California Real Estate Practice Exam

If the "demand" for homes goes up and the "supply":

1. diminishes, the values will decrease

2. goes up, the values will go up

3. remains the same, the values go down

4. remains the same, the values will increase

The correct answer is: diminishes, the values will decrease

In a market economy, the relationship between supply, demand, and prices is fundamental to understanding how real estate values fluctuate. When the demand for homes increases while the supply remains unchanged, it creates a situation where more buyers are competing for the same number of homes. If the supply diminishes while demand increases, it puts even more upward pressure on prices because there are fewer homes available to meet the heightened demand. As more buyers compete for a limited number of homes, sellers can raise their prices, leading to an overall increase in housing values. Selecting the correct answer relates to recognizing that diminishing supply in the face of rising demand leads to an increase in value, which contrasts with the provided answer. Consequently, the correct response indicates that if "demand" rises and "supply" diminishes, housing values will increase, not decrease. Understanding this core principle of supply and demand dynamics is crucial for analyzing market trends in real estate.