Orlando Real Estate

Demand Side Economics

January 19th, 2009 9:21 AM by David W. Welch

Supply side economics suggests "if you build it they will come." Demand side eonomics suggests "if you build a better mousetrap, you still have to market it." There are three factors that effect demand: need, desire, and ability meet those needs and wants. This is a real estate blog, so I am specifically talking about demand for homes. I believe that everyone would agree that people have a need for shelter. It is a basic necessity that protects us from the elements and provides a place where we can be safe. If you think about it though, there is no need to own your own home. Prior to the Magna Carta, few people actually owned the land they lived on. There are certainly benefits to owning versus renting, but there is no real need to own.

I'm going to skip desire for a minute to talk about the ability to meet the need and desire for real estate. There are two aspects to this: supply and financial ability. Just drive through any neighborhood here, and anyone would come to the conclusion that there is adequate supply of Orlando real estate available for sale or lease. Financial ability is certainly improved from where it was a year or two ago. December's affordability index was around 145. That means that the median wage earner makes 45% more than they need to purchase the median priced home. The bailout of the banking system has also improve the banks access to readily available cash to loan. The Fed's actions to purchase mortgage backed securities has pushed interest rates to historic lows. Renting is still, for the most part, less expensive.

This brings me to desire. If there is no real need to own, and renting is still less expensive than purchasing why buy? The simple answer is desire. There is greater feeling of control and security in owning your own home. This desire to own our own home is the keystone of "The American Dream." It is desire that drives a great deal of our demand for housing. "I want a four bedroom home in Conway" states a desire, not a need. "I want a condo in Baldwin Park, because it is close to work", is also a desire. It may be preferable to live close to work, but there is not necessarily a need to be close. I suggest that desire is the strongest force that acts on demand, and it is desire that is being squelched in today's market. It is also desire that can be influenced without spending another $800 billion.

Fear and uncertainty have more to do with our current economic situation than anything else. If enough people believe the economy is going to get worse - it will. If enough people believe the economy is going to get better - it will. In the end the market has the ability to correct itself. The market economy actually adheres to Newton's First Law. "A body continues to maintain its state of rest or of uniform motion unless acted upon by an external unbalanced force." In the absence of the constant negativity - even President-elect Obama has stated repeatedly "things will get worse before they get better" - the market will seek equilibrium. Obama has the power to change the direction of this economic cycle with his words tomorrow. He risks all his political clout, but a statement that we are back on the right track economically would be far more valuable than any stimulus package. Just tell people it is ok to buy: a home, a car, a boat. The only way to get things back on track is to quell the fears, so that desire can once again direct the demand side of our economy.

David W. Welch, Remax 200 Realty, Orlando Real Estate

Posted in:General
Posted by David W. Welch on January 19th, 2009 9:21 AM


Well Said! Don't think we heard exactly what we needed to hear on Tuesday from the President but hopefully that will come!
Posted by David on January 22nd, 2009 3:44 PM
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