Understanding Real Estate Demand and Supply for Buyers and Sellers

Buying a house is one of the largest purchases you will ever make. Understanding the supply and demand concept is valuable knowledge.
Buying a house is one of the largest purchases you will ever make. Understanding the supply and demand concept is valuable knowledge. | Source

I am a licensed REALTOR® since 1989. Although I am currently licensed, I am retired from active sales. Still, past clients call me for information, so I keep abreast of the real estate market and trending conditions. Since my first day in the real estate business, one of the first things I explain to clients is the concept of demand and supply. Whether you are a buyer or a seller, this concept is important to understand at the time you wish to buy or sell your home.

Demand and Supply

In the real estate industry, there is a relationship between the number of houses that are available for sale and the number of buyers who are able to buy. That’s the simple definition. The type of homes available and the price of the available homes also are important factors.

Demand-Supply Chart

Demand-Supply Equilibrium
Demand-Supply Equilibrium | Source

Basic Law of Demand and Supply

HIGH demand = LOW prices. This scenario is most advantageous to buyers.

LOW demand = HIGH prices. This scenario is most advantageous to sellers.

Know Your Real Estate Market

When buying a home, consider whether you are buying a home in a high priced market (also known as a seller's market) or a low priced market (also known as a buyer's market).

Seller's Market and Buyer's Market

Seller's Market
Buyer's Market
When the demand for properties in an area is high AND when there is a shortage of desirable properties on the market to sell, then this is referred to as a seller’s market.
When the demand for properties in an area is low AND there is an over-abundance of properties on the market, then this is referred to as a buyer’s market.
When supply is low, prices are high. When supply is high, prices are low.

High Supply Low Demand

In this analogy, we see that there is an abundance of apples. In fact, there are more apples than buyers. This is an example of high supply and low demand. Buyers reap the benefit of lower prices. This is a buyer’s market because the buyers are reaping the benefit of lower prices.

Buyer's Market Analogy

To help understand the concept of a buyer’s market, I share the following analogy. The assumption is that all of the products being sold are in desirable condition.

Suppose you go to the grocery store and see two bins of apples. Both bins of apples are identical in shape and quality. One bin of apples is priced at $1.00 and the other bin of apples is priced at $1.50. From which bin of apples would you buy? Of course! You would buy from the bin of apples that is priced at $1.00. When there are multiple products of the same quality and desirability, the product that is priced higher will sit on the market longer.

The result of over-pricing: The vendor selling the apples at $1.50 will (most likely) only sell his apples after all the apples priced at $1.00 are gone. By then, the over-priced apples may become older and less desirable. The over-priced vendor may need to lower the price of his apples to $1.00 or less in order to get those apples sold before they become rotten.

Low Supply High Demand

In this analogy, we see that there is a shortage of oranges. In fact, there are more buyers than oranges. This is an example of low supply and high demand. Sellers reap the benefit of higher prices. This is a seller’s market because the sellers are reaping the benefit of higher prices.

Seller's Market Analogy

To help understand the concept of a seller’s market, I share the following analogy. The assumption is that all of the products being sold are in desirable condition.

Suppose you go to the grocery store and see one bin with one orange. The price of that orange is $2.00. Three shoppers desire to buy the orange. Shopper number one bids $2.00 for the orange, but then shopper number two bids $2.50 for the orange. Wanting the orange more than the previous shoppers, shopper number three bids $3.00 for the orange. This bidding war continues until someone offers the highest price possible to purchase the orange.

The Loan Process

The price of the home is not the only defining factor of knowing the best time to buy. Getting the loan is the number one part of the buying process. Knowing how much you are able to pay for a home is a critical first step to buying a home. Interest rates and terms of the loan are critical deciding factors to knowing when it is the best time for you to buy a home.

The basic laws of demand and supply for housing are also applicable in the loan part of the home buying process. The general assumption here is that all of the available buyers are desirable buyers. In other words, all of the buyers have excellent credit histories, long-term job expectancy, income, and the ability to pay back the loan.

Getting a Loan in a Seller's Market

Remember, there is a shortage of homes in a seller's market, so the prices of homes are higher.

When there are fewer buyers/borrowers available to loan money to, loan prices and terms tend to be higher and less favorable. The higher interest rates and loan terms usually means the buyer’s loan amount is lower.

A buyer in this position is not able to purchase a home for the price that many sellers are asking. Consequently, the buyers who are able to offer the higher prices win the opportunity to buy the few houses available for sale.

