be more in favor of the buyer (go figure!). It may be easier for a buyer to negotiate a lower price or even get the seller to pay the

buyer's closing costs. Yay buyer!Summing it up: The active

license holder should always know what type of market they are in so they are ready to properly negotiate for their client.Buyer's and Seller's MarketsMost experienced real estate agents will tell you that the industry is rarely in a "normal market."Rather, most will say that we are either in, or moving towards, either a buyer's market (where it's good to be a buyer) or a seller's market (where it's good to be a seller).Whether the market is advantageous for buyers or sellers is closely related to the greater economy (nationally and locally) and where we are in the real estate cycle.Yes, just like the moon, the real estate market waxes and wanes in cycles. The real estate

market's phases include:Recession Recovery Expansion

Hyper supply Supply and DemandTogether, the two forces of supply and demand help determine the actual price, and quantity of, real estate on the market. The law of supply and demand states that the forces of supply and demand push the market price of any commodity to one particular point, the market equilibrium.This equilibrium is the point at which the supply and demand curves cross. (Remember this graph? There's the equilibrium in the center.) Impact of the EconomyThe state of the economy has a strong impact on the real estate market.If the economy is strong, first-time buyers will be buying homes and current homeowners will be wanting to upgrade or upsize to a new home.If the economy is weak (or consumers are feeling unsure), more homeowners will stay with their homes and fewer people will be interested in buying.You may not have control over the health of the United States economy, but you can at least stay on top of economic news. I'm not saying you have to read the whole Wall Street Journal every morning, but try to follow economic news and trends through the medium that suits you best. This stuff affects your career!The Supply of MoneyIn short, one very important factor affecting the supply and

demand of housing is the supply of money. In general:The

higher the supply of money available to finance real estate

ventures, the higher the demand for housing.Result: When