The Impact of the Supply and Demand Curve on the Real Estate Market in America

Abstract

This research paper will describe how the supply and demand curve impacts the real estate market. The paper states that selling property heavily depends on the economy, interest rates, and affordability. There is a break down on what a rightward shift in supply and demand, as well as a leftward shift in supply and demand impacts the real estate industry. This paper also uses a few online sources to describe how the equilibrium price impacts the price of the buyers and sellers market.

There is a graph at the end to give a visual on how the supply impacts the demand and vise versa.

The Real estate market in America is a major part of people wealth in today economy. On average 65% of Americans own their own property. The changes in price to real estate and rental prices play a major role in the wealth of property owners or tenants living in these properties. The law of supply and demand is present in real estate because this market includes a buyer and a seller.

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Usually when there is a high demand for properties but the supply is low in a particular area the cost to buy is high. When the supply of houses is high and the demand for property is low, the price to buy is lower. Although basic supply and demand rules are fairly similar to any other market, there are many factors that impact success of the real estate industry. Buyers are worried about many things before closing on a major purchase like buying or renting a property.

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Rightward shift in demand

One main cause for an increase in demand of real estate is interest rates. A change in the interest rates can determine if a person has the financial stability to purchase a property. When there is lower interest rates the demand for homes become higher because the cost of mortgages will be lower. But if the interest rates became to low the demand for residential properties will be higher which can also increase the prices to buy a property (Nguyen, Joseph). From the perspective of real estate investment trust (REIT) the relationship between interest can be seen as a bond for equity investments. As the interest rates increase the value of bonds decrease and vise versa for lower interest rates. REITs become more attractive to buyers when the interest rate is lower. Interest rates can be a deal breaker for a person looking to purchase real estate, if the prices are to high buyers might not be able to close in on deals which can negatively impact the real estate market.

Another reason for a rightward shift of demand is the economy. GDP, employment data, and the prices of goods. Housing starts and sales are two major parts of the housing market that is directly impacted by the economy. Housing starts is determined by the number of new residential construction projects in a particular area at a certain time of month (Nguyen, Joseph). In a booming economy buyers are more likely to buy new homes and the opposite occurs in weak economies. Home sales are directly connected to an economy’s health. If the economy is strange, money tends to be easier to borrow which allows for buyers to take out loan and lowers the inventory of houses because people are buying them.

Lastly, being aware of government policies and subsidies can cause for a rightward shift in the demand of real estate. Tax credits, deductions, and subsidies are some of the ways the government tries to boost the demand for real estate if the market isn’t doing so well. For example, in 2009 the US government started a “First-time Homebuyer’s tax credit” to homeowners who purchased homes between 2008-2010 (Investopedia.). This was an incentive to get the real estate industry thriving. This specific tax credit caused for 900,000 people to purchase homes. Government policies can allow for an increase in real estate sells if they are offering things that appeal to buyers.

Leftward Shift in Demand

All of the above factors that can cause an increase in demand for real estate can also cause for the demand curve to shift to the left. A leftward shift in the demand curve means that the demand for buyers are low. Although some people might see low interest rates as a great thing for homebuyers, if interest rates become to low, to many people now have access to the market which increases the demand and raises the prices of properties (How Does the Economy). The economy also can lower the demand for real estate, if the economy isn’t doing to well in other markets, they might increase the taxes in certain areas which can lower the demand for the properties. The government policies can also shift the demand curve to the left if they increase property taxes. A leftward shift in demand has negative impact on the real estate market because it lowers the amount of buyers in actual market.

Rightward Shift in Supply

A rightward shift in supply means there becomes an increase in the supply of houses. Factors affecting supply can range from panning restrictions on the use of land, local opposition to new homes being built, to the profitability of building new houses. One major factor that can contribute to a sudden boom in the supply of houses Is the current population (Pettinger, Tejvan.). The number od people has become less important but the demographic changes is a very important factor. The demand for property doesn’t depend on the population but also the size of a household. Another main issue that impact the supply of homes is the confidence of the buyer (Nielsen, Barry). The supply of houses depends on how well or bad consumers think about the economy and the real estate market. Since buying a piece is a huge investment, if the buyers do not fee the purchase will be beneficial in the long run that can cause a surplus of properties being available, thus increasing the supply.

Leftward Shift in Supply

A decrease in supply can be seen as a positive thing to people trying to purchase homes because they can increase the amount they are selling the property for. If there aren’t enough properties in a particular area, sellers can use this as leverage if the demand is high enough. Affordability plays a huge role in the leftward shift in supply because rising incomes mean that people are able to afford to spend more on housing (Nielsen, Barry). If there is a period of economic growth, demand for houses tends to rise (Pettinger, Tejvan). Interest rates also impacts the supply of property because if interest rates are low enough more people can afford to buy houses which lowers the amount of houses on the market.

An Increase or decrease in the Equilibrium Price

When the demand is equal to the amount supplied, then the equilibrium is achieved. As the equilibrium price is increased the the demand is decreased while the supply increase. If the equilibrium price is decreases the demand is increased while the supply is decreased (Spaulding, William C). With real estate and any other industry, you compare it to, the equilibrium price determines and set the price based on the demand and supply of goods. Below is a chart that displays how the demand and supply and supply impacts one another in real estate.

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The Impact of the Supply and Demand Curve on the Real Estate Market in America. (2022, Feb 12). Retrieved from https://studymoose.com/the-impact-of-the-supply-and-demand-curve-on-the-real-estate-market-in-america-essay

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