Getting a Loan in a Buyer's Market

Remember, there is an abundance of homes in a buyer's market, so the prices of homes are lower.

When there are more buyers/borrowers available to loan money to, loan prices and terms tend to be lower and more favorable. The lower interest rates and better loan terms usually means the buyer’s loan amount is higher.

A buyer in this position is able to spend more money for a house. This is an excellent position for buyers.

Hire a Professional in Any Real Estate Market

Whether demand and supply is high or low, real estate professionals can help you buy or sell in any market.
Whether demand and supply is high or low, real estate professionals can help you buy or sell in any market. | Source

Seek Counsel When Buying a House

The real estate market is cyclical. Sometimes, supply is high and demand is low or supply is low and demand is high. There usually comes a point when demand and supply equal out for a period of time and then switch to the reverse side of the demand-supply equation.

Buying a house is a large investment. And, buying a house in either a buyer’s market or seller’s market takes the right mix of strategy. The best way to determine whether you should buy a house in a buyer’s market or a seller’s market is to seek counsel from professionals such as a REALTOR®, real estate attorney, and/or a tax accountant. Consulting with one or all of these professionals can help you make the most informed decision you can make in buying or selling your home in any market.

"Real estate information; clear and simple!"

Marlene Bertrand is a Broker/REALTOR®.
Calif. Bureau of Real Estate Lic. #01056418.

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Comments 39 comments

MarleneB profile image

MarleneB 2 years ago from Northern California, USA Author

Thank you for your feedback, Kevin Vitali. I understand what you mean. That period when the market is transitioning is difficult for buyers and sellers. Here in California, I'm seeing a steady rise in property values. Sellers are happy to see that, but buyers are not so thrilled.


Kevin Vitali profile image

Kevin Vitali 2 years ago from Tewksbury Massachusetts

Great information in your article. Understanding where the market is today is important with buying or selling. Unfortunately right now in the Massachusetts Real Estate market buyers still think it's a buyers market where in many communities that has changed.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Yes, Tom Schumacher, you are absolutely correct. Right now, things are not normal and natural to how they would be. So, like you said, home prices are going up in a way that would not normally occur if lenders did what they would normally do in an ordinary market. Good advice about being careful what price buyers pay for homes.

By the way, for my friends who are just learning this stuff, the simple explanation for QE, which stands for Quantitative Easing - It is when the U.S. Federal Reserve (Feds) or any central bank make things happen in order to make more money available to loan.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello ChitrangadaSharan. Thank you very much for the congrats and for the positive vote.


ChitrangadaSharan profile image

ChitrangadaSharan 3 years ago from New Delhi, India

Hi MarleneB!

Congratulations for a well deserved HOTD! I came back to congratulate you after seeing this hub being selected as Hub of the day. Great hub indeed! Thanks again for sharing your knowledge and expertise!


Tom Schumacher profile image

Tom Schumacher 3 years ago from Huntington Beach, CA

Good information. Right now, however, we are dealing with somewhat of anomaly in the U.S. as the Fed's monetary policy is holding down the cost to borrow money (interest rates) thus homes are arguably appreciating artificially. Meaning, many people are projecting once QE stimulus is reduced/eliminated cost of money will increase causing the valuation of homes to quickly decline. Be careful what you buy and for how much. ~ Voted up.


Crystal Tatum profile image

Crystal Tatum 3 years ago from Georgia

I've already visited this hub, but I had to come back and say: Woohoo, way to go Marlene! Congrats on Hub of the Day. You deserve it!


heidithorne profile image

heidithorne 3 years ago from Chicago Area

Big congrats on Hub of the Day! Well deserved!


monic-alang profile image

monic-alang 3 years ago from USA

You are most welcome :)


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Dear monic-alang, thank you for your encouragement. It really means a lot.


monic-alang profile image

monic-alang 3 years ago from USA

yep exactly they'll :) thanks for your kind words. I've read your older hubs your writing is natural and easy to understand keep writing you are doing very well :)


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello monic-alang. Your comment is music to my ears. You've pointed out exactly what I wanted to accomplish - that people would be able to understand and use the information to their advantage.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi ieschiefengineer. Thank you for your comment. My goal in writing this hub was to be able to explain demand and supply in a way that everyone could understand.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello Writer Fox. I'm blushing after reading your comment. Thank you very much for your compliment. It means a lot.


monic-alang profile image

monic-alang 3 years ago from USA

Your hub is user-friendly so I think it's not a difficult task now. I hope it'll help thousands of users to understand quickly and easily...


