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Is Tight Supply Squeezing Demand?

tightenup-on-moneyFor months, the housing industry has reported that the supply has been tight. While low inventory does not seem to be adversely affecting sales—after all, new home sales are at their highest level in eight years and existing-home sales are selling at the fastest rate in nine years—is it affecting demand for housing?

According to some reports, it isn’t. The AEI International Center on Housing Risk, which covers the all loans guaranteed by Fannie Mae, Freddie Mac, FHA, VA, and Rural Housing, accounting for 85 percent of all primary home purchase loans and 93 percent of all first-time buyer home purchase loans, reported that agency purchase loan volume was up by 10 percent year-over-year in June and first-time buyer volume was up 11 percent.

Also, HUD and the U.S. Census Bureau on Tuesday reported that new home sales were at their highest level in eight years, which some economists saw as a sign that demand is robust for new homes.AEI graph

While that may be true for new homes, one analysis found that low supply is, in fact, resulting in downward pressure on demand for all single-family housing. Redfin reported that demand fell by 17 percent year-over-year in June, marking the fifth consecutive month of year-over-year declines. Redfin’s Housing Demand Index, which measures homebuyer activity prior to purchase and has a benchmark level of 100, registered at 88 in June, which represents lower-than-average demand.

Redfin also reported a lower number of customers requesting home tours in June (6 percent, down from 9.2 percent in May) and a lower number of customers writing offers (down by 6.6 percent over-the-year and 5.6 percent over-the-month in June). Redfin expects sales numbers to slow for August based on June’s decline in demand; even though the market “feels hot,” with 7.6 percent fewer homes for sales across the 15 metros tracked by Redfin’s demand index, there just wasn’t much for buyers to look at or consider; the result was more buyers than homes, meaning homes sold quickly—many of which sold over list price.

7-26 Redfin graphThe market that experienced the largest over-the-year decline in demand in June was Denver, where the demand index dropped by nearly 55 percent, according to Redfin. The largest over-the-month decline in demand in June occurred in Atlanta (47 percent).

“These major metro areas have all felt the squeeze from inventory, meaning there was just less for buyers to look at,” said Redfin chief economist Nela Richardson. “It’s not surprising that demand reflects that squeeze. Even strong buyer interest can’t squeeze a fresh listing from what’s become a dry turnip of housing supply.”

The two markets that experienced the largest month-over-month and year-over-year gains for demand were San Francisco and Baltimore, with 45 percent and 20.7 percent, respectively.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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