The forces of supply and demand in the market determine how prices for goods and services are set. Greater supply means producers need to attract more buyers, so they lower prices. Greater demand means producers can raise their prices because buyers compete for the product.
Supply and demand in the Real Estate market
Two characteristics of Real Estate govern the way the market reacts to the pressures of supply and demand: uniqueness and immobility.
Uniqueness means that no matter how similar two parcels of Real Estate may appear, they are never exactly alike. Each occupies its own unique geographic location, and two properties are never exactly the same inside.
Immobility refers to the fact that property cannot be relocated to satisfy demand where supply is low. Nor do buyers necessarily make relocation decisions based on greater housing supply in a certain locale. For these reasons, Real Estate markets are local markets.
When supply increases and demand remains stable, prices go down.
When demand increases and supply remains stable, prices go up.