Whether we think about it or not, we all know that the buyer pool is always in the shape of a triangle; there are more buyers who can afford less expensive homes than there are buyers who can afford higher priced homes. Our fluctuating economy creates a general perception that this buyer pool contracts when the market is “bad”: there appear to be less buyers out there, inventory builds, and we call this “a buyer’s market.” And conversely, that this buyer pool expands when the market is “good”: there appears to be more buyers out there, inventory is flying off the market and we call this a “seller’s market.”
The truth is that the buyer pool stays about the same size in all markets. It is the buyer’s perception of value that pushes prices up or down. The Law of Real Estate Economics is supply vs. demand. To put it another way, it is the supply that controls the demand, not the demand that controls the supply. In an appreciating market there is an abundance of energy and no inventory – this pushes selling prices up. Buyers are funneled through the limited inventory, all wanting the same property and there’s a sense of urgency. However, in a depreciating market there is an abundance of inventory and no energy. Buyers have their pick of inventory, know more is coming on and there is no sense of urgency – this pushes selling prices down.
We can always tell whether the market is going up or down (appreciating or depreciating) by measuring the amount of inventory coming on and going off the market. If inventory is going off the market faster than it is coming on, then prices will go up and it is an Appreciating Market. If inventory is coming on the market faster than it is going off, then prices will go down and it is a Depreciating Market. It is the supply of home inventory, not the supply of buyers, that drives the market. This is a major paradigm shift for most people.
The post Appreciating vs. Depreciating Markets appeared first on Lauren Sullivan.