<p>The principles of demand and supply are always operating in the background so they are not pointless.</p>
<ol>
<li><p>The magnitude of the effect that increase in price has on increase in supply is given by the price-elasticity of supply for housing. If the supply is inelastic then it takes large increases in prices to increase the quantity supplied. In a an extreme case when supply is perfectly inelastic it would not respond to price at all (but this is completely consistent with supply and demand theory - so it would not make it 'pointless', you just always have to take into account the parameters of supply and demand before trying to predict what will happen).</p>
<p>Empirical research <a href="https://pubs.aeaweb.org/doi/pdf/10.1257/000282805774670077" rel="nofollow noreferrer">(Green, Malpezzi &amp; Mayo 2005)</a> actually shows that housing supply is in many metropolitan areas inelastic so that is one explanation.</p>
</li>
<li><p>In many places government puts heavy restrictions on building of new housing. Especially in historic cities (e.g. Amsterdam) it is excruciatingly difficult to actually build a new housing. Even outside historical cities many places will be heavily zoned. If government restricts supply then of course it will not be able to increase. Also research shows that this is one of the leading causes behind high housing prices (see this empirical study by <a href="https://www.nber.org/papers/w8835" rel="nofollow noreferrer">Glaeser &amp; Gyourko (2002)</a> that examines the effect of strict zoning on prices in Bay Area in US).</p>
</li>
<li><p>You should also not confuse movements along demand or supply curve and changes in demand or supply. Changes in prices produce movement along demand curve. If demand curve is fixed then increase in price (excluding extreme cases such as perfectly inelastic demand or Giffen good) will lead to lower quantity demanded. However, no matter what price is demand can always shift to the right (for example due to change in preferences) which will make people demand more at any price.</p>
<p>If there would be no changes in demand or supply the price should remain constant. The high prices are likely due to the fact that demand for housing is increasing as economies grow and people are having on average higher incomes (since owning a house is likely normal good), and the prices increase because this demand outpaces supply. Of course, that is just gross generalization every city/area will be different. It is not even universally true that house prices increasing in every single area even though on average they do there are areas where they fall (see I<a href="https://www.imf.org/external/research/housing/" rel="nofollow noreferrer">MF global housing watch</a>).</p>
</li>
</ol>

CC BY-SA 4.0
2020-10-29T20:29:49.297Z
2020-10-29T20:38:02.527Z
2020-10-29T20:38:02.527Z
1muflon1
<p>High prices do not immediately imply supply when supply is constrained. Houses aren't widgets. They sit on real-estate, each parcel of which is unique. As a metaphor, think of an island: the supply is limited. As demand  rises, so the price rises. But supply can never increase, so prices just keep rising forever.</p>
<p>The land around most cities aren't islands, but they are made island-like by various factors. The limits of the 'island' are how far someone is willing to travel to work and back in a day. Most land already built on is excluded from the supply. And various land use regulations limit the amount of new development by limiting the amount of development--only so many units per acre, for example. This is why housing prices are so high--not scarcity of land, but land use regulations limiting supply of homes.</p>
<p>The 'size of the island' can be expanded by making it faster to travel to places, using railroads or expressways, but those are expensive. Expanding an urban area is like expanding an island through the use of land-fill.</p>
<p>If you want more detail, there is a whole branch of economics dealing with land - 'Urban Economics'. Von Thunen, Alonso, Mills, Muth are the classic authors.</p>

