We look at the housing demand/supply balance two ways:
- The need for more construction. Since the US has been adding more than two new jobs for every home built for the last several years and there are less than 1.2 jobs per household, we will clearly need to start building more homes soon.
- Pressure on home price appreciation. Price appreciation is driven by the imbalance of demand (home buyers) and supply (home sellers). The best demand/supply measure for price appreciation is the months of supply of homes on the market. Over the last 31 years, home prices have appreciated 1% faster than inflation while there was an average of 7 months of supply of resale homes on the market. When supply was much lower, prices rose faster, and vice versa.
Weighing Supply and Demand
When a homeowner sells their home and buys another home in the same market, they don't impact supply, since they add 1 and subtract 1 from the market. Detailed analysis may show that they are adding and subtracting supply from different price points and types of homes, but we won't get that detailed in this analysis. What matters to the overall market are the many groups who are:
- Buyers only, who pull down supply
- Sellers only, who drive up supply
We identified six primary buyers-only categories and eight sellers-only categories.
Categories 1 through 6 relate to each other, while categories 7 and 8 (banks and builders) are the big outliers that can cause supply to significantly outweigh demand. Since price appreciation historically exceeds inflation, the 6 buyer categories usually total more than the 8 seller categories. The categories that are currently lower than usual are red, and the categories that are currently higher than usual are blue.
- First-time buyers, most of whom were previously renters
- New migrants and immigrants to an area who choose to buy right away
- Second-home buyers
- Move-up/move-down buyers who choose to buy a home while keeping their prior home as an investment
- Investor buyers, including fix and flip buyers, foreign investors, and private and institutional landlords
- End of lifers; estate sales or moving to retirement homes or in with their kids
- Newlyweds who were both previously homeowners, so they sell one house
- Out-migrants to other areas, often attracted by better job prospects
- Second-home sellers
- Homeowners who choose to convert to renters
- Investor sellers, including fix and flip buyers, foreign investors, and private and institutional landlords
- Banks, as the final stage of a foreclosure or short sale
- Home builders
Let's look at the imbalances of each category:
- First-time buyers usually greatly outnumber the number of people ending their tenure of homeownership.
- Divorcees often end up owning two homes, while newlyweds usually combine homes.
- Immigrants and in-migrants outnumber out-migrants.
- Second-home ownership has been steadily increasing over the years, due both to strong demographics in the 40+ age group and a rise in affluence. During slow economic times, however, sellers outnumber buyers.
- 14 million individually owned rental homes in the country are primarily owned by move-up buyers who chose to keep their original home rather than sell it, as well as investors. Few homeowners voluntarily convert to renters.
- Investors have increased in numbers recently, especially foreign investors and institutional landlords. Surges in investor buying and selling can have a huge impact on the market.
- Banks usually sell about 400K homes per year and have been selling 3 times as many lately.
- Home builders are always sellers only. This is a huge category, with 1 million+ new homes (excluding apartments) built in a usual year. High levels of new home construction can soften home price appreciation dramatically. Home builders act as the great equalizer because they can bring more supply to the market when demand warrants it.
How It Worked Recently
In 2011 through early 2013, prices rose because of:
- the tremendous influx of investor buyers
- a reduction in bank sales
- a significant lack of new home construction
This imbalance tipped the scales back toward more buyers than sellers, and homes began appreciating again. Months of supply (MOS) plunged from 12 to 4.5. When MOS crossed 7 in late 2011, prices shifted from falling to rising.
Last year, rising prices, rising mortgage rates, and reduced confidence all contributed to a reversal in the direction of months of supply, slowing the rate of price appreciation.
To project price appreciation, we weigh all the factors described above to form a conclusion. We try to be scientific with our economic growth, housing supply, affordability, and bank sales estimates, but we also have to make qualitative assessments on factors such as investor activity and mortgage rates.
Right now, we believe more buyers than sellers will result in another year of price appreciation in most markets. However, we see huge differences by market. We are carefully monitoring supply in Texas and affordability in California and projecting very different years in each market and submarket.