When market supply is greater than market demand, what market condition results and what tends to happen to price?
Correct Answer
B) Excess supply with downward price pressure
When competitive available supply exceeds effective demand at prevailing terms, excess supply tends to put downward pressure on prices, other things equal. A precise forecast still requires local data, pricing behavior and timing. Neither construction cost nor a label alone determines value.
Why This Is the Correct Answer
Option B is correct because when market supply is greater than market demand there is excess supply, causing price to tend to decrease. Sellers compete for fewer qualified buyers, which leads to price reductions and concessions. A precise forecast still requires local data on pricing behavior and timing.
Why the Other Options Are Wrong
Option A: Excess demand with upward price pressure
Option A, excess demand with upward price pressure, describes the opposite situation, where demand exceeds supply.
Option C: Equilibrium with no price change ever possible
Option C, equilibrium with no price change ever possible, is wrong because supply exceeding demand is not equilibrium, and prices in an equilibrium market can still change when conditions shift.
Option D: A bubble shown by construction-cost indexes
Option D, a bubble shown by construction-cost indexes, mislabels the condition; construction-cost indexes do not measure the balance of supply and demand, and excess supply is not the same as a bubble.
Too many sellers, prices slide
When sellers outnumber buyers, the extra supply tends to make prices slide.
How to use: Use this to match supply exceeding demand with downward price pressure.
Exam Tip
Answer the two-part question as a pair: excess supply goes with downward pressure, excess demand with upward pressure.
Common Mistakes to Avoid
- -Reversing the direction of price pressure
- -Equating excess supply with equilibrium
- -Using construction costs alone to diagnose market conditions
Concept Deep Dive
Analysis
This question tests the outcome when supply exceeds demand. When more property is available than buyers will absorb at current prices, the market has excess supply. Sellers must compete for fewer buyers, which tends to push prices down, other things equal.
Background Knowledge
Supply and demand interact to set prices. Excess supply tends to reduce prices; excess demand tends to raise them; balance tends to stabilize them. Appraisers report these conditions in neighborhood and market analysis using data such as inventory, months of supply and price trends.
Real-World Application
A suburban market sees a wave of new listings as several builders finish projects while buyer traffic slows. The appraiser documents rising inventory and price reductions and reports an over-supply condition with softening prices.
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?
Several homes in a neighborhood are vacant and boarded up. Which market force does Fannie Mae classify this as?
Infrastructure investment such as a new interchange typically affects nearby land by:
A city raises property tax rates and tightens building regulations. Which market force does Fannie Mae classify these as?
An appraiser believes, without market evidence, that a nearby group home lowers values. What does Fannie Mae require?
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?
People Also Study
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam