Growing up, I was always curious about money and what something was "worth." My parents always had a special answer for this question no matter what I asked it in relation to. Even when it came to seemingly objective items, such as an antique with a set book value, the answer always was, "Its worth what somebody else is willing to pay for it."

And there it was, the best piece of advice they'd ever passed on as this answer describes our economy and monetary system to be subjective. Nothing is "worth" anything – its value depends entirely upon what someone else is willing to pay for it. I can have 2 apples that are identical and a market value of 50 cents each but if I can find 3 people that really want an apple, and one of them is willing to pay $1.00 for one, then we’ve established a NEW value, one based directly in relation to supply and demand.

While basic and simplistic, we can relate this to the real estate market to understand exactly why a house that costs 100k in materials to build may be "worth" 150k in 1 community and 500k in a neighboring one or 1M in another city. It all comes back to one thing in the end: supply and demand.

Today, we hear about skyrocketing house values often accompanied by a warning of the impending real estate bust etc. It’s easy to look at something, such as the "value" of a house rising from 150k to 300k and conclude that the value growth is out of control. Alternatively, however, we can look at it from a fundamental standpoint of supply and demand.

Most people understand the relationship of supply to demand and real estate investing from a macro-economic standpoint is no different. Overall, America has seen a tremendous rise in demand for Residential real estate and has thus far lacked enough construction of new units to meet demand in most areas. As such, values have risen dramatically in many, but not all, geographic locations around the country. This rise in demand coupled with short supply has powered the real estate value boom and is related to several key factors, including, but not limited to the following parts of what we call the Demand Mix:

S&D II: Interest Rates
S&D III: Evolution of Home Financing Options
S&D IV: Population Growth and Trends
S&D V: Increase in Real Estate Investor Demand
S&D VI: Consumer Psychology
S&D VII: Conclusion