Factors Impacting Supply & Demand on Real Estate That Influence Prices
- Adam Garrett
- Jan 3, 2024
- 7 min read
Updated: Jul 2
Above: Richmond - Image by Author
Impact of Supply & Demand on Real Estate
Moseley Real Estate School in their broker course states the following:
"Over-supply/Lower Prices:
Because real estate is heterogeneous and
immobile, you can usually expect there to be a fall in prices when there is an
over-supply of homes or land in a given area. You cannot move the overage to
another area to keep prices stable.
Under-supply/Higher Prices:
If there is not enough land or homes in
a given area, then prices will almost always rise. Even if there is the ability
to construct more homes, the time delay associated with the construction
industry cannot fill the short-term demand, and prices will rise.
Where to See Many of the Numbers Below for SE VA
I'll be borrowing a good amount below in case examples from my SE VA County/City Information spreadsheet that's linked within that article that provides details on how to best use it.
Where to See Migration Patterns
VPAP has a helpful map showing population shifts in Virginia from 2020-2024:
The US Census Bureau has a solid resource showing the # of housing units increasing or decreasing between 20-2024 by state and county:
Factors Affecting Real Estate Supply and Demand
Quotes in this section as well are from Moseley Real Estate School in their broker course.
Virginia Beach MSA vs Detroit MSA Referenced Below
Below I'll be referencing a comparison of the Detroit-Dearborn-Livonia, MI MSA vs the Virginia Beach-Norfolk-Newport News MSA.
The house price index went from 38.76k in Virginia Beach MSA in 1976 to 342.14k in Q3 2023. That's an 8.83 times increase.
The house price index went from 36.64k in the Detroit-Dearborn-Livonia, MI MSA in 1976 to 261.05k in Q3 2023. That's a 7.12 times increase.
Per capita income is 6% higher in the Detroit MSA than the Virginia Beach MSA, but the Detroit MSA started out 14% higher than the Virginia Beach MSA. The Virginia Beach MSA has gained more by % since 1969. The growth of income matters more than the base price in terms of its positive impact on home price growth.
a. Demographics (i.e. population size & growth)
"The main demographic determinants on the demand for housing are: population size and population growth. The more people in the area, the greater the demand for housing. Family size, as well the age and income of the population also play a role in the demand for real estate."
It should come as no surprise then that the 2 Hampton Roads (VA) cities/counties that had the highest population growth from 2010-2022 also had higher appreciation than the average rate in Hampton Roads.
Those 2 were:
James City County:
15.27% population growth (per World Population Review)
$435k/$282k=54.2% median sales price growth (per Domus Analytics)
Suffolk:
12.6% population growth (per World Population Review)
$360k/$231k=55.8% median sales price growth (per Domus Analytics)
One of the reasons why prices are higher in the Virginia Beach MSA than they are in the Detroit-Warren-Dearborn, MI MSA is that the population there has been more volatile and since 2004 has been on a downward trend overall, while the Virginia Beach-Norfolk-Newport News MSA has experienced a gradual increase, with no years in decline between 2000 & 2022 (chart updated May 19, 2023.
Here's that increase in Virginia Beach
Here is the comparable chart for the Detroit-Warren-Dearborn, MI MSA:
b. Unemployment/Income
"If job opportunities are limited and salaries are low, the demand for homes usually decreases. As unemployment rises, supply may increase because there are a number of homeowners who are forced to sell their homes due to their inability to fulfill the financial obligations that come with owning a home. High unemployment rates also affect demand because prospective homebuyers are deterred from buying due to fears over job security."
Again, compared to the Detroit-Warren-Dearborn, MI MSA, which has lower prices than the Virginia Beach MSA, the VB MSA has lower rates of unemployment, including the peak rates, lowest rates, and current rates from 1990-2023 vs the Detroit MSA:
Virginia Beach MSA Unemployment:
c. Cost/Availability of Credit
"If mortgage interest rates are low and financing is relatively easy to obtain, the demand for real estate will usually increase."
In recent years, as rates have gone up more than we've seen in over a decade, we've seen some of the lowest demand for mortgages in over a decade as well. Below is a chart on Mortgage News Daily showing 30-year fixed rate averages in orange and mortgage applications in blue:
d. Cost/Availability of Labor and Materials
"Housing supply is produced using land, labor, utilities, and building materials. If these commodities are readily available, it will contribute to the overall supply of housing in a market. A scarce supply of one or more of these commodities would contribute to
lower supplies and higher prices."
