Supply and Demand? What does this mean for Real Estate?
By Kevin Engholdt, MS, MBA - January 2023
Introduction to Topic
We are at a pretty unique time in terms of the Real Estate Industry. The age old question of "How's the real estate market these days" is often answered with, "it depends."
For me, I'd like to help my clients by answering this question with a little more data to clarify the "it depends" situation. It depends on if you are a buyer, seller, investor, or grandma looking to get the best deal to get your grandkids a down payment for their first home.
For those in the know, the "it depends" can be partially answered by Supply vs Demand. Supply for real estate would be the number of homes, aka in the business as "inventory." Demand for real estate would be the activity of purchasing homes. This can be "pending," "sold" and a key metric, "Contract Ratio." More on Contract Ratio in another blog.
Intro Takeaway
When supply exceeds demand (as between 2006 and 2009) the home prices are under downward pressure. In short, prices of homes reduce.
When demand exceeds supply, prices are under upward pressure. In short, prices of homes increase.
If you are a buyer of a new home and/or investment, you want supply to exceed demand - better deal for your purchase of a home.
If you are a seller of a home and/or investment, you want demand to exceed supply - better deal for your sale of property.
Herein lies the background to your typical answer of, "It depends." Are you a buyer or a seller?
Detailed Discussion
There are a lot of ways to view the Supply and Demand of homes, but a unique chart here in Arizona that has gotten popularity as well as credibility is using the "Cromford® Index." It has become one of the best holistic measures of where Supply and Demand lie. It is updated monthly, usually close to the start of the month. Below is a snapshot of this chart as of 1/25/2023.
For definitions sake;
The Cromford® Demand Index is a value that provides a short term forecast for the demand for resale homes in the market. It is derived from the trends in pending and sold listings compared with historical data over the previous four years. Values above 100 indicate more demand than usual, while values below 100 indicate less demand than usual. A value of 100 indicates the demand is close to normal.
The Cromford® Supply Index™ is a value that provides a short term forecast for the supply of resale homes to the market. It is derived from the trends in active listings compared with historical data over the previous four years. Values above 100 indicate more supply than usual, while values below 100 indicate less supply than usual. A value of 100 indicates the supply is close to normal.
In the above graph, you will see both Supply and Demand coming back together, this is a good sign, the market is stabilizing. If it stays stable is what remains to be seen. Post 2008, when supply and demand came back, it was a rocky stabilization. New regulations on a industry brought stabilization but eventually broke again in 2011. Between 2013-2015, the markets were the most stable they had been since early 2000s, just slightly below normal (100). From 2016 to 2020, markets were what could be considered a positive investor market, normal demand (within 100s) and low supply, good returns on your investments if you were home buying or investing. Multiple regulations and free market changes were in effect during this time that was a largely favorable timeframe - this is ideal for buyers and investors. From 2020 to now has been a firestorm of volatility, if you sold, you made big, if you bought, you had to pay for it. Covid lockdowns appeared to make persons realize that they may want to refinance or sell their home, now that they had been in it more from lockdowns. Political environments also made persons sell with one of the largest emigrations in history - people from CA, IL, and NY are flooding the states of TX, AZ, and FL. Which made the situations even more unique is they weren't coming with NINJA (No Income, No Job, and No Assets Loan) loans like back in 2006-2008, they were coming with cash, a lot of it. Thankfully, the Dodd-Frank Act cleaned up alot of the predatory behavior around the NINJA loans, however, we are a in a new market. One full of cash and emigration movement from other states. This will be a historic time in real estate, yet again.
As we bring supply and demand together, it remains to be seen where they will go. What we do know is the market is beginning a stabilization period.
Final Takeaway
If you are buyer or seller, wait 1-2 months to assess where the Supply and Demand are going. At the end of the day, your own personal situation will drive when is the best time to buy or sell but my hope in giving you this kind of information is that it makes you a more informed consumer when you do buy or sell.
We hope you found this information valuable to you and your family for your home buying, investing, or selling decisions.
Respectfully,
~ Kevin Engholdt, MS, MBA - Russ Lyon Sotheby's International Real Estate
