As entrepreneurs, and I hope budding capitalists, I would hope that each one of you understands the principle of Supply and Demand?
By way of example… consider what REO lenders are doing with all of that Shadow inventory we keep hearing so much about. If you talk to any active real estate investor, you will hear them lament that the banks just are not willing to negotiate (down to levels that work for real estate investors) to move their inventory. And one of the recurring themes regarding why lenders are not willing to negotiate, is that they don’t want to flood (too much supply) a market and drive prices downward, because there aren’t enough buyers (pent up demand).
Another example is the success of a ticket scalper. Why do you think they are able to demand such outrageous prices for sought after event tickets? Simple. They have something — a rare ticket (limited supply) — that many people (large demand) want. In the scalpers world, as long as they possess that rare ticket they can set the prices.
What does this have to do with real estate investing?
The expiration of the Homebuyers Tax Credit at the end of April 2010, is about to give us yet another real world example of Supply and Demand in action.
But before I chime in with my two bits, head on over to The Motely Fool and this post, Waiting for the End: To the Housing Tax Credit, to see what others are saying about supply and demand; and what for all intents and purposes is the law of Unintended Consequences and its impact on supply and demand in the real estate market.
Here are my thoughts:
- We can always count on politicians to take the easiest way out of situation, regardless of the consequences.
- You can always count on people to do what they are incentivized to do. In the case of the Tax Credit, many will buy a property now because they got paid to do so. This isn’t rocket science!
- You had better be prepared for a downturn in demand (assuming the Tax Credit isn’t extended again) starting mid-2nd quarter 2010, and continuing until the unemployment rate drops below 8 percent.
- If you have been deluded by your market or a real estate agent into believing prices are going to move upward, WAKE-UP and pay attention to what is happening around you! Prices won’t go up until employment rates increase and the overall inventory (shadow and otherwise) decreases. Do you know what your absorption rate is in your market?
- At the risk of sounding like a broken record, some of the best buying opportunities are ahead of us, not behind us. If you have dry powder (cash for your deals) be ready to use it; if you don’t have dry powder, now would be a great time to learn how to find some!
- As always, we can count on local, state and the federal government to attempt to control the supply/demand curves and as always, we can count on the law of unintended consequences to rear its ugly head…
And that is where the opportunities will be located.
Good Hunting!A Lesson in Supply and Demand! by Peter Giardini