In a growing metro area, buyer demand for new homes rises, but over the same period builders bring an even larger increase in homes to market. Other conditions equal, what does appraisal theory suggest about the direction of prices?
Correct Answer
D) Prices may fall, since supply rose more than demand
When demand and supply both change, the relative strength of the two forces determines whether price rises or falls. Here supply grows more than demand, so the net effect resembles a supply increase against steadier demand, which tends to lower price. Looking at demand alone, assuming the changes cancel, or assuming prices stay fixed out of equilibrium all ignore that interaction.
Why This Is the Correct Answer
Option D is correct because the relative strength of demand and supply forces determines whether price increases or decreases. With supply growing more than demand, the net excess supply tends to push prices down.
Why the Other Options Are Wrong
Option A: Prices rise, because higher demand pushes prices upward
Option A looks only at demand: higher demand does push prices up if supply is constant, but here supply grew even more, so demand alone does not settle the direction.
Option B: Prices hold steady, since demand and supply both increased
Option B assumes the two increases cancel out. They would offset only if they were similar in strength; the supply increase is larger, so prices are not expected to hold steady.
Option C: Prices cannot change until the market reaches equilibrium
Option C says prices cannot change until equilibrium is reached. Price movement is how a market moves toward equilibrium; an excess of supply tends to lower prices along the way.
Bigger shift wins
When demand and supply both move, compare their sizes: the larger shift decides the price direction.
How to use: Use this when a question describes changes on both sides of the market at once.
Exam Tip
Do not answer from one side of the market when the stem describes changes in both; look for the option that weighs their relative strength.
Common Mistakes to Avoid
- -Assuming rising demand always means rising prices
- -Assuming simultaneous increases in demand and supply cancel out
Concept Deep Dive
Analysis
The question asks the candidate to weigh two simultaneous shifts rather than one. Neither demand nor supply alone sets price; when both rise, the larger shift dominates. A supply increase that outpaces demand growth puts downward pressure on price.
Background Knowledge
In a competitive market, demand and supply interact to set price and quantity, like the two blades of a pair of scissors. From equilibrium, more demand with constant supply raises price, and more supply with constant demand lowers it; when both shift, the stronger shift sets the direction.
Real-World Application
In a fast-growing suburb, an appraiser sees strong job growth but also a wave of new subdivisions delivering homes. Rising inventory and price reductions show supply growth outpacing demand, and the appraiser reflects the softer price trend in the analysis.
More Market Questions
In market area analysis, what characteristic distinguishes a district from a neighborhood?
Under USPAP Standards Rule 1-3(a), which item must an appraiser identify and analyze when necessary for credible results in a market value assignment?
How does the Fannie Mae Selling Guide define a neighborhood?
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Which three categories are used to report the supply of properties in a Fannie Mae neighborhood section?
An appraiser is asked for a retrospective value opinion as of three years ago. When must the appraiser meet the Competency Rule?
Can mixed land uses in a residential neighborhood ever enhance home values, according to Fannie Mae?
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