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Supply and Demand: The Inescapable Conundrum of Doing Business

by The Jamey Kramer Group

A central tenet of business looms large over the housing market in Michigan: supply and demand. Across America -- and in parts of Michigan -- as the U.S. economy slowly continues to improve, it is providing people with comparatively more money than they've had for several years. One noticeable result is that, in a growing number of places, there are more people who want to buy a home (a.k.a demand) against the supply of homes available to buy (a.k.a supply). This tends to drive home prices upwards. But each specific housing market is unique, and this is certainly true in Michigan. Fortunately, things are looking up in the  Metro Detroit area

Supply and Demand In a Nutshell… and What It Means in Michigan

When broken down to its bare essentials, the economic concept of supply and demand is an easy one: When demand goes up, prices rise, and if supplies are scarce, items are more expensive. Of course, this is the laboratory version of things, and things like housing markets are highly complex.

In product manufacturing, for suppliers of goods, creating goods is fairly straightforward. For example, if you are a manufacturer, you agree with suppliers on prices for the raw materials or components you need, you build the product and then attach a price to finished goods.

But demand is tricky to gauge. Sellers try to determine the number of buyers they expect for their product. They must make educated guesses because the variables on the buyer’s side are numerous and buyers can be fickle. When it comes to real estate there are simply many factors beyond the seller’s control, from tax policies to interest rates to the ever-fluctuating American economy as a whole. It's a moving target, and a lot of factors have to be considered. What's more, the past may not be the key to setting home price points -- after all, we live in challenging times.

When there is strong demand for housing, there is a tendency for the most attractive, move-in-ready properties to receive a disproportionately large number of bids compared to properties that are considered less attractive. This potentially drives up the prices of these high-demand homes, while the homes in lower demand often remain in indefinite limbo. According to data released by Realcomp, a Farmington Hills MLS and quoted in the Detroit Free Press, The inventory of homes for sale in metro Detroit dropped 16.7% in June to 19,433, contrasted with 23,315 in June 2011. Nearly half, or 45%, of sales in July were cash sales, and homes sold on average nine days faster, with 81 days on the market.

It appears that the upward trend is due to several interconnected factors including low interest rates, relatively lower prices on homes and American consumers' gradually increasing confidence in their local economy.
 
For evidence of the upturn in Michigan's real estate market, consider information from Farmington Hills multiple listing service, Realcomp. They reported that home sales rose more than 5 percent in metro Detroit compared to the same time frame a year ago. In fact, each of the counties in the Detroit metropolitan area – Macomb, Livingston, Oakland and Wayne – reported increased home sales in June 2012:
 
Macomb: 12.6% 
Livingston: 11%
Oakland: 0.8%
Wayne: 0.5%
 
This is good news and while the economy and the housing market face challenges, the data are showing improvement.
 
Still, in some parts of Michigan those with property for sale are still feeling the pinch even while demand creeps upwards. This is because, overall, home prices in the state have taken a big hit since 2000. For some sellers, home prices are still low enough that selling property without incurring a major financial loss is incredibly difficult. In short, supply and demand are exerting their influence, but the market is still recovering from a decade of tough times.

Overall, if the economy continues to improve, increasing demand will drive prices higher. Total recovery won’t come overnight, but the housing market continues to strengthen.

Economy Stinks, but Housing Remains Sweet

by The Jamey Kramer Group

The housing market's fate is intrinsically dependent upon the overall fate of the economy of the United States as a whole. Makes logical sense, right? You could probably say the same thing about the retail market and the vehicle market and, really, about any market in which money is exchanged for goods and services. This doesn't necessarily mean, however, that these individual markets' fate will always mirror that of the overall U.S. market.

As we all know, America is in the midst of a multi-year economic slog. The reasons, justifications and rationalizations for the steep and sudden downturn are complex and confusing – so much so that even the country's professional economic brain wizards disagree on many of the finer points. When it comes to the real estate market, let’s just acknowledge that there was and likely still is an economic recession and look at the housing market's situation.

Some economic experts indicate that it was the inherent volatility of the housing market that played, if not the biggest, then certainly one of the biggest roles in creating the recession in the first place. Others say that the housing market's crash was collateral damage sustained by virtually every individual market that make up the nation's economy as a whole. The arguments will undoubtedly go on for years.

Whatever brought on the recession is essentially water under the bridge now, other than as a learning tool for what not to do. Regarding the future, economists are analyzing today's data and making educated, if cautious, predictions about the future of the nation's economy and its various markets. The reports of their findings are guardedly positive in some areas, including those coming from housing market analysts.

As the larger economy continues to struggle, the housing data is showing that the worst may be over. Data from July 17th underscore this view as home builders’ confidence showed the largest monthly increase in almost a decade.

The National Association of Home Builders indicated that its housing market index increased to 35 in July – the best since March of 2007. This also represented a rise of six points over June 2012. According to Cooper Howes of Barclays, “2012 is expected to be the first year since 2005 in which residential investment will provide a positive contribution to GDP growth.” 

Could it be that the U.S. housing market could be changing from a drag on the economy to a source of strength? Time will tell, and it’s unclear considering the overall struggles that continue in the economy, but it’s great to see housing trending positively.

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