Real Estate Headlines Are Often Deceptive

Housing: A Binary View

To fix the housing market, it comes down to increasing supply, reducing demand, or a combination of the two. Remember, both prices and rents are rising, so you will not reduce demand by pushing a consumer from one side of the market to the other. When we talk about housing, we’re talking about shelter, whether the consumer is buying or renting.

The supply and demand for homes in the US

This graph plots the number of homes for sale in blue, the months of supply in red, and the dashed-gray line measures the non-seasonal relative supply of homes.

The first point I will make is that the 1.3 million homes for sale today is 68% fewer than the 4 million homes that were available when the housing market tanked 15 years ago. The one-year average months of supply of homes has risen off an all-time low three months ago, but the US is far from approaching equilibrium. There are not enough homes built to house our growing population.

There are not enough homes, even for the lowered demand that has resulted from skyrocketing mortgage interest rates.

Supply Side

If one looked to the supply side of the housing market to balance with demand, more shelter is needed. Apartments, condominiums, and single-family homes are all needed. I have seen estimates that the US is deficient somewhere between 2.5M and 5M homes right now, and each year that we under-build for demand only exacerbates the problem.

Of course, things could change on the supply side. For example, what happens when a force majeure hits our population? As a dark, extreme example, think of how the supply and demand dynamic would have been impacted had 10% of our population (33M people) been killed by COVID since the pandemic began more than two years ago. Had such a tragedy occurred, it would have, on average, resulted in the addition of 12M homes to the supply side of the housing market.

Our market would have gone from grossly undersupplied to grossly oversupplied in a very short period. Today, we would have 14M homes for sale in the US (where we have averaged about 6M sold each year). Considering the market in 2007 had “only” 4M homes, you can see how devastating the pandemic could have been to the supply side of the market.

I have seen reports stating a large number of new homes are ready to flood the market. This is not true. The pipeline is taking 50% longer than the historical norm due to supply chain disruptions. Thus there are more (but not enough) homes in the pipeline. You can view an in-depth video below on the new construction pipeline.

I have also seen ignorant reports stating that the supply side of the market could change greatly if more current homeowners decide to move. Here’s why this is ignorant. Real estate math: One seller enters the market. Unless that person dies or moves to another country, one buyer (or tenant) enters the market.

One new seller plus one new buyer equals a net zero for inventory! No more houses are added. No more consumers are added. You cannot detach the inventory of homes for sale from the inventory of rental homes, as each represents a part of our inventory for shelter.

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