The law of supply and demand is a bastion of capitalism. During the pandemic, we have never before seen this law so vividly in action. Take the price of oil. Before the pandemic, the price of oil was over $60 per barrel. When the economy halted, demand plummeted and the price fell to just over $10 per barrel. Now demand has recovered, but production has not, and prices are higher than their peak before the pandemic.
On the other hand, the price of real estate never dropped during the aftermath of the pandemic — bolstered by record low interest rates and more demand from remote workers fleeing their cities seeking open spaces. Unlike oil, you can’t increase the supply of real estate to meet a sudden increase in demand. Even builders were hampered by the law of supply and demand as they faced rising lumber prices and labor shortages.
We have never had an economy turn off abruptly and then ramp up. Therefore, we are in unchartered territory with regard to the behaviors of supply and demand. We know that price of real estate cannot rise at the current pace forever. Yet, the demand is still present and the supply is expanding just moderately. Will labor shortages ease during the recovery, easing the threat of inflation? This is one of many questions we will be pondering as the recovery progresses.