Low Housing Supply Thesis Died Today As Sales Hit Cycle Highs


Whenever  the existing home sales report misses expectations, we hear the moans from various media outlets, from social media, print and TV, that low supply is at fault. What you never hear is how low supply may be the result of more sales, and that inventory builds (i.e. is higher) when sales are weak.

Could it be that demographics, household formation, selling equity and affordability have a greater effect on existing home sales than monthly inventory?  Not only yes, but **** yes!

In my 2017 Housing Prediction article published in December 2016, I wrote this regarding existing home sales:

“… I  expect 2017 to look much like 2016 in terms of existing home sales. We will eventually see a push in demand driven by changes in demographics but that is still a few years away.  For 2017, I predict existing home sales to come in around 5.15 to 5.45 million. Even if 2017 finishes with negative growth, this will not be cause to worry. Our path is slow until demographics get better.” 


Growth in existing home sales was soft this year because low household formation,  lack of selling equity and our country’s demographics (too young and too old for home ownership)  suppressed existing home sales. Sales were boosted by higher than normal  demand from cash buyers, however. Throughout this year, I have consistently relayed data that supports the thesis that low monthly supply is not to blame for low existing home sales.  The data in the report today  shows that for the 3rd time in the last 12 months,cycle high demand coincides with lower monthly supply.

From Doug Short:

Notice the 3 data points for the highest existing home sales in the cycle, correlate with low monthly supply—all  three of which occurred during a non-seasonal time for the housing market.  Be cautious of any big move in the numbers, up or down, from one month to the next for any metric in housing. Having said that,  I am sure if sales fall next month, they will blame low inventory again.


Unsold inventory is at a 3.4-month supply at the current sales pace, which is down from 4.0 months a year ago.


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1-family months supply (aka home inventories) near multi-decade lows

Monthly supply

As we can see above, the low monthly supply of homes had no impact on housing demand from 1999-2005 when demand was higher and mortgage rates were too. The speculation demand we saw in the housing bubble occurred during the years 2003-2006. The only time we had more than 6 months plus supply was during the housing bust years of 2006-2011

From Doug Short:

I like to use 1996 as a starting point of supply because that is when home prices deviated from historical norms making 6 month supply an abnormal housing economic event.


Note that last month’s data was revised higher setting the pace for this recent  strong print for sales.


Total existing-home sales jumped 5.6% to a seasonally adjusted annual rate of 5.81 million in November from an upwardly revised 5.50 million in October.

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One prediction that I got wrong for existing home sales this year is that I truly believed that, like in 2016,  the number of mortgage buyers would grow and the number of cash buyers would fall as a percentage of total sales.  This did not happen, The number of cash buyers stayed flat and even grew year over year in some reports. I was looking for a 16%-19% cash buyer make up of sales and we only had one report that fell into that range.

First-time buyers were 29% of sales in November; Investors purchased 14% of homes in November; All-cash sales were 22% of transactions in November; Distressed sales were 4% of sales for the fourth straight month in November.

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In 2016 we had 25% plus mortgage purchase application growth in the heat months, which are crucial indicators for yearly demand. This year we had a range of negative 1% to 10% growth. Therefore in 2017 mortgage demand grew but not as much as it did in  2016,  and never surpassed 1998 levels.

From Calculated Risk:

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For more on the report from the NAR, follow the link below:


The housing data for 2017 looks fine.  A lot of people in the industry tried to put a bearish spin on things this year because housing starts are ending the year with barely over 1.2 million in total starts,  new home sales will not have strong double-digit growth and existing home sales were essentially flat.  However, considering our demographics and the lack of selling equity for the move up buyers,  this cycle looks just right. In a few years household formation will increase, (people will get married and start having kids)  and we will have a lot more college educated or skilled, dual income households, which will be better economic environment to drive demand.  The years 2008 through 2019 have demographics that are weak for home buying — and it is demographics that explain the low-level of mortgage demand and new home sales.

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