How real estate markets differ from other markets
Real estate is bought and sold like other goods: buyers compete for what sellers offer, and price moves when one side outweighs the other. But four features make the real estate market behave differently from the market for, say, cars or stocks. Exam questions often describe one of them and ask you to name it.
1. The market is local
There is no single "Florida housing market," let alone a national one. Prices are set by buyers and sellers in a particular area, and conditions can be very different a few miles apart. A Federal Reserve study of housing markets notes that supply factors such as regulation and geography "differ widely across metropolitan areas" and treats each city as its own market with its own supply and demand conditions (Paciorek, FEDS 2012-01).
That is why a licensee pricing a home looks at nearby sales, not statewide averages.
2. Property is immobile
Real property is land and whatever is permanently attached to it (Wex: real property). You cannot move a lot, and moving a house is rare and costly. So a surplus of homes in one town cannot be shipped to a town with a shortage. Immobility is the reason the market is local, and it is why location matters so much to value.
3. Supply is slow to adjust
When demand rises for most products, factories add a shift. Housing cannot respond that quickly. Land has to be acquired and developed, plans approved, permits issued and homes built. A Federal Reserve study estimates that developing residential property, including preparing the land and building, takes about three years on average, with wide differences between places.
The practical result:
| Short run | Long run |
|---|---|
| Supply is nearly fixed, so a change in demand mostly moves price | Builders respond, so supply catches up (or overshoots) |
This lag is also why markets overshoot. Builders start projects when prices are high, and by the time the homes are finished demand may have cooled, leaving too many homes for sale.
4. Property is heterogeneous
No two parcels are identical. Even two homes with the same floor plan sit on different lots, with different views, condition and upkeep. The Fed paper puts it bluntly: housing markets are "substantially heterogeneous," and empty land on the edge of a city is "poorly substitutable" for land in desirable locations.
Because every property is different, there is no posted price to look up. Value has to be estimated by comparing a property with similar ones and accounting for the differences, which is exactly what a comparative market analysis does (lesson 4).
Other consequences
- Big, infrequent purchases. Most buyers need financing, so the cost and availability of credit strongly affect demand (lesson 2).
- Imperfect information. Each sale is a private deal, so buyers and sellers rely on licensees and public records to learn what similar properties sold for.
Exam tip: "local," "immobile," "slow to adjust" and "heterogeneous" (also called unique or nonhomogeneous) are the four words to know. If a question describes a property that cannot be moved, that is immobility; if it describes one market booming while a neighboring one is flat, that is the local nature of the market.