Excessive Supply Means Lower Prices

The two big questions on everyone?s mind are why have property values dropped so much, and when will they stop dropping? Even though there are no truly simple answers to the complex set of issues which have created and sustained the problems in the real estate and financial sectors of our economy, I can distill the explanation into a few words:

1. Psychology
2. Supply and Demand
3. The Availability (or lack thereof) of Credit

Psychology

Currently, it is a buyer?s market in the residential housing arena. In the early 2000?s it was a seller?s market. What caused it to change from one to the other? The simplest answer is ?bad press.? As the financial sector of the economy crumbled, it was great fodder for the media. You couldn?t open a newspaper or magazine, watch TV or browse the internet without running into disturbing, negative information about our economy.

People became nervous. As the stock market tumbled, unemployment escalated, and banks teetered on the edge of insolvency, people became downright frightened. When people are frightened?even those with money?they are slow to take out money from their wallets and purses.

Supply & Demand

Our country runs on people spending money. The more goods, commodities, and services that people spend money on, the more other people have to work to produce these goods, commodities, and services. When people don?t spend money, when the Demand portion of Supply and Demand drops off, the Supply side always plays catch-up.

I don?t believe I know of any other sector of our economy where the lag time between Demand and Supply is as great as in our real estate markets; and the greater the lag time, the greater the possibility for a large drop in what that commodity (in this case housing) is going to be worth in the open market.

So as demand has been dropping because of fear, or loss of employment, or reduction in potential buyer?s credit ratings, supply has been increasing because of lack of sales of existing properties. These factors all put tremendous downward pressure on home values; housing prices have been in a downward spiral in most of the markets across the country.

When will these prices level off? When people believe that they can purchase a house for such a great price, that it overcomes their fear, and they will be willing to spend money? We are approaching that point in most of the Chicago real estate markets. Even though the supply of foreclosed properties and short sales seems never-ending, Demand is finally making inroads into the inventories of unsold properties, and hopefully, prices will start to stabilize.

Lack of Credit

Maybe this stabilization could have occurred earlier. How? The banks need to get back to their job and loan money for mortgages by loosening credit. But that?s a different story for another day.

We would like to thank Colin for kindly sharing today’s photo via the Creative Common’s License.