CC BY-SA 4.0
2020-11-04T01:10:33.923Z
2020-11-04T01:10:33.923Z
Mox
<p>Considering basic supply and demand theory, as demand increases prices rise from competition; there is less to go around per person.  The demand drives up the prices not the other way around.  Increases in prices are expected to soften demand, true, but as demand softens then prices fall so the high prices would imply demand is still high.  (But is it demand by homeowners or is it rather by speculator investors, and are prices rising or are we seeing inflation so that dollars deteriorate while housing holds its value?) When the price is high, supply should increase, but this doesn't mean demand is low, it only means at a higher price - other things held equal - demand will be softened. But supply-demand theory does not explain housing prices.</p>
<p>So step away from supply and demand theory to see why housing prices are high.  For one thing, the value of the dollar has indeed eroded.  People have less confidence in the dollar, so they search for something to hold instead of bank balances.  Interest rates are artificially low and do not reflect time value of money, and real estate investment can be leveraged through a mortgage loan which is below the actual time value of money.  It does not make so much sense to save in bank deposits at interest rates that are close to zero, particularly as national debt increases so the dollar loses value and real estate prices respond by requiring more dollars that are worth less each.  Around the new millennium the tech bubble attracted investment levels that were not explained by the value of the stocks, and when tech crashed the real estate markets boomed since investors wanted out of tech and sought a tangible substitute.  If you read the Big Short by Michael Lewis, the rating agency fraud allowed seasonal migrant workers earning \$17,000 to purchase homes worth \$700,000 and everyone should know that would spike demand but it was not going to last.  Wall Street playing the market with mortgage backed securities has also resulted in a demand for mortgages to fill the portfolios and has undermined the value of the dollar towards housing.  In reality the housing supply in the US has outpaced population for decades.  But in many regions beautiful affordable homes sit empty, while developers seek to build densely in high cost areas to extract a greater profit.  The housing consumers are forced to pay more for a lower quality of home, and must enter higher cost of living regions to find work so the wealth gap widens.  There are too many factors overall that make the assumptions of the Supply-Demand theory unattainable (holding everything else equal).  Besides, supply-demand is not a model and is not predictive, it is only a theory that can be useful sometimes to describe observed economic behaviors.  And other times is not useful in which case some other theory is applied.</p>

CC BY-SA 4.0
2024-03-07T06:10:58.707Z
2024-03-07T06:31:46.727Z
2024-03-07T06:31:46.727Z
Gwendolyn Anderson
<p>Home prices are at an all time high so according to supply and demand, that means suppliers will supply more homes due to the high prices. Demand for a house on the other hand is also at an all time high. I really am confused on why demand is high when prices are high. From my understanding of demand and supply when supply is low, demand will be high and so will prices. When the price is high, supply is also high but the demand is low.</p>
<p>There are some articles saying supply is low which is why home prices are at an all time high. But that doesn't make any sense to me since home prices are very high right now so it incentivize suppliers to make more to provide for the buyers. Also, bidding wars are very common when supply is low, but there is lack of bid wars happening in the housing market.</p>
<p>My questions are:</p>
<p>Are the principles behind demand and supply pointless in this scenario?</p>
<p>How come demand for a house is very high but the prices are high and the supply seem to be relevantly adequate?</p>

CC BY-SA 4.0
2020-11-04T01:11:44.767Z
Supply does not always respond to price. For example, no amount of demand (or price) can increase the number of vintage Faberge eggs in the world, or the number of Mona Lisas.
Mox
<supply-and-demand><housing>
Current House Demand and Supply
NIX
# Current House Demand and Supply

(Asked by: username_0 on 2020-10-29)

Home prices are at an all time high so according to supply and demand, that means suppliers will supply more homes due to the high prices. Demand for a house on the other hand is also at an all time high. I really am confused on why demand is high when prices are high. From my understanding of demand and supply when supply is low, demand will be high and so will prices. When the price is high, supply is also high but the demand is low.

There are some articles saying supply is low which is why home prices are at an all time high. But that doesn't make any sense to me since home prices are very high right now so it incentivize suppliers to make more to provide for the buyers. Also, bidding wars are very common when supply is low, but there is lack of bid wars happening in the housing market.

My questions are:

Are the principles behind demand and supply pointless in this scenario?

How come demand for a house is very high but the prices are high and the supply seem to be relevantly adequate?

**Tags:** supply-and-demand, housing
> **Comments:**
> **username_1**: Supply does not always respond to price. For example, no amount of demand (or price) can increase the number of vintage Faberge eggs in the world, or the number of Mona Lisas.  

---

## 3 answers

### Answer by username_2 on 2020-10-29. Score: 4

The principles of demand and supply are always operating in the background so they are not pointless.

1. The magnitude of the effect that increase in price has on increase in supply is given by the price-elasticity of supply for housing. If the supply is inelastic then it takes large increases in prices to increase the quantity supplied. In a an extreme case when supply is perfectly inelastic it would not respond to price at all (but this is completely consistent with supply and demand theory - so it would not make it 'pointless', you just always have to take into account the parameters of supply and demand before trying to predict what will happen).

