The fact that the prices go down when there are too many homes on the market and too few buyers means that the economic principle of Competition is at work.
How does competition affect price?
Competition is a very important part of the law of supply and demand because it is competition that drives prices up and the lack of competition that drags prices down. In the case of competition being in a market, you find that there will be many buyers who will be competiting for the same good. Sellers would then be able to charge a higher price knowing that their products are being sought after.
When there is no or little competition however, the number of buyers would fall. After they fall, there will be too much product in the market. Suppliers will try to sell at a lower price to entice the fewer buyers to get from them. This is the reason why too many homes and too few buyers leads to prices going down.
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