Home Prices: It’s About Supply & Demand

The real estate market continues to heat up as we head into the summer. Will this increase in demand equate to an increase in home prices? That depends.

Remember, the price of any item is determined by the supply of and demand for that item at any point in time.

Let’s look at the facts as reported by the National Association of Realtors (NAR) in this month’s Existing Home Sales Report:

• Demand has strengthened, showing a 10% increase over the same month last year.
• The supply of homes for sale is down 20.6% from the same time last year.

Because supply is down and demand is up, many believe prices should begin to increase as we finish out 2012 and head into 2013. In some markets, this analysis is correct.

However, there are certain states that still need to clear through a backlog of foreclosed properties which were delayed by the court procedures in those states. The National Mortgage Settlement gave the banks a clear path for releasing these distressed properties.

Therefore, in several states, there will be a new supply of discounted inventory coming to market over the next six months. Whether that increase in supply will be fully offset by the increase in demand is still unknown. If not, home prices in those markets will still be under downward pressure.