Real Estate: It’s Still a Lack of Supply, Not a Lack of Demand

<article class="post-9549 post type-post status-publish format-standard has-post-thumbnail hentry" id="post-9549"><span class="entry-date">August 18, 2021</span><div class="entry-header center-block text-center"><h1 class="entry-title">Real Estate: It’s Still a Lack of Supply, Not a Lack of Demand</h1><div class="shareBlock"><div class="shareTitle">Share</div><div class="shareIcons"><a aria-label="Twitter Share Link" class="twitter solid display-inline-block" data-tracking="Post,Social Post Link Clicked,Twitter" href="http://twitter.com/share?text=Real+Estate%3A+It%E2%80%99s+Still+a+Lack+of+Supply%2C+Not+a+Lack+of+Demand&amp;url=https%3A%2F%2Fgilliggroup.com%2Fblog%2Freal-estate-its-still-a-lack-of-supply-not-a-lack-of-demand%2F" target="_blank"><span class="force-hidden">Twitter</span></a>
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<p><img alt="Real Estate: It’s Still a Lack of Supply, Not a Lack of Demand | Simplifying The Market" class="webfeedsFeaturedVisual wp-post-image" decoding="async" link_thumbnail="" loading="lazy" sizes="auto, (max-width: 549px) 100vw, 549px" src="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/17115231/20210818-KCM-Share-549×300.jpg" srcset="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/17115231/20210818-KCM-Share-549×300.jpg 549w, https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/17115231/20210818-KCM-Share.jpg 750w" style="display: block; margin-bottom: 5px; clear:both;max-width: 100%;" width="358"/></p>
<p>One of the major questions real estate experts are asking today is whether prospective homebuyers still believe purchasing a home makes sense. Some claim rapidly rising home prices are impacting demand and, by extension, leading to the recent slowdown in sales activity.<span id="more-44967"></span></p>
<p>However, demand isn’t the real issue. Instead, it’s the lack of supply (homes available for sale). An article from the <a href="https://www.wsj.com/articles/home-builders-are-restricting-sales-pushing-up-new-home-prices-11628596801"><em>Wall Street Journal</em></a> shows this is true for new home construction:</p>
<blockquote>
<p><em>“<strong>Home builders have sold more homes than they can build</strong>. Now they are limiting their sales in an effort to catch up.”</em></p>
</blockquote>
<p>The article quotes David Auld, CEO of <em>D.R. Horton Inc.</em> (the largest homebuilder by volume in the United States since 2002), explaining how they don’t have enough homes for the number of buyers coming into their models:</p>
<blockquote>
<p><em>“Through our history, to have somebody walk into our models and to tell them, <strong>‘We don’t have a house for you to buy today’,</strong> is something that is foreign to us.”</em></p>
</blockquote>
<p>Danielle Hale, Chief Economist for <em>realtor.com</em>, also explains that, in the existing home sale market, the slowdown in sales was a supply challenge, not a lack of demand. Responding to a recent uptick in listings coming to market, <a href="https://news.move.com/2021-08-10-Realtor-com-R-July-Housing-Report-New-Listings-Rise-6-5-Nationwide-as-More-Smaller-Homes-Hit-the-Market">she notes</a>:</p>
<blockquote>
<p><em>“. . . if these changing inventory dynamics continue, we could see <strong>a wave of real estate activity</strong> heading into the latter part of the year.” </em></p>
</blockquote>
<p>Again, the buyers are there. We just need houses to sell to them.</p>
<p>If the slowdown in sales was the result of demand waning, we would start to see home prices beginning to moderate – but this isn’t the case. As Mark Fleming, Chief Economist for <em>First American</em>, <a href="https://blog.firstam.com/economics/reconomy-podcast-whats-driving-the-shift-in-the-housing-market-today-supply-or-demand">explains</a>:</p>
<blockquote>
<p><em>“There’s a lot of conversation around rising prices and falling quantity in the housing market, and there’s this concept, or this idea, that it’s a demand-side problem . . . . But, if demand were falling dramatically, we would actually see less price pressure, less home price growth.”</em></p>
</blockquote>
<p>Instead, we’re seeing price appreciation accelerate throughout this year, as evidenced by the year-over-year percentage increases reported by <a href="https://www.corelogic.com/intelligence/u-s-home-price-insights/"><em>CoreLogic</em></a>:</p>
<ul>
<li>January: 10%</li>
<li>February: 10.4%</li>
<li>March: 11.3%</li>
<li>April: 13%</li>
<li>May: 15.4%</li>
