Determining Supply and Demand in Real Estate
Timing is everything when it comes to investment in real estate. You have to be able to determine the speed and direction of the market place, and the relationship between supply and demand. These factors will give you a fairly clear picture of whether it’s the right time to invest.
Your local real estate agent will likely not tell you this, but there are investments in markets that you may want to avoid investing in. The prospect of losing money in the short term is high, because of housing supply and demand trends. The supply of housing continues to expand faster than the demand for new housing, and when the supply is greater than demand, properties continue to lose value. When you determine real estate supply and demand trends, you are really looking at a month’s housing supply. This supply of housing is the measure by which you need to test your real estate market.
For instance, a market with a nine-month supply of housing reveals merely that there is an over supply of houses in the area. It does not reveal whether it is a good time to make an investment - it only tells you the market status as of now.
However, if we go back to housing supply trends in the past and compare them, we begin to get a fuller picture. Fir instance, if we were aware that there was a 10-months supply of housing last month, and a 11 month supply a month before that, and a 12 month supply the month before, this would be an indication that the housing over supply is being absorbed. What this tells us is that this is a market which has already bottomed out, and is now on the rebound. So, while a housing supply of 9 months may not look that great, the additional information about past months’ trends provide a different angle from which to see the bigger picture.
Now, imagine that the same market had an eight month supply of housing last month, a even month housing supply a month before that, and a six month housing supply a month before, it is an indication that the market is seeing a downward trend on property prices. Such a market has not yet experienced a recession, and this means that the trends are not in favor of purchasing.
To recap, make sure that the monthly housing supply and demand trends are in favor of a rebound, rather than a continuing recession which is bad news.
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