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello KoraleeP. Thank you for your positive feedback. Since I first started in the real estate industry, I have always worked with first-time buyers. Demand and supply is a concept that I have had the pleasure of explaining thousands of times.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi AlvinTay. While demand and supply is a universal concept, real estate processes vary from one area to another. Thank you for reading and for your positive feedback.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi monic-alang. Thank you for your positive feedback. The concept of demand and supply can be difficult to understand. I was hoping people would find it easy to understand now.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Thank you, lasigns. I'm with you about the house. When I saw that photo, I couldn't resist using it for this hub.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Thank you, rcorcutt, for your positive feedback.


ieschiefengineer profile image

ieschiefengineer 3 years ago from India

Hi I like it very nice description. You share the whole process in a very wonderful way thankyou for sharing.


Writer Fox profile image

Writer Fox 3 years ago from the wadi near the little river

Congratulations on your Hub of the Day, Marlene. Real estate is certainly a subject you know well and every Hub you write on this topic is a quality article.


KoraleeP profile image

KoraleeP 3 years ago from Vernon British Columbia Canada

Great Hub, and well deserving of being Hub of the Day. Your explanation of real estate terms, the process, and strategy when buying is really easy to understand. I have heard these terms, but didn't quite understand them in their entirety.

Thank you for sharing your knowledge :)


AlvinTay profile image

AlvinTay 3 years ago from Singapore

Hello. I am a Realtor in Singapore. It is always good to learn from the basic:)


monic-alang profile image

monic-alang 3 years ago from USA

Understanding real estate demands, actually this is a difficult task or we can say that this's not a v easy job. This hub is great as this one is in simple and clear wording and easy to understand. I don't know v much about Real Estates but I can understand some basics as I've studied in my college life. Thanks for sharing a natural and user friendly hub... Voted up!


lasigns 3 years ago

The picture of the house with the water fountain is so awesome. You just have to step back and appreciate the beauty of the home. It is breath taking and soothing at the same time-very nice!


rcorcutt 3 years ago

Great article.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello DDE. Your favorable comment is encouraging. Thank you.


DDE profile image

DDE 3 years ago from Dubrovnik, Croatia

Understanding Real Estate Demand and Supply for Buyers and Sellers a simple explanation allowed me to learn more about the Real Estate Demand. An informative, useful and interesting view of this hub. Voted up!


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi Crystal Tatum. Thank you for your feedback. Out here where I live, it has been a little stale. Buyers couldn't get loans, so sellers couldn't sell. The market was not moving much at all. But now I'm starting to see some movement. It will be interesting to see which direction the market flows.


Crystal Tatum profile image

Crystal Tatum 3 years ago from Georgia

I like that you explained this thoroughly but in layman's terms. Very good job here. I guess it's been a buyer's market for a while, at least in my part of the world. Voted up and useful and sharing.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Thank you Rajan. My goal was to explain supply and demand in a simple way so that anyone could understand.


rajan jolly profile image

rajan jolly 3 years ago from From Mumbai, presently in Jalandhar,INDIA.

Useful post and explained simply, Marlene. Thanks.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hello ChitrangadaSharan, thank you for your positive feedback. One of my main goals was to explain the concept in a way that people would understand with ease.


ChitrangadaSharan profile image

ChitrangadaSharan 3 years ago from New Delhi, India

This is so very informative!

I must admit I did not know many of the facts you explained above. But thanks for explaining in simple to understand steps.

You are an expert in this field. Thanks for educating us!


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi Benjamin Chege! Thank you for your feedback. Yes, buying real estate is such a significant investment. I am glad the information is helpful.


Benjamin Chege 3 years ago

Hi MarleneB. Voted up and useful. I cannot deny I have learned a few things here and there about the real estate business. Now I can make conscious decisions when venturing into such significant investments.


MarleneB profile image

MarleneB 3 years ago from Northern California, USA Author

Hi Bill, that was some instructor. But, what an excellent way to demonstrate the importance of supply and demand. I work primarily with buyers, so I tend to relate to economics from a "demand" point of view.


billybuc profile image

billybuc 3 years ago from Olympia, WA

I remember walking into Economics 101 my sophomore year...first day of class...we are all sitting there and the prof walks in and says I'm now going to teach you everything you need to know about Economics..and he wrote Supply and Demand on the board....and then walked out.

I still laugh when I think of that lesson.

Great information here, Marlene, simplified so anyone can understand it.

Enjoy your Sunday

bill

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