The Supply Curve In Residential Real Estate Bubbles

| November 5, 2011

The opposite of the demand curve, the supply curve indicates the amount that sellers can supply given a specific price. In a supply curve, sellers supply very few units at low costs and supply many units at higher costs. Supply and demand are in balance and market transaction is possible when these two curves meet.

The Great Housing Bubble in the United States saw a growth in demand for real estate, which was a result of a significant increase in lending and credit. Sellers refuse to sell assets as these are quickly appreciating�this means a greater opportunity for them to gain more profits. This results in a limited supply on the market. In a supply and demand graph, the supply curve moves to the left, pushing the equilibrium between demand and supply to a more elevated price point.

This happens because of the seller refusal. On the other hand, the demand curve moves to the right due to the higher liquidity of the lending environment. The intersection of the supply and demand curves shifts prices to a higher point. But once the supply and demand become balanced, their intersection touches the point of low transaction volume. This means fewer buyers can afford the higher prices.

When more buyers cannot afford the high prices, transaction volumes drop. Prices also stop increasing as a result. This was the scenario in 2005 and 2006 when housing affordability was at its lowest record on many markets in the United States. This indicated the start of the so-called deflation of the Great Housing Bubble.

Category: Investment

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