When Supply & Demand (Especially “Supply”) are Broken

“The sale of a home actually represents two, discrete transactions.  To a Seller, it represents a lump-sum payoff; to a Buyer, it represents a series of monthly payments.”

–Floyd Norris; The New York Times

To explain the dearth of homes for sale nationally as well as locally in the Twin Cities, you need to look at home sales the way Floyd Norris does.

econ2So, thanks to dirt-cheap interest rates, courtesy of The Federal Reserve, what Realtors call “home affordability” has never been better.

While home prices have now rebounded off the bottom by as much as 10% – 20% in some markets, on average they’re still 25% below the 2006 peak.

Meanwhile, that 25% drop in prices — coupled with the plunge in mortgage rates — means that Buyers’ monthly payments for the same house seven years ago might easily be one-half (yes, half!) that today.

That discount looks even better against a backdrop of rising rental prices and limited rental supply (for now at least; new rental construction is if anything frothy in many markets at the moment).

Supply Conundrum 

Add up all the above, and housing today looks incredibly cheap.

To Buyers. 

As you might expect, they’re eagerly snapping up well-priced, well-prepped homes, with the result that inventory is vanishing and prices are rising.

Ahhh, but not enough for millions of Sellers to want to sell — or be able to.venn

A Tale of Two Markets

Normally, rising prices elicit more supply; that’s how economics works.

Specifically, the “dismal science” teaches that demand for any given product rises as prices fall, while supply rises as prices increase.*

Which is where Mr. Norris’ insight comes in.

Namely, it explains that prices have come down for Buyers more than they’ve come up for Sellers (sit with that one a moment).

That, plus the fact that most Buyers finance anywhere from 80% to more than 95%-plus of their home purchase, means that a 25% drop in prices leaves millions of homeowners either:  a) unable to sell, because they’re underwater on their mortgages; or b) psychologically unwilling to sell at a (still-deep) loss.

*The exception being what are called “Giffen goods,” where demand increases as prices rise (true of a certain yellow metal??).

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

Leave a Reply