How The Laws of Economics Are Starting to Weigh Down Housing

ECONOMICS OF HOUSING | MAKING AN IMPACT

Unit sales are down. Price increases are flattening out. The pending sales index is down. Each is a sign that the laws of economics are starting to weigh on the housing market.

We saw this last year when, even in a strengthening economy, housing unit sales increases were flattening. Several months of the last two quarters saw dips in year-over-year comparisons.

When the supply of a product, service or, in this case, asset, declines relative to demand, then prices will rise.
At some point, the price of the goods, services or assets becomes out of reach for consumers of those items. Then, sales will flatten, and prices will soften until the supply, and the prices come down to the point where purchases will increase once again. This is true in any market for any goods, services or assets.

Such is the case of housing. We don’t have enough. Demand greatly exceeds supply, especially in the lower-priced segments of the market. To correct this imbalance either more supply must be created, or demand must be cooled. Builders don’t appear to be able to create much more. They are building some, but not enough in the near term to have much impact. Holders of investor-owned homes (22 million units of one-to-four family homes mostly owned by private individuals) don’t appear to be in any mood to sell their investments (returns from renting too good).

So that leaves cooling demand. And, while mortgage rates are heading up and prices are cooling a bit, there remains an imbalance between new households being created and new homes being built, whether single-family or multi-family between $400,000 to $500,000 per year. That imbalance is not going to go away either.

From 2009 until 2017, the average price of a home sold rose far faster than the average household income. That is starting to ease mainly because household incomes and overall employment are increasing at the best rates since 2004. The general economy is strong and looks to get a little bit stronger (although how the new tax act and potential trade issues will affect it is anyone’s guess).

We are in for a slowdown. No one we read or listen to thinks it will be dramatic. But, it now appears to be underway in most markets. For the strong, this is a good time. It’s a matter of historical fact that only twice in the past 25 years have leading brokerage firms gained share when the market was growing. But, almost every time there is a market downturn, leading brokerage firms gain share.

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