Supply and demand refers to the relationship between the buyers and suppliers of a particular product. The housing market depends extensively on this dynamic, because generally speaking housing prices rise and fall in sync with supply and demand.
There are many housing market supply and demand scenarios. These scenarios are sometimes referred to as market cycles. Now consider the past several years: In most markets we've seen a shortage of supply, but healthy demand, for housing. So what happens in this case? Prices in most markets have been rising.
Here's an overview of housing market supply and demand, what high and low supply and demand means for investors, and how this dynamic affects your real estate investment portfolio.
How does supply and demand affect housing prices?
When the demand curve for housing increases, so too do prices. It makes sense: If more people want something than is available for purchase, then they are willing to pay more for that product. As prices increase, demand generally drops as affordability decreases.
Further, when supply can't keep up with demand, prices generally increase as well. But in a situation where demand drops and supply increases, you have fewer people who want housing and more houses than there is a demand for. Prices in this case drop. Housing market supply and demand generally work against each other until an equilibrium price is achieved.
Indicators of housing market supply include housing starts, permits issued, and construction completions, among others. Indicators of housing market demand include home sales, days on market, home prices, and inventory levels.
Generally speaking, supply and demand in housing follow suit. Take a look at historical charts from the Office of Policy and Development and Research (PD&R):
Historical data for housing starts (supply):