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The Price is Not Right… (But Not by Much) December 22, 2008

Posted by DustinRJay in supply and demand.
Tags: , ,

In 2005 and 2006 supply was much less than demand and house prices rose.  A ratio of 50% sales to new listings ratio has historically kept prices in balance.  House prices overshot the supply/demand balance and started to fall.  The crossover of the supply/demand balance indicates a level of price support at ~$375,000.  Demand is likely to rebound slowly as prices drop.  Supply is likely to retrace the supply/price relationship.  As illustrated below, some overshoot to the downside is likely to burn through the current inventory.

Of particular interest is that supply had a high degree of elasticity in respect to price whereas sales did not.  As a corollorary, I think that to some extent:

  • Supply = f(marginal cost of supply), linear relationship
  • Demand = f(consumer confidence), nonlinear relationship

The Price is Not Right... (But Not By Much)

Click above image to enlarge.

Data:  Bob Truman, First Place Realty – Old Criteria