What Is Priced Out?

Understanding Priced Out

Being priced out of the market means that it has become too expensive for you. Although the term is most closely associated with real estate, this can occur with practically any good. At any given price, some buyers will be willing and able to pay it and some will not; those who cannot or choose not to buy at that price are said to be priced out. As the price on a particular good rises, if incomes do not rise in conjunction, then a larger portion of people will be priced out of the market for that item. They may be forced to switch to a substitute good at a lower price which may not have all of the features of the item they used to be able to purchase.

As new features have pushed smartphones to the $1,000 mark, for example, many consumers have been priced out of owning the latest models. This is particularly true when smartphone makers look to enter markets where $1,000 USD is a considerable sum. To avoid pricing out international customers, smartphone makers have tried offering stripped-down versions or partnering with carriers to provide significant upfront discounts with long-term contracts.

Priced Out of Real Estate Markets

As mentioned, being priced out is commonly used to refer to the real estate market. For example, people in cities with extremely high average home prices, such as Newport Beach, Calif., would be said to be priced out of the market if they could not afford even an entry-level home. In markets where people have been priced out, these people may become permanent renters or simply move on.

Being priced out of real estate can be due to a single factor, such as depressed wage growth. However, it is more often a combination of factors such as slow wage growth and the influx of real estate investment dollars from elsewhere leading to the gentrification of a previously affordable area.

Being priced out in real estate becomes a serious demographic issue for areas as it is often young families that get priced out first due to their general lack of disposable income compared to other demographics. The options available to someone who is priced out of a real estate market would include buying in a different area, waiting for the supply of housing to increase enough to lower housing prices, or getting a higher-paying job that would allow them to afford a property.

An individual who is priced out of a real estate market can buy in a different area, wait for the supply to increase enough to lower housing prices, or get a higher-paying job that would allow them to afford a property.

Priced Out and Price Elasticity

The proportion of potential buyers who are priced out of a market at any given point in time or who become priced out due to a price increase, is related to the price elasticity of demand for the good in question. Price elasticity is the percentage change in the quantity of a good that buyers will purchase compared to the percentage change in the price. It corresponds roughly, though not exactly, to the slope or steepness of a demand curve in basic economic terms.

When the price of a more price elastic good goes up, consumers will cut back the amount they are willing to purchase by much more than they would for an equivalent price hike for a price inelastic good. This usually means that many more consumers will find themselves priced out of a market when the price goes up for a relatively price elastic good than for other goods.

Examples of goods that are more price elastic in demand are durable goods, for which buyers can more easily put off replacement purchases; luxury goods, which consumers can forgo buying and live without; and goods that have many close substitutes, which consumers can easily switch out for a similar good. When the price of a good that falls into one of these categories goes up, you should expect to see a relatively large number of potential buyers priced out of the market.