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Supply and Demand

Posted Nov 17 2008 9:11pm

As has been obvious for some time, many metro areas are in a housing bubble.  Las Vegas has been a prime bubble market with record appreciation in 2004.  Evidence has been mounting for some time that the Vegas market has now peaked, and is now stalling and soon may be headed downhill. 

First, there are over 23,000 houses up for sale in Vegas, which I believe is a record.  It is difficult to know for sure due to the spotty press coverage out here.  When prices were rising, the local newspaper was quick to point out this news.  Now that prices have flatlined, there is only the occassional article about housing.

Second, the number of homes being sold each month is going down.  You put these together, rising supply and falling demand, and you have a simple economic result: a surplus.

Historically, high inventory levels is the first sign that a real estate bubble is going to burst or deflate.  Initially, sellers stay firm with their prices believing this is what their house is "worth".  Eventually, sellers get motivated to cut prices (or keep their selling prices the same over time as inflation rises), and the bubble deflates.

Tonight as I walked through the neighborhood, I found a house for sale that is a prime bubble example: a 1,400 sq ft house that was for sale for $364,000.  In any non-bubble market, this type of pricing would be looked upon as a joke.  Yet with the average home in California selling for over $500,000, maybe this is normal to some folks.

There is probably a slim chance that this home will sell at this price, given the large surplus of houses now available.  I will keep my eye on this and see what happens.

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