How can one determine at any given time what the status of the housing market is, and where does it currently stand? A variety of statistical data are available relating to new/ existing home sales. This paper will examine these data and apply the same methodologies to today’s market in order to answer these very questions. Furthermore, this paper will explore if current trends are a result of supply and demand or if there are additional factors in play. Among the information sources available for exploration are housing data research from https://www.redfin.com/blog/data-center (‘Data Center – Redfin Real-Time Housing Market Data,’ n.d.), household income data from Real Median Household Income in the United States (‘Real Median Household Income in the United States,’ 2018) as well as a look at various opinions expressed by analysts.
This paper is a non-exhaustive review of historical trends in housing with the intent of using these data to form a hypothesis as to the current status of the U.S. housing market. Property prices and market durations are positively related as evidenced by test equations that examine the quality of instrumental variables, severe overpricing, atypicality, structure quality, loss aversion, market tightness as well as measures unique to our data such as sellers’ income levels, reasons for sale, and urgency (Hayunga & Pace, 2018, p. 1). Tariffs on Canadian imports offer insights on what may happen in the United States economy as President Trump pursues new trade policies. (Eavis, 2018, p. 1) and regulatory factors are also suggested to influence home pricing (Tobias, 2018). A variety of opinions will be explored as well as a glimpse into areas of future research (Maalsen, 2018).
“The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good” (‘Law of Supply and Demand: Basic Economics,’ 2017). “Supply” means that “if all other factors remain equal, the higher the price of a good, the less people will demand that good” (‘Law of Supply and Demand: Basic Economics,’ 2017). These concepts are best understood when viewed graphically (Figure 1). The supply and demand graph depicts basic factors such as supply, demand and equilibrium price. Travel along either the supply or demand curves illustrates the direct relationship between price and quantity. Shifts in these entire curves represent outside influence. For example, increased interest rates, lower incomes, etc. will cause the demand curve to shift leftward. Factors such as increased labor prices, severe weather events and hurdles to building will result in the leftward shift of the supply curve. The confluence of these curves is referred to as the equilibrium price. Equilibrium is defined as “the state in which market supply and demand balance each other, and as a result, prices become stable” (‘Law of Supply and Demand: Basic Economics,’ 2017). When the actual price varies from equilibrium, a shortage or a surplus will exist. Ceteris paribus is invoked when analyzing housing data to identify influential variables and consumer behaviors
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One measurement of the housing market involves Time on Market. (TOM) A house that sells quickly may indicate high demand or a low asking price. Conversely, lengthy stays on the market could indicate precisely the opposite or be a reflection of a negative aspect of that individual home or region (Hayunga & Pace, 2018). A review of TOM data is interesting. Historically, regardless of outside influence, TOM tends to oscillate (Figure 2). These oscillations in TOM indicate a market seeking equilibrium. Referring to the supply and demand graph (Figure 1), a higher TOM indicates a consumer’s surplus, that is, the area of the curve between the equilibrium price and the demand curve. Lower TOM reflects a producer’s surplus and is defined by the area between the supply curve and equilibrium price.
Raw housing price data currently shows that some cities are experiencing up to a 168% rise in home prices (Table 1). Could this simply mean that the demand is so great that supply cannot keep up? Oxford Analytical Daily Brief Service thinks so. In their August 23, 2018 issue they write, “Undersupply has been concentrated in the cities with the strongest economies” (Housing squeeze may prove hard to solve, 2018). Others blame outside influences such as import tariffs (Eavis, 2018). Peter Eavis with the New York Times opines that President Trump’s recently enacted tariffs are a cause for increased home prices. In one case, the “cost of 1,000 board feet of western Canadian lumber is up nearly 80 percent over the past 12 months.” While this figure is noteworthy, the New York Times quotes Paul F. Jannke, a principal at Forest Economic Advisors as saying, “The prices have gone up by much more than the tariffs because of supply and demand factors.”
The housing market in 2008 was punctuated by lower income levels (Figure 3) followed by a sharp drop in housing starts (Figure 4). While the overall economy played a part, it was regulations that eased credit restrictions that led to record levels of mortgage defaults. Peter Tobias with American Banker thinks this is happening again and is influencing current trends. He writes that the Consumer Financial Protection Bureau is currently relaxing many the very same credit restrictions that exist in a manner similar to 2008 (Tobias, 2018). An examination of data referenced thus far indicate that recent outside influences, specifically TOM, tariffs, and regulations cannot definitively identify a trend in the housing market.
Data collection and dissemination has never been better than it is today. What picture does the data presented paint? Are outside influences such as regulation and tariffs driving the trend of rising home prices, or are we headed for a crash in the housing market? Unlike 2008, the overall economy remains strong, and more qualified people are buying homes. Builders, mindful of a surplus, have been cautious and as a result, supply has not kept up with demand, especially in cities that have shown rapid growth (Metcalf, 2018). Despite this, CBS warns that a bust may be approaching, citing increasing interest rates, high student loan debt, and faltering new home sales (Guerin, 2018). Kriston Capps with citylab.com is calling todays trends a boom but cautions that the “the party will have to come to an end,” since wages cannot keep pace with the rising cost of home buying (Capps, 2018). Analysis is just as important as the data itself. The United States has made mistakes in the past, which has clearly not been lost upon buyers and sellers. More and more people are becoming informed before buying and on the supply side, builders and lenders do not want to be left out on the street.
In as much as all this data and analysis is available to those who seek it, would it not be a great thing automate the research in a way that offers a simple yes or no answer to the question of whether to build or to buy? This concept should not come as a surprise in a world where we have smart homes that are capable of learning our schedules and using that information to set thermostats, turn on lights, or even start the pot of morning coffee. Creating “smart cities” is a logical extension to this same theme. In fact, in much the same way as one’s home does, economic and social data can be tracked and analyzed in order to be able to keep the housing market stable and near equilibrium (Maalsen, 2018).
The data shows that through lessons of history and increases in technology, barring any unforeseen worldwide catastrophe such as world war, the housing market is not headed for a crash or a boom. Supply and demand are absolutely at work in this market, and the struggle to find equilibrium is well under way. Much as the same way as the stock market will make periodic corrections after rapid rises, the housing market is bound to do the same. When prices rise beyond the point where buyers are willing to pay, there inevitably will be a slowdown in housing, which is what we are currently seeing right now. It is a sign that the housing market is getting close to equilibrium. Individual outside factors can have some effect but are unlikely to drive the housing market. Lessons have been learned, as evidenced by more responsible building and lending.
