A Lesson in Supply and Demand!

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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?

EVERYTHING! 

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:

  1. We can always count on politicians to take the easiest way out of situation, regardless of the consequences.
  2. 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!
  3. 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.
  4. 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?
  5. 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!
  6. 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!

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About Author

Peter is an active and successful real estate investor in the Baltimore Maryland region for the past 8 years and is one of the founders of The Club Mastermind a real estate investing coaching program focused on local coaches helping investors to perfect their game.

9 Comments

  1. Great article Peter.
    I think you bring up a great point about absorption rates. Also, I think if you asked the questions, 98% of real estate agents and just about as many real estate investors would not know the answer to that question and many would not even know what you mean by “absorption rates.” I think we are going to see a little uptick in April for SFR as the tax credit expires, but I doubt that it will be as big as the November bump. I also don’t think we will see this credit get extended again, but congress might surprise me.
    To quote Dick Cheney from many years back “A billion here, a billion there… pretty soon that adds up to real money”. ;-) Not sure if they have figured that out on the hill yet, but if the program is not really working to bring more buyers to the market, they are not going to extend it again.
    Keep up the good work.

    • Marshall,

      Your point about real estate agents and investors not understanding something as simple as absorption rates is a primary reason why some of them struggle. It’s simple economics!

      Pete

  2. Well put Peter. Like you I wonder about the “shadow” inventory. Banks are hard to deal with and want top dollar for a home when the market is soft not wanting to loose money. Guess what, they better take a small loss now, or keep them on the books for another couple years waiting for the up turn that may or may not happen within that time. We have not seen a mad rush of home buyers swamping the market to buy homes because they’re not sure about what the economy will bring next.

    Visit Liz Voss’s last blog at San Antonio Homes.

    • Liz… so many people are of the same opinion that banks have got to start selling off some of their inventory… I see it happening in some markets… but mostly in areas where investors are not fighting each other and driving up prices.

      Pete

  3. Peter, excellent points in your article. I’m curious to see when the intervention runs out. I saw California extended their tax credit for home buyers into 2011. Do you think the states will step in here?

    I’m thinking the impact of the feds leaving will be less than everyone thinks but it certainly won’t help the absorption rates and peaking foreclosures.

    Best,

    • Ryan,

      I see many communities/states offering first time home buyers incentives and have been doing so for some time. I believe the more populated the area the higher degree of incentives (more tax dollars to dole out). The net effect has always been to get first-time home buyers into a home.

      We will have to see whether these various and individual local and state programs can effectively pick up the load left when the Homebuyers Credit expires.

      Pete

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