We saw with the Covid pandemic some severe shortages in labor and materials, driving up prices on things like lumber. Naturally, new construction prices went up as well. It wasn't uncommon for an original price to not be the same as an eventual sales price in some cases, depending on the contract used, especially with custom-built homes that were not in the development of the same builder. That said, keep in mind that it's not uncommon for some homes that are resale to be a lower cost than the cost of building the same home, especially in cases where the home is at the peak of the neighborhood. I saw a case where a home went under contract at list price, but the appraiser knocked down the price by 9% due to the fact that there were no homes selling for that high in that neighborhood, even though it was likely the nicest home in the neighborhood.
This factor is also one of the reasons why a home in Hawaii, which has the highest average sales price in the US, is typically a higher cost than a home on the mainland within similar population density areas. It costs more to build a home in Hawaii than it does on the mainland. Likewise, Hawaii is one of 2 states tied for the top prices of gas as of May 2023.
e. Governmental Policies (Especially Tax Rates)
Per Moseley Real Estate School & echoed by Quizlet, "Federal, state, and local government policies and regulations can influence real estate markets. For example, favorable tax incentives for homeowners can increase demand, while high local property taxes can decrease demand. The local land use controls and zoning policies can affect the supply of land available for residential and other uses."
I go over diverse governmental policy differences, with an emphasis on taxes, side by side in various locations, including the following:
With the estimates below, pay more attention to the percentages than the actual amounts, despite the amounts being the color scheme, while percentages are viewable if you hover over them, since the cost of homes itself could be misleading for places with high taxes but low costs in part due to tax rates, i.e. around Chicago:
A state-by-state map of outgoing vs incoming paints a good picture when you compare that map to state-by-state tax maps & consider that CA, NY, & IL are 3 of the 5 states with more departing than coming in that "just so happen" to also be some of the highest tax states in the union for either income taxes or real estate taxes:
The top marginal state income tax rates put CA at the top and NY at #2:
My brothers left CA and NY after years in each state, and tax rates were likely the top expressed reason why for one of my brother's departure from NY. IL doesn't look so bad, until you consider the property tax rates there, at #2 in the US:
A local example of the impact of government policy differences is Newport News vs York County. In York County, the tax rates are substantially less than in Newport News (1.18 vs .77, or 53% higher). Even within the same neighborhood (Kiln Creek) with a large section in York County & a large section in Newport News, the price per square foot in York County is substantially higher (17%) than the price per square foot in Newport News. Out of 53 sales of attached homes that were between 3-4 bedrooms, 2.5-3 baths, and 1500-2500 sq ft in the past year, here are the results:
Newport News | York County | |
Sales # | 47 | 6 |
Lowest Sales Price | 249000 | 399000 |
Highest Sales Price | 405500 | 490000 |
Median Sales Price | 360000 | 454950 |
Tax Rate (as of publication date) | 1.18 | .77 |
Lowest Tax Amount | 2196 | 2586 |
Highest Tax Amount | 4443 | 3295 |
Median Square Foot | 1939 | 2248.5 |
Median Price Per Sq Ft | 177.93 | 208.58 |
While not a factor mentioned in Moseley's list that I quoted from above, there are significant environmental factors that influence supply and demand.
For example, if narrowing down to homes in Hampton Roads region of VA (REIN MLS VA only data), I pulled detached home sales (1706) with the following criteria:
3-4 bedroom
2-3 bathroom
1250-2500 sq ft
1 story
For non-waterfront homes (1578), the median sales price was $330k with a median price per sq ft of $202.98
For waterfront homes (128), the median sales price was $388,750, with a median price per sq ft of $234.58.
Conversely but relatedly, a property's location within a hurricane evacuation zone &/or flood zone can negatively impact its value. A property that's waterfront and not in a flood zone will tend to sell for more than an almost identical property next door that is also waterfront but is lower in elevation & in a flood zone.
g. Crime
A 2010 study published in Regional Science and Urban Economics, titled “Panel Data Estimates of the Effects of Different Types of Crime on Housing Prices,” found that "robbery and aggravated assault crimes (per acre) exert a meaningful influence upon neighborhood housing values."
A 2012 case study of 8 American cities published by the Center for American Progress titled "The Economic Benefits of Reducing Violent Crime" found the following:
"Murders, rapes, assaults, and robberies impose concrete economic costs on the victims who survive as well as the families of those who lose their lives, in the loss of earnings and their physical and emotional tolls. Violent crimes also impose large costs on communities through lower property values, higher insurance premiums, and reduced investment in high-crime areas. In addition, violent crimes impose significant costs on taxpayers, who bear the financial burden of maintaining the police personnel and operations, courts, jails, and prisons directed toward these crimes and their perpetrators."
"On average, a reduction in a given year of one homicide in a zip code causes a 1.5 percent increase in housing values in that same zip code the following year."
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