The law of supply and demand is a basic economic principle that explains the relationship between supply and demand for a good or service and how the interaction affects the price of that good or service. The relationship of supply and demand affects the housing market and the price of a house.
The law of supply and demand states when there is high demand for a good or service, the price of the good or service rises. If there is a large supply of a good or service but not enough demand for it, the price falls.
In the housing market, the law of supply and demand is prominent. Generally, each housing transaction involves a buyer and a seller. The buyer places an offer for a property and the seller may accept or reject the offer. The law of supply and demand dictates the equilibrium price of a property.
When there is a high demand for properties in a particular city or state and a lack of supply of quality properties, the prices of houses tend to rise. When there is no demand for housing due to a weak economy and an oversupply of properties is available, the prices of houses tend to fall.
For example, during the Great Recession, the United States experienced an economic downturn from December 2007 until June 2009. The collapse of the real estate market in 2007 caused a decrease in demand for properties, thus creating an oversupply of houses and decreasing properties prices.
(For related reading, see: The Real Estate Market's Supply and Demand Dilemma.)