The law of supply and demand is a basic economic principle that explains the relationship between supply and demand for the product or service and how the interaction affects the price of the goods or services. The ratio of supply and demand affect the housing market and housing prices.
The law of supply and demand States when there is a high demand for goods or services the price of goods or services increases. If there is a large supply of a product or service, but not enough demand, the price falls.
In the housing market, the law of supply and demand is prominent. As a rule, each residential transaction involves a buyer and a seller. The buyer locates the real estate and the seller can accept or reject the offer. The law of supply and demand determines the equilibrium price of the property.
When there is high demand for property in a particular city or state and the lack of supply of quality real estate, house prices tend to increase. When there is no demand for housing due to the weak economy and oversupply of properties is available, house prices usually fall.
For example, during the great recession, the U.S. experienced an economic recession from December 2007 until June 2009. The real estate market collapse in 2007 led to a decline in demand for property, thereby creating excess supply on the housing market and lower real estate prices.
(For associated reading, see: proposal of the real estate market, and the dilemma of demand.)