The real estate market is influenced by two major factors: supply and demand. While it's easy to understand the concept of demand (who doesn’t want to invest in real estate?), not many people pay attention to how the supply of available housing impacts the market. Both of these factors are equally important as they determine the dynamics of the real estate market.
A Quick Intro to Supply and Demand
When we say demand, we’re referring to the number of people who are looking to buy a home. Demand has several variables attached, such as prices, affordability, and mortgage rates. On the other hand, supply refers to the number of houses that are available for sale. If the supply is low and demand is high, the market will experience a price surge. Conversely, if supply exceeds demand, there will be a price drop.
What Are We Seeing?
A great way to visualize the impact of supply and demand when it comes to your investment decisions is called months of inventory or MOI, and it’s a key tool that we use here at JWB. This number is calculated by dividing the total number of homes on the market by the number of sales made in a given period. For example, if there are 100 homes on the market, and 10 homes sell in a given month, the MOI would be 10.
MOI data shows how many months it would take to sell off the existing inventory if no new properties were listed. Suppose MOI is below six months. This would indicate a seller's market because there aren’t enough homes available to match the demand of buyers. In that case, prices are likely to rise, reflecting strong demand and limited supply.
Now, this is a metric that can be used across the U.S., but here at JWB, we focus on Jacksonville, Florida, so let's look into the specifics of our hometown.
In March 2021, MOI was 1.1, which indicates very low inventory. This scarcity resulted in an increase in prices of 12-15%, reflecting the high demand but limited supply. In 2022, MOI was slightly lower at 1.0, again indicating a tight real estate market with a shortage of houses.
Looking at MOI for March 2023 just a few months ago, was 2.1, which is double the current what we’d been seeing for the last two years. If you take that increase at face value, you might think, “Oh no! There won’t be enough demand to make this investment decision pay off for me.” And in our humble, well-informed, and data-driven opinion, you would be wrong.
You see, it should be noted that even with an increase in supply, Jacksonville is still undersupplied and may actually experience upward pressure on prices for the next three years until there is eventual price stability. But we want to be clear, there is no forecast or evidence of a crash on the horizon. The numbers just don’t back it up. Without perspective, you might think that home sales decrease, which is technically true, but without looking at the proper variables, you won’t be able to accurately discern the situation.
Understanding the Impact of Supply & Demand
Understanding the power of supply and demand is crucial for anyone looking to navigate the real estate market. By keeping an eye on local inventory levels, population trends, and affordability, you can gain a better understanding of the dynamics that drive supply and demand, and make informed decisions as an investor. While predicting the future of the real estate market is never foolproof, having a solid understanding of supply and demand can help you stay ahead of the curve and make the most of your real estate investments.