Home Sales Increased—But Will We Ever Meet Demand?

This is a reprint of a Bigger Pockets Article written by Matt Mayre

The housing market has been tight on inventory since well before the pandemic. We’re nowhere near the end of the problem, unfortunately—but the effects of the pandemic finally appear to be tapering off.

Home sales increased in July

New data released by the National Association of Realtors (NAR) found that existing home sales improved by a modest 2% in July—the second straight month of increases. The current seasonally adjusted annual rate is 5.99 million.

Sales increased from last year’s hot summer by 1.5%.

NAR Chief Economist Lawrence Yun had this to say: “We see inventory beginning to tick up, which will lessen the intensity of multiple offers. Much of the home sales growth is still occurring in the upper-end markets, while the mid to lower-tier areas aren’t seeing as much growth because there are still too few starter homes available.”

Housing has been tough for lower-income Americans since the pandemic started. Prices have dramatically accelerated, and many families have been disproportionately financially harmed by the pandemic. The reality is that many would-be homebuyers plan to sit out of the market until prices start to come back down. In fact, just 30% of July’s market was made up of first-time homebuyers, a cohort that makes up about 40% of the market historically.

Bidding wars are still happening regularly. According to data from June, 89% of homes sold in less than a month—a huge jump from 56% in June 2019. Furthermore, homes spent 10 days fewer, or 17 total, on the market compared to June 2019. Sellers had nearly double the number of offers, 4 in total, to sift through compared to back then.

Redfin’s buyer demand index shows nearly equivalent levels of demand as last year’s summer. However, it’s important to note that the index has dipped consistently since its all-time high in February. While still nearly 50 points higher than June 2019, it’s falling.

What factors are creating increased supply?

We’re still far from meeting demand, but a few things are kicking the ball towards equilibrium.

First, with the Delta variant spreading rapidly, there’s always the potential for botched deals due to rising cases and disruptions. Danielle Hale, the chief economist at Realtor.com, said, “Continued economic recovery is key to maintaining sales momentum, and anything that disrupts progress, such as rising Covid cases, could knock home sales off course.”

While COVID-19 won’t be the sole cause for increased supply, it’s a factor.

Second, lumber prices have continued to fall, now in its 11th straight week of decline. Since reaching an all-time high of $1,515 per thousand board feet, prices have fallen 74% to $399 as of last Friday.

While there won’t be immediate effects on the consumer end of the market, the return of pre-pandemic lumber prices provides an incentive to builders that have sat out due to mounting costs.

Lumber isn’t the only building material included in home construction, but it’s an integral element. The other concern is the price of wire, OSB, and other materials still hovering near peak levels.

Regardless, a decrease in lumber will bring some homebuilders back.

Third, we’re simply seeing a decline in buyer demand, which will inversely create gains in sales and inventory.

While demand is still sky-high, as stated previously, the economic curve will naturally increase home sales.

Whether it’s lumber, runaway appreciation pushing many would-be buyers of out the market, bidding wars, or inadequate wage growth to support the current market’s pricing—demand is declining slowly.

Where are we headed?

We don’t know where decreases in demand will lead. We’re still short millions of new construction housing units, which we need to help catch up. It’s likely we’ll remain in a seller’s market until those housing units appear, whenever that may be.

It’s also a matter of government and politics. Some local and state governments have created tight regulations and environmental procedures that have made it hard to cut through the red tape.

California, for instance, recently mandated solar panels and battery storage as a requirement for most new high-rise residential development projects. In America’s most expensive state for housing, this type of legislation makes it harder for builders to afford and profit off projects, thus deterring and sending them off to more lucrative markets with fewer hoops. Builders must increase unit pricing just to break even with costs, adding to the affordability crisis.

This is just one example. There are countless other regulations and laws that have led to California’s dramatic housing price surge and an affordability issue akin to nowhere else in the country.

Moving forward, it will be interesting to watch how governments respond to housing issues and whether the economy will continue to recover at a reasonable rate or fall flat of its goals.