Because they can have such a big impact on monthly mortgage payments, mortgage rates alone can significantly alter the demand for homes. In 2022, the Federal Reserve’s efforts to rein in inflation by raising interest rates caused mortgage rates to spike.

Interest rates for fixed-rate mortgages typically move up or down along with yields on 10-year Treasuries, which, in turn, tend to rise if bond traders think the Fed is going to raise interest rates sharply. The Fed’s rate hikes hurt demand and slowed home sales—although prices continued to rise because of the restricted supply.2

Consumer Financial Health

The broader economy and the state of people’s pocketbooks also have major bearings on demand for home buying. When people are flush with cash and feel secure in their jobs and good about the direction of the economy, they’re more likely to invest in buying a house.

One way to measure the overall mood—and get some idea of what’s influencing supply and demand—is the Home Purchase Sentiment Index by mortgage giant Fannie Mae, which polls consumers every month about their income, feelings about job security, and whether it’s a good time to buy or sell a home.

In 2021, optimism about both buying and selling homes was boosted by the healthy shape of household finances in general, with a recovering job market and stimulus payments from the government bolstering homebuyers’ bottom lines. But as time went on, rising prices and mortgage rates soured the homebuying outlook, according to the survey.

Demographic Changes

The number of people in the market for homes can also impact demand, with an influx of new buyers pumping up demand. At the height of the 2021 housing boom, a wave of millennials entered prime homebuying age, meaning there were even more buyers chasing those scarce homes, especially lower-priced “entry-level” ones suitable for first-time buyers.

“There is a wave of young adults who are aging into peak household formation,” said Jessica Lautz, vice president of demographics and behavioral insights at the NAR. “And those young adults want to find a place to live and to earn equity and the financial gains that homeownership brings.”

Institutional investors also contributed to the housing boom, making up a small but growing share of the market. In 2021, 13.2% of homes sold were bought by companies, corporations, and limited liability companies (LLCs), up from 11.8% in 2020, according to a study by the NAR.

Pandemic Effects on Supply and Demand

When the COVID-19 pandemic hit in 2020, many businesses switched to remote operations, and a horde of newly minted telecommuters went in search of bigger houses better suited to their new work-from-home lifestyles. At the same time, mortgage rates plunged to record lows, which made it much easier for families to afford houses. In short, the demand side of the supply-demand seesaw went through the roof.

Normally, basic economics would dictate that suppliers of the thing in high demand would respond by increasing production, eventually stabilizing prices. But building a new house is a slow process; in 2021, it took an average of 7.2 months from start to finish, not including any time spent making plans and getting building permits, according to government data.

On top of that, homebuilders had a hard time finding enough workers and building materials to complete projects because of labor-market and supply-chain disruptions caused by the pandemic, so the roaring demand wasn’t matched by an equal building boom.

Longer-Term Supply Issues

It wasn’t just the pandemic, though. Longer-term factors have also contributed to the supply-demand imbalance. The U.S. has underbuilt homes for decades, resulting in a chronic shortage.

Among the reasons for the housing supply gap is difficulty finding land to build houses on in hot housing markets, and a growing lack of skilled workers and building materials, according to Lautz. 

With the supply side unable to keep up, there were far more buyers than sellers, and prices spiked. The median home in the second quarter of 2022 sold for $440,300, an increase of more than $100,000 from the typical $329,000 price tag in early 2020. An uptick in mortgage rates in the spring of 2022 slowed the pace of price increases, but not by much.

Real Estate Supply and Demand Varies by Location

Those are national trends, though, and things may be very different depending on where you are buying or selling a home. Pay attention to the factors that influence your local market. Watch local businesses and make note of upsizing and downsizing trends if you do business in a market that has many workers relocating to or from there.

As at the national level, divorce rates, death rates, and demographics can factor in. Other significant factors include the impacts of climate change (increases in flooding, fire risk, and excessive heat may send homeowners fleeing and prices plummeting), an aging population, and investment trends if you do business in a resort area that includes vacation homes. Trends that impact discretionary income have more of an influence on this type of market than others. 

There are regional trends, too. For instance, prices for homes in the West have stayed relatively stable compared to those in the South from 2019 through 2021, according to NAR data.1

To get a good idea of supply and demand in your area, visit the website of your local association of Realtors—most state organizations provide statistics on months’ supply in the local market.

Land Parcels Are Finite and Immovable

Underlying all these influences are the basic fundamentals of supply and demand. 

You cannot fill a real estate supply shortage by manufacturing more units of land. It's a finite supply, not a manufactured commodity. You might be able to create more units within a given space, such as condos or townhouses, but the land itself is unique and cannot be duplicated to accommodate a short supply.

Likewise, when a shortage of land for homes exists in a given area, you can't simply move in more land to alleviate the shortage. Real estate is where it sits. It will always be a local commodity influenced by local conditions.

Source: Thebalancemoney.com