Real Estate Pricing

Essay by amad786University, Bachelor's August 2004

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In search of an article on supply, demand, and pricing of real estate, it was interesting and educational to come across an article that read; the national median selling price for real estate increased in July while volumes fell, according to data from the Real Estate Institute of California (REIC) (Clark, 2004). The determination of prices in local housing markets is a classic example of microeconomics.

As a new home owner, it would be hard to disagree with the contents of this article. The interaction between buyer and seller with prices being offered and agreed before a final transaction is made is the clear evidence that there are more buyers in the market place than sellers. Each housing transaction in the US is based on the seller and the buyer or in economist terms supply and demand.

Supply and demand is defined in a book called "Macroeconomics fifth edition" Economics for Business I, by Back Matter in chapter-4 page-101 first paragraph, "the law of demand states that quantity demanded rises as price falls, other things constant.

The law of supply states that quantity supplied rises as price rises, other things constant (Matter, 2004) respectively."

It is crucial to pay attention to the phrase "other things constant," because this is one of the factors that influences supply and demand. What does "other things constant" mean? To better understand this phrase please refer to the following example:

"Over a period of two years, both the price of houses and the number of houses purchased rise. That seems to violate the law of demand, since the number of houses purchased should have fallen in response to the rise in price. Looking at the data more closely, however, we see that a third factor has also changed: Individuals' income has increased. As...