Real estate prices depend on the law of supply and demand. When the demand for property is high but property is scarce, prices skyrocket and it becomes a seller's market. When the number of available properties increases to glut the market, prices typically drop.
Supply and demand in real estate aren't easy to balance. Creating more saleable properties takes time, considerable work, and a lot of effort. It's not possible at all in some cases, and even when it is, it might not be possible for supply to increase in time to meet consumer demand.
Over-Supply and Under-Supply
You can usually expect a drop in prices when there is an over-supply of homes or land in a given area. You can't move the overage to another area to keep prices stable.
Scarcity causes prices to rise when there isn't enough land or if there aren't enough homes in a given area. Even if land is available on which to build more homes, the time it takes to construct them cannot meet immediate property needs, so demand will remain constant or rise.
Real Estate Is a Local Business
Many forces that might have little or no impact on other regions influence local markets and vice versa.
Pay attention to the factors that influence your local market. Watch local businesses and make note of upsizing and downsizing trends if you do business in a market that has jobs and many workers relocating there. You'll also want to keep an eye on these issues if you're a homeowner looking to sell in such an area or if you're looking for property to purchase.
Things like divorce rates, death rates, and demographics can factor in. Factors that can greatly impact supply and demand—and by extension your business—might include local weather trends, an aging population, and investment trends if you do business in a resort area that includes vacation homes. Trends that impact discretionary income have more of an influence on this type of market than others.
But Not Always
Trends in interest rates, national home prices, new housing starts, and many other economic indicators can influence real estate markets as well. These national events might not typically move real estate supply and demand directly, but they can render it less or more important. The mood and sentiments of the buying public cannot be overlooked. Supply and demand don't exist in a vacuum.
Let's assume that the economy enters into a severe recession period, such as what happened in the U.S. between late 2007 and the beginning of 2010. The supply and demand balance was poised for healthy prices just prior to this time: Properties were in demand and prices were correspondingly high early in 2007.
But few could afford to pay those prices in a worsening economy and even those who could were understandably reluctant to part with their money at that time. So properties sat on the market, unsold. Worried homeowners in financial distress put their homes up for sale rather than risk foreclosure. Remember, almost 9 million jobs were lost during the Great Recession. Now what happens?
Supply begins surpassing demand by leaps and bounds. The housing market is glutted and those healthy prices evaporate—which has little to do with local factors except as they're an extension of national woes.
Land Parcels Are Finite
Underlying all these influences are the basic fundamentals of supply and demand.
You cannot fill a real estate supply shortage by manufacturing more units of land. It's a finite supply, not a manufactured commodity. You might be able to create more units within a given space, such as condos or townhouses, but the land itself is unique and cannot be duplicated to accommodate a short supply.
Real Estate Cannot Be Moved
When a shortage of land for homes exists in a given area, you can't simply move in more land to alleviate the shortage. Real estate is where it sits. It will always be a local commodity influenced by local conditions.
In short, keep up with the big picture but narrow your primary focus to your region. Supply and demand in real estate will always be foremost a local issue.