Real Estate Economics in the United States: Supply and Demand

Understanding the fundamental economic concepts of supply and demand is essential to evaluating the market and making informed decisions. Below, we will explore these concepts in the context of the real estate industry in the United States and how they influence prices and investment decisions.

Offer (Supply)

Offer refers to the quantity of a product or service available for sale, rental, or exchange at any given time. In the context of real estate, supply refers to the number of properties available for sale or rent. This supply is measured in housing units, square feet or acres, depending on the property in question.

  • property available for sale or lease; measured in dwelling units, square feet, acres


Demand, on the other hand, refers to the amount of a product or service that you want to buy, rent or exchange at a given time. In real estate, demand refers to the number of buyers or tenants interested in purchasing properties. Demand is measured in housing units, square feet or acres, depending on the needs of buyers or renters.

  • property buyers and tenants wishing to acquire; measured in households, square feet, acres

Interaction between Supply and Demand

The relationship between supply and demand is essential to determine prices in the real estate market. Two key principles apply here:

  1. If Supply Increases in Relation to Demand: When there are more properties available than buyers or renters want to purchase, prices tend to decrease. This creates a favorable market for buyers, with greater bargaining power and lower prices.
  2. If Demand Increases Relative to Supply: When there are more buyers or renters than available properties, prices tend to increase. This creates a favorable market for sellers or owners, with higher prices and greater competition among buyers.
  • if supply increases relative to demand, price decreases
  • if demand increases relative to supply, price increases

Supply and Demand Cycle

The supply and demand cycle in real estate is dynamic and can vary depending on geographic area and economic conditions. Various factors influence this cycle, and it is essential to understand how they affect the real estate market.



Factors Influencing Supply and Demand

  • Cost and Availability of Financing: Interest rates and the availability of mortgage financing can significantly influence the demand for properties.
  • Availability of Land for Development: The amount of land available for new development can affect the supply of properties.
  • Construction Costs: Construction costs impact supply by determining whether it is profitable to build new properties.
  • Infrastructure Capacity: Infrastructure capacity, such as roads and utilities, may limit supply in certain areas.
  • Government Regulation and Police Powers: Government regulations, such as zoning laws, can influence supply and demand by dictating how properties can be used.
  • Changes in the Economic Base: Changes in the local economy, such as the arrival or departure of major employers, can have a large impact on property demand.
  • Employer Migration: The arrival or departure of major employers can affect housing demand in a region.
  • Labor Availability: The availability of local workers can also influence the supply of properties.
  • Land Availability: The amount of land available for the construction of new properties is a key factor in supply.

Government Influence on the Real Estate Market

The government plays a significant role in the real estate market through various measures, including:

  • Local Zoning Power: Local authorities have the power to regulate land use and determine what types of developments are permitted in different areas.
  • Local Control and Permits for New Developments: Local authorities control and grant permits for new real estate developments.
  • Local Tax Power: Local authorities can set property taxes that influence the costs of ownership.
  • Federal Influence on Interest Rates: The federal government can influence interest rates, which affects the affordability of mortgages and the demand for properties.
  • Environmental Legislation and Regulations: Environmental laws and regulations can affect the availability and cost of properties.

Market Indicators

Real estate professionals use a number of indicators to evaluate the state of the market. Some of these key indicators include:

  • Vacancy Rates (vacancy rates): Vacancy rates indicate whether the market favors buyers or renters. An increase in vacancy rates is often related to lower prices or rents, which benefits buyers or renters.

      increases indicate buyer / tenant market & falling prices / rents decreases indicate seller / landlord market & rising prices / rents

  • Construction Permits: The number of construction permits issued can provide information about demand and supply in the market.

    building permits – increases indicate declining vacancy; increasing prices & construction

  • Prices: Property prices are a clear indicator of supply and demand. A price increase may indicate increased demand or a decrease in supply, or both.                                                              increases indicate rising demand or declining supply or both
    decreases indicate falling demand or rising supply or both

These indicators help real estate professionals and investors make informed decisions in an ever-changing market. Understanding supply and demand dynamics is essential to successfully navigate the United States real estate market.

Legal and Tax Disclaimer

Please be advised that the content presented in this blog is for informational purposes only and should not be construed as legal or tax advice. The articles and information provided here are written from the perspective of a real estate agent affiliated with Keller Williams, and do not represent legal or tax counsel.

As the author, I am a licensed real estate professional under Keller Williams, holding Brokerage DRE License Number: #02197031. However, it is important to note that my expertise is in the field of real estate, and not in legal or tax matters. The insights and opinions shared on this blog are based on my experiences and knowledge in the real estate industry and should be treated as general guidance rather than definitive legal or tax advice.

For specific legal or tax concerns relating to any real estate transactions or investments, readers are strongly encouraged to consult with a qualified attorney or tax advisor who can provide tailored advice based on your individual circumstances and the latest legal and regulatory requirements.

The information on this blog is provided "as is" without warranty of any kind, and I, along with Keller Williams and its affiliates, disclaim all liability for any loss, damage, or misunderstanding arising from reliance on the information contained herein.

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