Housing Supply Is Rising, And Demand Is Dropping. This Isn’t Likely To End Well.

Housing Supply Is Rising, And Demand Is Dropping. This Isn’t Likely To End Well.
Stéphane Renevier, CFA

over 1 year ago1 min

One of the things that’s been making it tough to buy a home these past few years – even before inflation reached sky-high levels and mortgage rates started to surge – was that there were just very few homes available. And because of the fundamental tenets of supply and demand, that meant higher prices on the homes that were available. But now everything in the housing market may be about to change: supply is beginning to rise, just as higher mortgage rates and inflation are pushing potential buyers to the sidelines.

The monthly supply of new houses is the ratio of new houses for sale to new houses sold. It breaks down how many months the current new for-sale homes would last if no new houses were built and if sales continued at the same rate. A high and rising number means that inventories are building, and are outpacing the rate of sales. Put simply, it means supply is rising much faster than demand.

This will affect far more than just the price of homes. As we explained here, the housing market is a key pillar of the economy – linked to other important sectors like construction and financial services. What’s more, it represents a huge portion of consumers’ wealth. So when the housing market slows dramatically, the broader economy tends to take a serious hit. Just look at this chart: sharp rises in the monthly supply of new houses (blue line) have often preceded recessions (shaded gray bars). Be prepared for a few challenging months ahead.

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