With Prices So High, Why No Supply?

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It’s simple economics. When prices rise, people are motivated to sell. But in today’s housing market, reality looks different. Prices are surging but for-sale signs are few and far between.

In some cities, the lack of inventory borders on catastrophic. Seattle had 34 percent fewer homes for sale in this January than a year ago. In Portland, inventory was down 27 percent.

Even where supply has risen, as in Denver and Orange County, Calif. there still aren’t enough homes for sale. Denver had a 1.3-month supply at the end of last year, Orange County had 2.2 months. Nationally, there are only half as many houses for sale as homebuyers demand.

Sellers and buyers are equally matched when there’s about a six-month supply of properties on the market. Chronic short supply has dealt sellers a strong upper hand.

No wonder prices climbed nearly 9 percent in December from a year ago. Homes are selling faster, too. A fourth of all new listings go under contract in two weeks or less.

For buyers, things won’t get better anytime soon. Here’s why:

#1 Builders aren’t building

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U.S. homebuilders built an average of 1.5 million homes each year for the 50 year period preceding the housing collapse. Home construction took a nosedive in 2008 and still hasn’t recovered. The U.S. needs about 1.2 million new housing units a year to keep pace with population growth and another 300,000 to replenish homes that are demolished every year.

That translates to a total of 12 million houses, condominiums and apartments that should have been built over the last eight years. Instead we’ve built only half as many, and most of that construction has been apartments for rent insead of homes for sale. Builders are starting to ramp up, but it will take years to close that 5.5 million gap.

#2 People aren’t trading up

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Buyers aren’t the only ones frustrated by the lack of inventory. Increasingly, Redfin agents report that homeowners who want to sell or move choose not to because they can’t find a suitable house to buy or don’t want to get caught up in bidding wars.

People are spending twice as long in their last-purchased home as they did 15 years ago. Blame it on seniors who want to age in place or boomers who refuse to downsize or GenXers who’d rather renovate than relocate. It all boils down to the same conclusion, fewer listings.

New for-sale listings were off to a slow start in January, even before Snowzilla barreled up the East Coast.

Homeowners who want to trade up might not be able to, even if they’ve reaped the benefits of rapid appreciation in recent years. Income growth hasn’t kept pace, and for some people a loan might be harder to get now than it was when they bought.

#3 More people are becoming landlords

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Investors swept up homes at bargain-basement prices after the housing collapse, depriving buyers of all that stock. In the past 10 years housing units occupied by renters grew 25 percent while owner-occupied units slipped 1 percent.

And more Regular Joes are joining the ranks of investors, taking advantage of low mortgage rates and high rents. People who can pay cash for a new home or qualify for a mortgage without selling the house they live in are hoarding real estate. With rents at an all-time high, it makes economic sense to become a landlord or join the Airbnb generation.  

The law of supply isn’t broken, just bruised from the worst housing crises since the Great Depression. The good news is, when it comes to the housing market, time can heal all wounds (as long as there’s proper foresight and planning). More construction and smarter zoning are the keys to housing’s future.

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nela-richardsonredfin-com

Chief Economist

Nela leads Redfin’s housing market research team on data reports that help Redfin customers make informed choices. She comes to Redfin from Bloomberg LP, where she served as a senior economist with Bloomberg Government. She also served in past roles in the mortgage industry, capital markets and financial policy. Redfin is a full-service real estate brokerage that uses modern technology to make clients smarter and faster. For more information about working with a Redfin real estate agent to buy or sell a home, visit our "Why Redfin?," page.

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