Real Estate Investing Basics

Real Estate Is Local: A Tale Of Two Cities

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We often hear the expression that “real estate is local,” and I have stumbled upon some good evidence that proves this to be true. I was conducting some market research in the Great Tampa real estate market in order to gain an understanding of how my local market, Tallahassee, compared to some other areas in the Sunshine State.

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For those readers who have little interest in the Florida housing market, this post will serve as a demonstration for a process that can be done in any market. But for those of you who understand the chaos that is occurring in a State with a new governor poised to make historic changes, then this might provide some critical market intelligence.

Supply And Demand Rule The Day In Housing

Just like any other commodity, housing must obey the laws of supply and demand. When demand is high and supply is low, the law of scarcity works to drive up prices and gives control to sellers. But when supply is high and demand is low, the same law yields control to buyers, and pricing pressure either cools appreciation or actually causes periods of depreciation.

If I want to purchase a property outside of my area of specialization, the first thing that I do is “attack the data” in order to discover the current supply and demand dynamics in the new market area. It is very easy to mistakenly think that a property is an great deal (or a poor one) due to ignorance of local real estate market conditions, so this supply and demand study ensures that my opinions on value are based in facts and analysis.

Real Estate Is Local: Contrasting Two Separate Real Estate Markets

Before I show you my discovery in Tampa, let’s take a quick look at my daily tracking of the Tallahassee real estate market. If I were to go to Tampa to analyze a property and not factor in local market conditions, these conditions would be the bias that I bring to the analysis.

Tallahassee Housing Supply And Demand

This graph is very simple. The one-year trend of home sales is plotted in green, current real supply is plotted in red, and the resulting relative supply (the supply of homes measured at the current rate of demand) is plotted in purple. As you can see, the Great Tallahassee real estate market has 18 months of supply and is grossly over supplied.

A similar graph from the Great Tampa real estate market shows a different picture:

Real Estate Supply And Demand Graph Tampa Florida

Tampa has so much more positive trends occurring. Supply is falling, sales are rising, and Tampa has seen its gross over-supply whittled down from over 19 months of relative supply down to a mere 8 months of supply. If the current trends continue, Tampa should hit equilibrium sometime this year.

As these two different graphs demonstrate, the prudent real estate investor should take time to study the current supply and demand dynamic in each and every housing market that she or he considers to be worthy of investment. A bias established in one market just might not be valid in the next, and only a study of the housing supply and demand can get the investor in a profitable frame of mind.