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How Economics Affect the Housing Market

Summer is pretty much here and so is a hot housing market, especially in New England. Though summer is the end of the school year, I thought we’d go back to class for one more lesson before everyone heads up to camp. This month I wanted to go beyond the basic economic principles often applied to real estate and talk about the more nuanced factors that affect the housing market.

Most people probably remember their lessons from basic economics on supply and demand, and how they factor in on prices for goods. I thought I’d take this month’s blog post to review these basics and also highlight some of the other very important but often forgotten factors that play a key role in home values.

Basic economics talks about supply and demand. The law of supply and demand states that with increasing prices on an item comes a higher supply and lower demand and with decreasing prices on an item comes lower supply and higher demand.

Before I lose you, I’ll add that these principles can be put on curves, and where these curves intersect is generally the accepted market price.

This is a simplified version of things, but rather than getting bogged down here, let’s transition to the real estate market. You might’ve already drawn the connection, but let’s go over how the law of supply and demand moves prices in the housing market.

The housing market over the last few years has been difficult for buyers. The demand for homes has far exceeded the supply of FOR SALE homes in Maine, New Hampshire, Massachusetts and many other parts of the country.

This mismatch in demand has helped drive up the cost for homes everywhere, as we’re seeing. I don’t think many of you will find this concept new, and I didn’t intend to turn my blog post into a lesson on basic economics.

As I mentioned earlier, what I hope to do is point out other key factors that come into play when it comes to real estate.

The principles previously discussed are basic and mostly academic. On a simple level, they can help us draw an easy cause and effect for the well above average rise in home prices over the last few years.

These principles, however, are not designed to consider the nuances of a particular commodity like, say, real estate.

For example, the “supply” of real estate is not simply determined by price or demand. Houses require land, time to build, possibly financing to build, and the material. These factors raise the barrier for entry and slow down the process so that even if demand incentivises homebuilders to construct more homes for the market, the process is very slow and the market can hardly discern the effect, at least in the short-term.

With demand for real estate rising and a slow to minimal change in supply to meet it, prospective home buyers only see a continued rise in cost like what most buyers are experiencing today.

This doesn’t paint the entire picture of the real estate market, however. Another interesting quality about real estate is its disparity in prices. Real estate is a broad category encompassing all kinds of different properties from spanning acres of thick forest land to a beachside cabin.

Properties today can sell for tens of thousands of dollars to hundreds of millions. Variations in location, size and an endless list of features help determine a home’s value in the market.

Real estate isn’t just one market. It’s a series of markets based on these variations. Prices in a coastal town are going to be different from a city ten miles from the same body of water. 

Demand is going to change based on cost and affordability. Supply can change based on economic factors like interest rates or the stock market, and prices vary based on the above plus the many, many different styles, types, uses and location of a property.

Let me give you some examples of different markets and how their temperatures can be vastly different.

We’re all under the assumption of a hot housing market. Homes being listed are going under contract within days. But that’s not always the case. The more expensive a property, the fewer buyers available, which means less demand – meaning more time on the market.

While most current numbers show the average home is on the market and under contract in 21 days (with an average home value around $431,000), houses valued over a million dollars can take more than 100 days to sell – some can spend over a year or more on the market.

We also have to consider location. Prices have certainly increased broadly across the state of Maine. But not all increases are equal. Some areas have seen significant increases, and others only minimal.

Some counties in Maine have seen a year-over-year increase in sale prices close to or more than 20%, but Cumberland County prices have only increased about 4%. Please note that larger sale volumes help to keep the increase down by dampening outliers, but those numbers will probably surprise anyone trying to buy a home in or around Portland.

Understanding the diversity and disparity in real estate, and knowing that the climate in one area or price range isn’t necessarily the climate in another area or price range, is key to entering into the real estate market with realistic expectations.

Far too often prospective homeowners approach selling with an inflated sense of their home’s value. I don’t blame them, but they need to understand that the market is much more complicated than the simple headlines we see in the news or on the internet.

While the headlines aren’t wrong, they can be misleading because they are broad and generalized.

Real estate is inherently an appreciating asset, and everyone should expect to sell their home for more than what they paid. But entering the market with a listing price that’s too high because David Muir said real estate is booming could cost you time and, worse, potentially money.

Leaning on a trusted real estate agent with a good pulse on the market in your area is the best way to know your home’s true value and get the most equity without wasting your valuable time.

If you have any questions or want to talk more about real estate or your home’s worth, send me a quick hello and let’s chat!

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Melanie Graham

Melanie Graham