Why the Law of Supply and Demand Doesn’t Apply to Phoenix Real Estate

“If there are so many more buyers and so many fewer homes for sale, why aren’t home prices going up?”

Photo credit: Images_of_Money via Flickr Creative Commons

Such was the paraphrased question that arose during a Friday night real estate continuing education class nestled inside happy hour at Rock Bottom. (Okay, so it wasn’t a real class but I’ve learned more with a beer in my hand than anywhere else since I first entered the business.)

On the surface, the question seems to be a completely logical attempt to determine why logic – in this case, the law of supply and demand – hasn’t applied to the Phoenix real estate market. Yes, there are places in the Valley of the Sun where prices have started to rise but those have been the exception and not the rule.

Except they ought to be the rule in an environment where an astronomical 8,397 single family detached homes closed escrow in June according to the Arizona Regional MLS and only 14,187 such homes are currently listed for sale.

At the current sales pace that means we have less than 2 months of inventory left on the market. And, yet, prices aren’t moving. Why? The answer could be in your local poker room …

If you’ve ever played poker, more chips equals more power. The larger your stack the more easily you can bully those with substantially smaller stacks. Put another way, a very thin amount of supply will cause someone to act differently than they will with a large amount of supply.

Normally, when someone poor shlub is down to their last handful of chips, you can be the aggressor and enforce your will upon them. Think of the person holding the chips as the seller and the person on the short stack as the buyer. Fewer homes for sale, sellers have the leverage and can drive prices up.

Here’s the problem. While the idea of shadow inventory is sketchy at best, it does exist in one form or another. There’s no question that banks are not putting homes on the market as quickly as they foreclose upon them; the only real question is how many homes are on the sidelines waiting to be listed.

(Brief aside for the lenders out there – this would be one hell of a time to release the flood gates, should there be a flood waiting – at least to bring the market to a more healthy three or so months of inventory. But hey, what do I know?)

Bullying someone off a short stack of chips doesn’t work when they can reach into their pocket for a couple of Benjamins and stay in the game. You’re looking at what you believe to be their supply – the chips on the table – while they are behaving in a manner based on the knowledge that there’s more supply you can’t see.

Buyers know there are going to be more homes for sale, homes that the banks will price somewhat aggressively to sell as quickly as possible. Whether the exact home they want is waiting in the shadows isn’t certain. Whether they’ll be able to survive a bidding war to get the house they want definitely is in doubt.

But there’s little doubt in most buyers’ minds that there are more homes out there.

Because of this knowledge, this perception of a supply that isn’t appearing to the naked eye, buyers aren’t necessarily willing to climb over each other to purchase a house. Yes, we have multiple-offer situations on many, many homes now. But no, we don’t have insane circumstances like 2005 when buyers are waiving appraisals and writing escalation clauses promising to pay $10,000 more than anyone else offers.

(Those, incidentally, were pretty dumb ideas back in the day; amazingly, I’ve had more than one buyer suggest adding such a clause within the last six months.)

Yes, the law of supply and demand is an economic law. But it’s also based on a certain set of assumptions, assumptions that at least at the moment in the Phoenix real estate market, simply don’t exist.

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at allphoenixrealestate.com.


  • Another Investor 7 years ago

    There is no inventory and what little is left has been picked over by every vulture out there.  The properties left on the market are overpriced, in poor condition, or the short sale will never work.

    What I’m seeing in Tempe is the somewhat higher priced properties are starting to sell, where six months ago they would have been ignored.  Vistancia in Peoria is selling at higher prices, although some of that is attributable to the completion of the 303 to I-17.  Fannie is holding out for top dollar on everything.  B of A has been pricing at least some of their inventory low and working the buyers in bidding wars.

    Prices are going up. but the increases are just not reflected in the stats yet.  They won’t go up quickly, because the lenders have yet to instruct the appraisers to be less conservative.  Also, every jump in price has the potential to increase inventory as sellers start putting their properties on the market when prices go up.

    It will be interesting to see what happens if interest rates go up significantly.

  • Jonathan Dalton 7 years ago

    From an investor standpoint, I don’t disagree. From an owner-occupied
    standpoint, it’s not quite that bleak yet. And I don’t think it will be as
    long as banks are putting homes on the market. One of the offshoots of the
    conversation was how the banks “conspired” to slow inventory. My argument is
    they came to the conclusion independently. Now we just need a couple to
    realize that it would be okay to release more homes more quickly.

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