Jill and I were showing houses the other day when our buyer client asked us, “Why is the market still so hot?”
These buyers had accepted a job promotion and were relocating to Bethesda. They had already sold their New Jersey home for top dollar and were living in temporary housing. Now they needed to buy fast and were on the other end of the transaction.
Like most buyers in today’s market, they were frustrated with the lack of inventory. They asked, “where are the listings?”
I’ve looked at the data. On the surface, it seems like there are not enough new listings. However, when you dig deeper, the number of homes selling is not that different from prior years.
What we really have is a demand problem – too many new buyers for the same amount of sellers. At least these clients laughed when I told them they were part of the problem.
They pressed further and wanted to know, “why is buyer demand still so strong?”
How we got to this hot seller’s market has already been well documented. But why is it lasting so long?
It’s a classic supply and demand problem. There is little raw land left for new home development (supply), yet our population keeps growing (demand). According to the 2020 Census our region is only adding one new housing unit for every 2.8 new residents.
I began thinking about how our buyer clients impact the supply of houses on the market.
Many of our new clients are relocating from out of state to the DC area. I’ve personally seen a big uptick in those affiliated in the pharmaceutical and vaccine industry. These clients are moving into the area, creating more demand and not adding back to the supply.
Millennials have reached their first time home buying age. The number of them entering the market continues to increase and we are still years away before this generation peaks. Like the generations before them, their primary reason for buying is their “desire to own their home.” Many of them start the conversation with, “My lease ends in 4 months and we are not going to renew it. Can you help us buy?” Like relocation buyers, first time buyers create more demand without adding back to the supply.
There are two categories of buyers that also become sellers. Those are homeowners looking to change school districts or make a lifestyle change. At first glance, these types of buyers seem to be net neutral to the supply and demand curve. However, they tend to buy first, move, then sell second. This means they increase demand prior to adding back to supply. Even though these buyers are net neutral, the way they “time” their move still contributes to the demand problem.
When the number of buyers exceeds the number of sellers, buyers end up competing in multiple offers. As buyers watch prices and interest rates increase, they become very competitive fast. To win in a competitive market, they use an “escalation clause”. If they win, great. If they lost, they just pushed up the price that the winner paid. This in turn increases the price of the next listing that they might be interested in pursuing.
The answer to my client’s question, “where is all the inventory?” There are just as many new listings this year as in prior years. The problem is the demand. In a market this hot, very few listings go unsold. Therefore, from one month to the next, there is hardly any build up of old inventory to ease the growing demand. As long as the build up of inventory remains this low, I would expect this cycle to continue.