<li>June: 17.2%</li>
</ul>
<p><em>(July numbers are not yet available)</em></p>
<p>There’s a shortage of listings, not buyers, and there are three very good reasons for purchasers to still be interested in buying a home this year.</p>
<h4><strong>1. Affordability isn’t the challenge some are claiming it to be.</strong></h4>
<p>Though home prices have risen dramatically over the last 18 months, mortgage rates remain near historic lows. Because of these near-record rates, monthly mortgage payments are affordable for most buyers.</p>
<p>While homes are less affordable than they were last year, when we adjust for inflation, we can see they’re also <a href="https://www.simplifyingthemarket.com/2021/08/11/are-houses-less-affordable-than-they-were-in-past-decades/?a=712984-fa409495d5d70154d03a25e81e9540e2">more affordable</a> than they were in the 1970s, 1980s, 1990s, and much of the 2000s.</p>
<h4><strong>2. Owning is a better long-term decision than renting.</strong></h4>
<p>A <a href="https://www.zillow.com/research/housing-affordability-forecast-2021-29944/">recent study</a> shows renting a home takes up a higher percentage of a household’s income than owning one. According to the analysis, here’s the percentage of income homebuyers and renters should expect to pay now versus at the end of the year.<a href="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/17115232/20210818-MEM-Eng-1.png"><img alt="Real Estate: It’s Still a Lack of Supply, Not a Lack of Demand | Simplifying The Market" class="aligncenter wp-image-44969" decoding="async" height="488" loading="lazy" sizes="auto, (max-width: 650px) 100vw, 650px" src="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/17115232/20210818-MEM-Eng-1.png" srcset="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/17115232/20210818-MEM-Eng-1.png 1000w, https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/17115232/20210818-MEM-Eng-1-400×300.png 400w" width="650"/></a>While the principal and interest of a monthly mortgage payment remain the same over the lifetime of the loan, <a href="https://www.simplifyingthemarket.com/2021/08/03/with-rents-on-the-rise-is-now-the-time-to-buy/?a=712984-fa409495d5d70154d03a25e81e9540e2">rents increase</a> almost every year.</p>
<h4><strong>3. Owners build their wealth. Renters build their landlord’s wealth.</strong></h4>
<p>Whether you’re a homeowner or an investor, real estate builds wealth through growing equity year-over-year. If you own, your household is gaining the benefit of that wealth accumulation. <a href="https://blog.firstam.com/economics/reconomy-podcast-should-you-rent-or-buy">Fleming says</a>:</p>
<blockquote>
<p><em>“<strong>The major financial advantage of homeownership is the accumulation of equity in the form of house price appreciation</strong> . . . . We have to take into account the fact that the shelter that you’re owning is an equity-generating or wealth-generating asset.”</em></p>
</blockquote>
<p>Odeta Kushi, Deputy Chief Economist at <em>First American</em>, elaborates in a <a href="https://blog.firstam.com/economics/why-owning-a-home-was-cheaper-than-renting-in-all-50-top-u.s.-markets">recent article</a>:</p>
<blockquote>
<p><em>“. . . once the home is purchased, appreciation helps build equity in the home, and becomes a benefit rather than a cost. When accounting for the appreciation benefit in our rent versus own analysis, <strong>it was cheaper to own in every one of the top 50 markets, including the two most expensive rental markets</strong>, San Francisco and San Jose, Calif.”</em></p>
</blockquote>
<p>Today, that equity buildup is substantial. The <a href="https://www.nar.realtor/newsroom/94-of-metro-areas-saw-double-digit-price-growth-in-second-quarter-of-2021"><em>National Association of Realtors</em></a> (NAR) reports:</p>
<blockquote>
<p><em>“The median sales price of single-family existing homes rose in 99% of measured metro areas in the second quarter of 2021 compared to one year ago, with double-digit price gains in 94% of markets.”</em></p>
</blockquote>
<p>In 94% of markets, there was a greater than 10% increase in median price. That means if you bought a $400,000 home in one of those markets, your net worth increased by at least $40,000. If you rented, the landlord was the recipient of the wealth increase.</p>
<h3><strong>Bottom Line</strong></h3>
<p>For many reasons, housing demand is still extremely strong. What we need is more supply (house listings) to meet that demand.</p>
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