Rising Housing Prices - Econ 101 Supply & Demand Factors Out of Whack?

Below is our monthly Housing and Mortgage Finance Dashboard (click on image for PDF version). The Dashboard provides a near-term comparison (change from 3-months and 1-year ago) and longer term perspective (change from peak and trough since 2000) on the state of the U.S. housing sector.

The longer term historical perspective: housing sector recovered significantly from the depths of the Great Recession but remains well below pre-crisis levels.

The recent performance: housing sector has generally been solid with some recent mixed results in housing starts and home sales, but may be hitting plateau.

There is one area within the housing sector that has not slowed - home prices.  The median home price is up over 6 percent from one year ago and within one percent of the pre-crisis peak. Home price increases across the U.S. vary dramatically by market - ranging from 3% to nearly 13%. Econ 101 tells us that this is all caused by supply and demand factors - and these are out-of-balance.

This table shows the HPI for each of the three sale price tiers for these metropolitan markets. Data is compiled by S&P Case Shiller and was sourced via FRB St. Louis FRED economic data service. Let’s focus on the tier identified as “Low Tier HPI”, which is the lowest one-third of home sales by price.

This table shows the more dramatic uptick in home prices in the lowest price tier and clearly reflects a serious imbalance between available supply of homes and the demand for these more entry level homes.

Perhaps a visual aid in the form of a graph will more readily show this point. This graph for the Portland area shows the three tiers: Low (Green), Mid (Blue), High (Red) and U.S. median (Black). Note the severe steepness and height of the Low Price Tier line. In simple terms, housing demand factors are significantly out of line with housing supply factors in this home sales price segment.

Demand factors are primarily driven by national influences. Mortgage interest rates are driven by macro and national factors. Mortgage loan down payment requirements are influenced by Fannie, Freddie and FHA guidance. Similarly FICO and loan-to-income requirements typically are more national in scope. And historically, national tax policy has influenced demand for housing with tax deductibility of interest and state & local property taxes. Population change and migration have both national and local influences. Perhaps, the most important demand factor is job growth (or lack of growth).

Supply factors are more local - builder capacity in each local market, labor and materials availability and local zoning and permit requirements. Supply of homes for sale is a factor. In some local markets, this is impacted by homes with negative equity that do not go on the market. Supply factors will further vary or be more constrained in smaller towns and rural markets compared to metropolitan markets. Even bank capital regulations and proposed regulations can influence supply.

This imbalance in supply and demand factors shows up significantly in the lower home price tiers reported by S&P Case Shiller. All of these MSAs have year-over-year price increases above the U.S. median of +6% for all homes. Seven of these MSAs have double digit price appreciation. Las Vegas was over 16%; Tampa was over 14% and Seattle was over 13%.

Four MSAs are now significantly higher than their pre-crisis peak in housing prices. Seattle is 11 percent above its prior peak. Boston is more than 15 percent above its peak. Portland is nearly 35 percent above its previous peak. And Denver home prices for this price tier has soared 70 percent higher than its peak.

The current housing market has a different feel to it compared to the market just prior to the collapse in housing prices in 2007 or so. There does not appear to be any poorly structured or underwritten mortgage lending (non-QM) exacerbating demand (nor setting stage for collapse if economy falters and unemployment jumps). Economy remains solid. No eminent housing bubble is foreseen.

This is not a short-run issue that will go away; it is a longer-term issue. If housing supply imbalance is the critical path, this may be the most difficult to resolve. Over the long term, bringing housing supply across the large number of local markets into balance with housing demand is paramount.

This will require leadership at the regional and local levels - and at the federal / national levels. It will require a new or renewed U.S. vision on housing policy.

For our analytical reporting on the housing and mortgage finance sectors, go to this link: Housing and Mortgage Finance. For a PDF version of our monthly report, click on Regional Housing Price Trends.