How do supply and demand influence real estate prices?

Supply and demand are fundamental concepts that directly influence the pricing of real estate. When demand for property increases—due to factors such as population growth, a strong economy, or desirable location—this heightened interest often leads to increased competition among buyers, which in turn drives prices higher. Conversely, if the supply of available real estate decreases—perhaps due to fewer homes being built, increased regulations limiting new developments, or economic factors deterring sellers—this reduced inventory can create scarcity in the market.

Both increased demand and decreased supply create a dynamic where prices typically rise because more buyers are vying for a limited number of properties. This relationship is essential for understanding market behavior and helps stakeholders make informed decisions regarding buying, selling, or investing in real estate.

The incorrect options highlight misconceptions about how real estate markets operate. For instance, asserting that demand has no impact on prices disregards the basic economic principle that increased buyer interest usually leads to price increases. Similarly, suggesting that higher demand or lower supply lowers prices is fundamentally inaccurate, as it contradicts the accepted framework of how these forces interact. Lastly, claiming that supply and demand are irrelevant in real estate pricing undermines the core economic principles that govern market fluctuations.