Economics in my own words is the study of how the demand for a product or service relate to the supply of that same product or service (in this case real estate). Economics can apply to almost any product, service, or idea in existence. Real estate economics is the application of economic techniques to real estate markets. The end goal is to attempt to make a prediction of what will happen to the relationship between the supply, prices and demand for real estate property(in a nutshell). The focus of my writing here is the residential real estate economics and more specifically, property in Palmdale, California. Residential real estate markets are of course just a small portion of the bigger real estate economic picture. Real estate economics might be different in each locality, meaning Palmdale might be quite different than fifty minutes away in Los Angeles. Many factors come into play which affect the supply and demand of and for residential real estate. The availability of reasonable financing is a big factor which has most impact on the demand side of the economic equation.
The Federal Reserve Bank plays a major role in the residential housing market. If the Federal Reserve wants to maintain stability in the economy they can manipulate the money market by instituting a tight money policy or they can increase the amount of money in the economy by a loose money policy. Let me explain this and be as concise as possible. The Federal Reserve Bank is what is called the “Bankers Bank” meaning they control the amount of money that a given bank must have on hand, as a percentage of the total deposits the bank has. The Federal Reserve can make it much harder for a potential real estate buyer by making some quick policy changes. The fed could increase the amount of deposits the bank has to have on hand and they could increase the prime interest rate. The combination of these two quick policy changes would make it much harder for a bank to make a loan to a real estate buyer. On the other side of the coin, if the Fed feels they need to stimulate the economy, or real estate development, they could increase loan activity to the real estate market by reducing the reserve deposits required for the bank to have on hand, and lower the prime interest rate. This has such a powerful impact on real estate economics it is hard to follow. Imagine that the economy is quickly flooded with cash. Now a buyer essentially has more dollars and can buy more house than just before. The money supply has increased so there is more realty activity going on. Prices of homes take a little time to adjust to the new value of the dollar, but eventually home prices rise to find a new equilibrium point where the demand and supply curves for real estate intersect.
In today’s Palmdale, CA real estate market it is estimated that roughly ninety-eight percent of the supply of homes comes from existing real estate and only two percent of the supply comes from new development. The real estate market adjustment process is subject to time delays due to the length of time it takes to finance, design, and construct new supply and also due to the relatively slow rate of change of demand. Because of these delays, there is great potential for disequilibrium in the short run.
One thing that I love about real estate is that it can serve so many purposes. You could invest in real estate simply as an income property or you could buy a home to live in, while hopefully gaining appreciation in value. In the latter case home buyers tend to place a greater value on a home than just the money they can pull out of it. This disrupts what I call the value equation and makes it more difficult to appraise a home for sale. A real estate buyer who wants to live in the property most likely sees more value in the same house than someone who wants to buy that house and collect rental income on it.
Income, demographics (such as population in a given area), the price of housing, financing availability, and many other factors make real estate economics a very complicated topic, which I just scratched the surface of. Call me any time for my two cents on what’s going on at the moment in the real estate market in Palmdale, CA. It flips from a buyers market to a sellers market in a matter of months mostly due to the basic economics of real estate.