What Makes a Buyer’s Market: Supply and Demand

This is a pretty simple concept that can be over complicated by economists.  A buyer’s market simply means that it’s better to be buying than selling.  Why?  Too many houses (supply surplus) and not enough buyers (no reckless lending.)

Supply and Demand

When a supplier (people selling homes) floods the market with too much product (houses) the buyers tend to take longer to choose what they want.  As a result, sellers who are tired of waiting will lower their prices to spur the buyer into taking action.  This is a natural movement that many sellers miss because they don’t understand the LAW of supply and demand.  When the supply is low, buyers climb over themselves to bid on what product is available which drives the price up.

The red line represents the supply.  The green line represents the demand.  The point at which they cross is the market value or market equilibrium.  This is the price that we aim for when we price a home.

The graph can be interpreted as such.  On the demand curve (green) when the price of the product is $1.00, the number of units sold will be 100.  When the price is $10.00, the number of units sold will be about 14.  It’s the economists challenge to set the price of his product as close to market equilibrium as he or she can whereby the most money is made for the least amount of production.  100 units sold X $1.00 = $100.00.  14 units sol X $10.00 = $140.00, but 50 units sold at a price of $6.00 each is $300.00.

Shifting Curves

This is the important note for supply and demand.  When supply is increased, the entire red curve shifts to the right by the number of units produced.  Assuming demand remains the same, the point at which the lines cross will naturally fall and the price will naturally fall.  If the price is not adjusted, the product will not sell.  If demand increases at the same rate as the supply increases, then the price will remain the same because market equilibrium will simply follow along.  True, more product will be sold, but the price will stay put.  Remember, when supply and/or demand increases or decreases, the entire line shifts left or right.  For example, if demand suddenly dropped off for a given product like homes, and there was an excess of supply or a surplus such as we have now, the price point would fall dramatically.

Buyers Market

In Phoenix, we have a surplus of homes.  Nation wide we have a shortage of buyers because of tightened lending.  In many cases, the buyers are really still there, but they’re just afraid to move forward and/or they don’t realize they actually can get a home loan.  While the buyer’s market exists, it means the influence of movement on the supply and demand curve has shifted to the demand curve.  Buyers can ask for more, and have more to choose from than ever before, so why not wait it out?

On the contrary, if it’s a buyer’s market and there is blood running in the streets, take advantage of it because you won’t want to be buying in a seller’s market.

Other articles of interest:

• April 10, 2009 -- Real Estate Trends, Market Update
• September 10, 2010 -- Agents Owe It To You, No More Attorneys Negotiating Short Sales
• July 27, 2009 -- Pre-Approved Short Sales Do Not Exist
• July 3, 2011 -- Fireworks Are Nice, But What About This?
• March 14, 2009 -- Should I Buy a New Or Used Car?