Supply and demand. Yes, this is vital to pay attention to in real estate as in most everything else. When it comes to real estate you want to be carefully analyzing supply and demand. But how does one go about that?

Look at Zillow (or a similar website) or ask a realtor and find the property’s price per foot for July 1st of the past five years. In that process we learn exactly whether or not we’re paying more. You’ll be able to get an idea of where the market is at in terms of the real estate cycle. Here’s what the cycle looks like:

Real Estate Cycle

Supply and demand work in real estate like this: a healthy market has got the right amount of buyers (demand) and sellers (supply). In real estate, you will hear things like “a market has a 9 month supply.” What’s this mean? If a market has a 9 month supply it means this: with the number of houses listed and the number of buyers in the market, it would take 9 months for that housing to be sold. Therefore, the prices will be soft or, frankly, cheaper. Take the average of houses sold in one month and the average of houses listed for sale that same month. Divide houses for sale by houses sold that month and you get the months of supply.

When do you not want to make a move? Whenever the supply is under six months. When demand is exceeding supply, the market gets overheated.  Everyone is competing for the same handful of properties and so the sellers are able to ask a lot more than usual. Basically, that tells you that you could buy the houses at a different time for a lot cheaper.

You do want to make a move when the supply is 6, 7, 8, 9 months. What you’re looking for is about 6 months of supply. That signifies a balanced or healthy market. If it’s above 6 months, you get strong price concessions because you should be able to buy for less than the asking price easily. And this is simply because of supply and demand. Demand is less than supply and so the market is yours to conquer.

So make sure to include this real estate cycle in your calculations when looking at a property! It will allow your investment to go to the best place.

Do you have any questions about a potential market? Let me know in the comment section!

Tune in next week for more thoughts on real estate and entrepreneurialism!