   Empirical research [(Green, Malpezzi & Mayo 2005)](https://pubs.aeaweb.org/doi/pdf/10.1257/000282805774670077) actually shows that housing supply is in many metropolitan areas inelastic so that is one explanation.
2. In many places government puts heavy restrictions on building of new housing. Especially in historic cities (e.g. Amsterdam) it is excruciatingly difficult to actually build a new housing. Even outside historical cities many places will be heavily zoned. If government restricts supply then of course it will not be able to increase. Also research shows that this is one of the leading causes behind high housing prices (see this empirical study by [Glaeser & Gyourko (2002)](https://www.nber.org/papers/w8835) that examines the effect of strict zoning on prices in Bay Area in US).
3. You should also not confuse movements along demand or supply curve and changes in demand or supply. Changes in prices produce movement along demand curve. If demand curve is fixed then increase in price (excluding extreme cases such as perfectly inelastic demand or Giffen good) will lead to lower quantity demanded. However, no matter what price is demand can always shift to the right (for example due to change in preferences) which will make people demand more at any price.

   If there would be no changes in demand or supply the price should remain constant. The high prices are likely due to the fact that demand for housing is increasing as economies grow and people are having on average higher incomes (since owning a house is likely normal good), and the prices increase because this demand outpaces supply. Of course, that is just gross generalization every city/area will be different. It is not even universally true that house prices increasing in every single area even though on average they do there are areas where they fall (see I[MF global housing watch](https://www.imf.org/external/research/housing/)).


---

### Answer by username_1 on 2020-11-04. Score: 1

High prices do not immediately imply supply when supply is constrained. Houses aren't widgets. They sit on real-estate, each parcel of which is unique. As a metaphor, think of an island: the supply is limited. As demand rises, so the price rises. But supply can never increase, so prices just keep rising forever.

The land around most cities aren't islands, but they are made island-like by various factors. The limits of the 'island' are how far someone is willing to travel to work and back in a day. Most land already built on is excluded from the supply. And various land use regulations limit the amount of new development by limiting the amount of development--only so many units per acre, for example. This is why housing prices are so high--not scarcity of land, but land use regulations limiting supply of homes.

The 'size of the island' can be expanded by making it faster to travel to places, using railroads or expressways, but those are expensive. Expanding an urban area is like expanding an island through the use of land-fill.

If you want more detail, there is a whole branch of economics dealing with land - 'Urban Economics'. Von Thunen, Alonso, Mills, Muth are the classic authors.


---

### Answer by username_3 on 2024-03-07. Score: 1

Considering basic supply and demand theory, as demand increases prices rise from competition; there is less to go around per person. The demand drives up the prices not the other way around. Increases in prices are expected to soften demand, true, but as demand softens then prices fall so the high prices would imply demand is still high. (But is it demand by homeowners or is it rather by speculator investors, and are prices rising or are we seeing inflation so that dollars deteriorate while housing holds its value?) When the price is high, supply should increase, but this doesn't mean demand is low, it only means at a higher price - other things held equal - demand will be softened. But supply-demand theory does not explain housing prices.

So step away from supply and demand theory to see why housing prices are high. For one thing, the value of the dollar has indeed eroded. People have less confidence in the dollar, so they search for something to hold instead of bank balances. Interest rates are artificially low and do not reflect time value of money, and real estate investment can be leveraged through a mortgage loan which is below the actual time value of money. It does not make so much sense to save in bank deposits at interest rates that are close to zero, particularly as national debt increases so the dollar loses value and real estate prices respond by requiring more dollars that are worth less each. Around the new millennium the tech bubble attracted investment levels that were not explained by the value of the stocks, and when tech crashed the real estate markets boomed since investors wanted out of tech and sought a tangible substitute. If you read the Big Short by Michael Lewis, the rating agency fraud allowed seasonal migrant workers earning \$17,000 to purchase homes worth \$700,000 and everyone should know that would spike demand but it was not going to last. Wall Street playing the market with mortgage backed securities has also resulted in a demand for mortgages to fill the portfolios and has undermined the value of the dollar towards housing. In reality the housing supply in the US has outpaced population for decades. But in many regions beautiful affordable homes sit empty, while developers seek to build densely in high cost areas to extract a greater profit. The housing consumers are forced to pay more for a lower quality of home, and must enter higher cost of living regions to find work so the wealth gap widens. There are too many factors overall that make the assumptions of the Supply-Demand theory unattainable (holding everything else equal). Besides, supply-demand is not a model and is not predictive, it is only a theory that can be useful sometimes to describe observed economic behaviors. And other times is not useful in which case some other theory is applied.


---

