Home Prices May Not Always Follow Housing Supply

Aaron crowe
Written by
Aaron Crowe
Read Time: 4 minutes

Buying a home, unlike most purchases Americans make, involves negotiation. And to negotiate successfully, you have to know what's on the market.But prices may not always follow the classic rules of supply and demand.

Unlike many other countries, Americans are unaccustomed to haggling over prices and other terms of sale. Except for our homes, our cars and the occasional garage sale knickknack, we typically don't negotiate pricing - we just pay what's on the tag. So many people are uncomfortable when it comes time to negotiating a price and the other terms of sale on a home.

One of the key factors affecting price negotiation is how long it's taking homes to sell in your area. Naturally, if houses are selling quickly, the owners will probably be less inclined to bargain than if a typical property is lingering for nine months to a year, or even longer.

Owners may not be eager to deal

However, just becomes homes have been lingering on the market for a long time doesn't necessarily mean the owners are itching to make a deal. Other factors can come into play as well.

For example, the current inventory of unsold homes on the market around the U.S. is about a 9 month's supply, according to the National Association of Realtors. Roughly speaking, anything over a six month supply is generally considered a surplus that leads to lower prices, while less than six months is a tightening market that usually causes prices to rise.

However, this surplus isn't uniform, as one might expect. It varies, not only by region, but also by price - the supply of unsold homes at the lower end of the market differs greatly from the supply at the higher ends.

Little drop in high-end prices, despite increased supply

As home sales decline, the inventory of unsold homes increases. Conventional wisdom predicts that this will result in declining prices. However, the biggest declines in sales right now are at the high end of the market - and prices aren't moving down much in response.

"The general rule of thumb is that the rule of supply and demand should determine the terms," said Gregg Stratton, an NAR research economist. However, that's not exactly what's taking place at the higher ranges of the market these days.

Sales of homes in the $1 million plus range are down almost 30 percent from last year, according the NAR figures, driving up the inventory of unsold homes in that price range nearly 4.5 months to a roughly 21-month supply. But sales prices in that range are down only 3.8 percent - about half the 7.5 percent price decline experienced in the bottom end of the market of homes under $250,000, even though sales in that category are up nearly 17 percent over last year.

A big reason, Stratton said, is that the wealthier homeowners can afford to bide their time and may be unwilling to take a big hit on a house they bought just a few years ago."They're not in a position where they have to sell," he said.

Big price drops lead to smaller housing inventory

Ironically, the tightest supply of homes is presently at the bottom end of the market - according to NAR figures - with a 5.8 month supply of homes under $250,000. But that's also where prices have dropped the most of any price category, down about 7.5 percent from last year.

The biggest price drops have been in the West, according to NAR figures, where prices are down 16.5 percent from last year. But those dropping prices have spurred so much interest among buyers that sales in the sub- $250,000 category are up 58 percent from 2008 in the Western region, shrinking the available inventory of unsold homes to only 2.7 months.

"These properties are being priced so aggressively and being sold at large discounts compared to a year before, that (investors are) buying up large numbers of houses," Stratton said.

Particularly in the Phoenix and Las Vegas markets, investors appear to be buying up blocks of homes for use as rentals, essentially taking them out of the home buyer's market - but the shortened supply doesn't appear to be driving prices up yet.

So while the rules of supply and demand generally dictate home prices, they don't always provide a hard and fast rule. Sometimes other factors may be at play that home buyers should be aware of when negotiating a purchase price.

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