Low Housing Inventory Thesis Died Today


Today has been the day I have been waiting for. I can officially say that the thesis that low inventory is holding back home sales has finally gone to the grave.  I say this because, despite low inventory, the NAR reported seasonal adjusted annual rate of home sales to be 5,710,000, up from a February low of 5,470,000.


Total existing-home sales ascended 4.4% to a seasonally adjusted annual rate of 5.71 million in March from 5.47 million in February.


For many years we have been hearing that it was low inventory instead of demand that was holding back home sales.  I have continued to argued that mortgage demand was going to be light,  but as long as cash buyers stayed at historically high levels  and mortgage demand continued its slow and steady growth, we would see higher sale trend.

Last month existing home sales missed sales estimate and low inventory once again became the whipping boy for this fact. Low inventory is a favorite excuse  for low sales estimated misses among housing “experts” but they never blame low inventory for rising sales which has been the case since the bottom of 2014 when inventory was actually higher but demand was lower.  Strange world we live in these days. I on the other hand thought the last existing home sales report was excellent.


The report today shows that existing home sales hit a cycle high despite low inventory.  Somemay say this is today due rates falling, but this is not the case.   Housing demand has been slow and steady for years and won’t get strong until years 2020-2024 when demographics change. Unit sales from mortgage buyers are low which gives this cycle legs for both new and existing homes.

Two days ago the head economist of Redfin, Nela Richardson, said housing had record breaking demand.

Record breaking demand

If we dig a bit deeper into the facts we see that that Nela is ignoring two important points.

1. Purchase application data is still at 1998 levels even with population growing near 17% since 2000. This is not record breaking mortgage demand.

2. Last year purchase application data in the heat months was growing at 25% +  year over year. This year purchase applications have had a range of  – 1% – 8% growth year over year. While this metric is still growing,  remember that this comparison is from a cycle high, and is now only back 1998 levels. Again, not exactly “record breaking” by my estimate.

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You may ask if mortgage demand is back to 1998 levels, how is possible that we reached 5,000,000 in existing home sales?

Cash buyers have been trending at 20%-30% for many years and even in 2017  their numbers are growing as a total percentage of existing home sales. I was expecting to see the number of cash buyers fall into the teens (16%-19%) at this point in the cycle.

However, for the first 3 months of this year,  the average number of cash buyers as a percentage of the growth in home sales, is increasing year over year.  This month’s report showed the first decline in cash buyers YoY.  But cash buyers are still  trending over 20% for 2017.   Twenty percent + of 5,710,000 homes is a lot of homes sold for cash especially considering that distress sales are falling. I’m surprised how well cash buyers are holding up this year. I was looking for this demand metric to fall and slight growth on purchase applications. However, cash buyers are still holding up well. Historically they’re 10% of the market but not in this cycle. This is where you can make the thesis of record breaking demand because the data does show that with cash buyers.


Cash buyer

Demographics for housing from 2008-2019 supported renting more not buying but this is going to change in a few years. Be patient, demographics will change and buyers will come. Additionally compared to the last housing cycle, in this cycle we have a much more stable and qualified buyers, instead of over 8 million delinquent or foreclosed-on homeowners. This also added to renting demand in this cycle and the boomerang buyers haven’t come back as strong as some had hoped. Notice below that even with the record breaking cash buyers in this cycle, adjusting to population we haven’t hit the 21st century mark in sales, only in nominal terms.

From Doug Short


New home sales haven’t fared as well as sales of existing homes, especially when adjusted to population. New home sales are at the levels we would expect to see during a recession but this cycle has lasted 8 years, with over 154 million people working, unemployment claims at decade lows, job openings is at 5,700,000 and rates under 5% since early 2011. The monthly supply of new homes is higher in this cycle than last, as well.  We have legs for growth in new home sales and even more growth if median home sales price cools down which it has for the past 2 years. In fact median home sales price cooling off is the most bullish housing data line I can give to people right now

I explain that more here


Record Breaking Demand

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With mortgage demand at 1998 levels and a high number of cash buyers, sales are going to hold up. If cash buyers went back to their historical norm of 10% then existing home sales wouldn’t even print over 5,000,000. The reality is  that we have Record Breaking demand from cash buyers but slow growth in mortgage buyers.

From Doug Short


The housing market  is doing what it should be doing considering our demographics. Unit sales from mortgage buyers was never going to be strong with these demographics. We can expect new home sales to grow because they’re working from the lowest levels ever recorded in U.S. history.

Home prices remain a major concern and this will get worse when demand improves. It might take a recession in order to get inventory above 6 months on a consistent basis.  Or we need to wait for years 2020-2024 when demand is better and we have more growing families and there fore more buyers looking to list their smaller existing homes and move up.   The caveat to this is that when prices rise it becomes more difficult to sell and move up. This has been case since 1996.  After 1996 we saw home prices deviated from historical norms making it harder to move up and we only saw 6 months plus inventory after the housing bust were we had forced selling running into a softer demographic patch for housing demand. We aren’t going to have that weaker demographic profile in a few years.  For new home construction post 1996, the  builders went crazy building bigger and bigger homes which didn’t help affordability either. Remember how all those home built in the last cycle made housing affordably? It didn’t, adjusting to inflation we had the highest home price inflation ever. We need more smaller homes to fight the housing inflation issue because building bigger and bigger homes isn’t going to address the problem

New Home Size 1

Expect price gains in this cycle, because inventory will be held down due to affordability. Adjusting to inflation, real home prices are lower than they were in 2006 and interest rates are much lower too, by  2%- 2.5%.  In the next  housing cycle we will see improved demand due to better demographics but  a growing problem with housing affordability. If you are lucky enough to be in a college educated, dual income household, though, you should be fine. For the rest, may the odds be with you!

From Calculated Risk


Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing marketLogan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami