Image for supply vs. demand

Buyers, or the lack of them, normally get the blame for all that ails housing.

When not enough people want homeownership, or can afford it, the available inventory of for-sale homes sits and loses value, and that's bad.  Fed chief Janet Yellen may be one of the few people who believe this is currently an issue.

Knock on wood, that doesn't seem to be a problem of the moment. This morning, the National Association of Realtors will release data on existing home sales for August. Consensus expectations are for a run-rate of 5.5 million. Likely, commentary accompanying the actual figure, to be disclosed at 10 a.m., will be that limited supply continues to stifle demand and inflate prices. Scarcity unbalances demand. 

How many markets and submarkets do you hear about these days where available, for-sale inventory goes languishing?

The pace of sales may slow, the mix may shift, traffic flow may be off and on. But few question the fact that if there were a healthy supply of good homes in good communities--new and used--at varying price points and offering a variety of fair finance options, there would be a steady stream of demand.

If a market is creating jobs, or sustaining them, or casting a spell of allure to people--like retirees--to move there, there is demand. We see it now in the form of household formations. We do not see it in terms of transactions.


Risk, for one. Demographics, for another.

For home developers and builders, the risk is clearest in the flow of capital into lot acquisition and development. For all the while borrowing costs have literally been dirt cheap, the fact is, most people and firms who would most benefit from those rock bottom borrowing costs have been shut out of that kind of capital. They have to put more of their own money, more of their own personal guarantees, more of their own resources of time and value into the equation.

From the "Joe-Borrower" perspective, one of the biggest risks is that if one owns something now, and has locked in "dirt cheap" borrowing costs on that property, it's a crapshoot to sell that property and possibly get higher borrowing costs on a new one.

That becomes a greater risk in an era--which we're in--where interest rates for mortgage loans drift upward. This would de-motivate more people from selling. We know too that just as individual potential sellers are "de-motivated" from putting homes on the market because of the personal risk to themselves they would be taking on, also, new home builders are "de-motivated."

They're "de-motivated" because of the impediments they face in arranging for capital, putting the muscle and time into developing land into sites, and navigating a rat's nest of local political ins-and-outs that can halt progress at any moment and turn projects on their head in a whim, impacting the entire investment.

So, builders, too, have become risk-averse, sticking to a "comfort zone" of higher end homes in master planned communities and low-barrier-to-entry tracts.

As for the demographics part of the equation, have a look at this analysis from Harvard Joint Center for Housing Studies senior research associate Dan McCue. His dive into the numbers illustrates the substantial "hit" to the norm the housing economy took as a result of the two-pronged force of the economic downturn and the movement of Generation X through their prime homeownership years of 35 to 45.

McCue writes:

Traditionally, the 30s and 40s are key ages for housing market activity – particularly for trade-up and new home purchases. Indeed, homeowners aged 35-44 historically make up the majority of trade-up buyers (Figure 5). Fewer current homeowners in this key age group has meant fewer potential trade-up buyers and sellers, meaning fewer people putting their homes on the market, adding to tight inventories of for-sale homes.

Here's the "Figure 5" he refers to.

Harvard Joint Center for Housing Studies analysis of American Housing Survey data.
JCHS analysis of American Housing Survey data.

McCue is rooting around for reasons and explanations for the scarcity of available, for-sale inventory, and it seems he's got some pretty good ones here.

The implications are:

  • As GenX moves through the 40-somethings and 50-somethings, structural demand should continue to take a hit vs. longer term trends. 
  • Focus on the lower-price tiers of the housing market, both for new and existing homes, will be likely to pay off for those who can manage the capital and time risks of providing those offerings for buyers who want to enter the ownership continuum 
  • Focus among new home builders on people currently in their latter 50s and early 60s will be another big pay-off area, assuming that this is not a homogeneous cohort, and the existing options--even "age-ing in place" in their current home--may not be preferable, given where their kids are drawn to to find their livelihoods.

Understanding "the who," both on the buy-side and the selling side is an area of improvement we can see as needed, and each monthly existing homes sales release becomes and opportunity to do just that.