Minneapolis, Minneasota: Market Observation: The Root Cause

Supply and Demand are a driving force in any market. In the real estate market, supply and demand are currently the most important single factor to consider.

Quick Caveat - I think the current market is a good one. I represent buyers and sellers. In this marker my clients are by and large getting better, more "fair" deals. Buyers can carefully consider their choices, and sellers are forced to be competitive for buyers business. This is a great time to be in the market, buying or selling because it's fair.

People often blame our current market conditions on the boom, or the credit crunch, over building, foreclosure rates, etc. But looking back at the number of sales and listings over time it's easy to see the root cause of the current market.

When the "boom" started, when appreciation rates really started rising fast (1999/2000) there were darn near as many sales, as there were listings. That's amazing. It means darn near every seller who put a home on the market sold it, almost no one took it off the market because they didn't get the price they wanted, or changed their mind, or for any other reason. Everything sold, demand was high, and supply was low. Prices went up.

By 2005 the number of homes for sale was far above the number listed. The supply (listings) had been rising faster than the demand (sales) since 2000 and was at the over supply point. Now no one saw that coming, well some say they did but I didn't hear them saying at the time ;-)

Today demand has dropped off, and supply continues to rise. The gap between listings and sales grows, resulting n a market flooded with listings and buyers picking and choosing among them for the best deals.

While home sales are down, a lot, right now, look back to historical homes sales and remember that sales are strong, there's no lack of demand here, is a supply issue, too many homes for sale.

This over supply will take years to correct, in the mean time average sales prices will continue rising, just at a slower rate than over the past 10 years.

Issues like the sub-prime melt down, credit crunch, over building are all contribution factors but are not root cause of the market conditions.