Back in the late 1970’s, the Hunt brothers tried to corner the silver market by buying up silver at an amazing pace. Their activities were solely responsible for the rise of silver prices to around $50 per ounce. This was an astounding price for silver in those days. It is the classic example of supply and demand. Demand increased with their buying spree, as well as supply decreasing as they added to their hoard.
May real estate never be that volatile, though we know that we can’t “mine” any more land. The reason for the example is to help real estate investors to realize that there are supply and demand factors at work in the real estate market. The most obvious is the tendency of a building boom to go too far too fast. Times are good, people are moving in, and home builders crank out houses as fast as they can build them. At some point, the demand pendulum begins to swing the other way, but there is still a group of unfinished houses that will add to supply as demand weakens. That’s when we see price drops. Though they are usually temporary, the astute investor will avoid buying at the top of the price curve.
That’s a good negative example, but what about trends or activities that can reduce supply, thus bringing about price increases and appreciation for the investor? Government activities, such as dedication of land for public use, can decrease supply of building space, thus bringing about price appreciation over time. Nationwide, there is increased activism to slow building and increase green space for the good of all. If you already have a home in the area, it’s probably something you would support. If you’re trying to buy in, it means you’ll pay a higher price.
Government or subdivision restrictions and covenants can also cause building cost increases. Any increases in costs normally contribute to price increases at sale time as well. Minimum square footage requirements, laws requiring wider streets that reduce space for homes, stricter building codes and environmental rules can all cause significant increases in the costs to build homes in an area.
As investors, we want to watch more than just housing price numbers that follow the activity. We want to be aware of current trends, as well as proposed new laws or restrictions in an area. If an activity is likely to lock up land for uses other than building, or if the costs to get a new home built are going to go up significantly, it could be the right time to buy.