Question

The basics of supply and demand will naturally impact the market but when answering this question make sure to take into consideration the building cycle of real estate and also what it would take to create a balanced market and how this is defined. Is a 6 month supply ideal? What about a 9 month supply? What type of an impact would this have on real estate prices? Are basic economic pricing models relevant to a real estate investor?

Answer 1

Yes, a 6 months’ supply will be the ideal scenario both for home builders as well as buyers.

It should be noted that in the real estate sector months of supply is a measure of how many months it will take for the existing inventory of homes that are in the market to sell. In case of 6 months of supply the real estate market will neither favor the buyers nor the sellers i.e. the market will be neutral towards buyers and sellers. Thus a balanced market will exist in case of 6 months’ supply.

In case supply is less than 6 months then the market will favor sellers and prices of homes will rise sharply. In case supply is more than 6 months then the market will favor buyers and prices of homes will decline sharply.

Basic economic pricing models are relevant to a real estate investor but only to a limited extent. This is because a real estate investor is impacted largely by the unique, stationary nature of land. Also it is not always easy to balance demand and supply in the real estate sector and supply cannot always be increased in time to meet the rising consumer demand. Hence for a real estate investor basic economic pricing models are relevant but only to a limited extend but never fully.