Market conditions are always determined by the balance between the intensity of buyer demand and the supply of homes for sale. Since 2000, and especially since the 2008 financial and housing markets crash and foreclosure crisis, factors such as population growth, interest rate changes, the aging of homeowners and homebuyers, investor home buying, tax law, inadequate new home construction, declining affordability, an increase in the speed at which listings sell, and the pandemic have combined to cause an unprecedented imbalance between supply and demand. Buyer competition for an inadequate supply of listings has become the dominant reality of the real estate market.
The large increase in interest rates in 2022 led to the “mortgage lock-in” effect, and homeowners began listing their properties in greatly reduced numbers, being reluctant to trade a very low interest rate on the home owned for a much higher rate on the one purchased. Also, as rents increased, and the tax benefits of owning rental real estate multiplied (due to 2017 tax law changes) – plus having very low interest-rate mortgages – more would-be sellers rented out their homes instead of selling.
Even before 2022’s increase in interest rates caused the historic plunge in new listings, listing activity had already been declining for years, even as demand increased. Over 54% of homeowners are now aged 55 years and above, and as people age, they typically move much less often and sell their homes much less frequently. And as homes have become more expensive, far outpacing inflation, the median age of homebuyers has jumped to 49, over the past 20 years. The percentage of 1st time buyers, who trend younger and move more often with life changes, has dropped – and the median age of 1st time buyers has also jumped to 36. Due to these factors, the median duration of homeownership has more than doubled since 2005, and this has severely impacted the supply of listings available to buy at any given time.
Another factor in declining turnover in more expensive markets, and with long-term owners in particular, is capital gains taxes on the huge appreciation in home values that has occurred since tax law changed in 1997 from being able to roll-over your principal residence into another without taxes, to the $250,000/$500,000 capital-gains exclusion.
Demand fluctuates due to a number of factors but as population increases, so does the number of people who wish to own homes. The U.S. population increased by 53.5 million since 2000. Over the same period, the average monthly number of active, existing-home listings declined by 45%. When an increased number of buyers compete for a reduced supply of listings, overbidding jumps and homes sell faster at higher prices. Higher prices lead to older, more affluent buyers who move less often continuing the cycle.
Since the foreclosure crisis (when hundreds of thousands of homes sold to institutional investors at fire-sale prices), as well as the advent of Airbnb, an improvement of rental-property tax law, and the effects of the pandemic, investors, large and small, and second-home buyers have made up a much greater proportion of sales, recently averaging 14% to 17% of all home sales (including condos and co-ops), and up to 27% of single-family-home sales.
New home construction has trailed far below population growth, with the gap between household formations and new homes built numbering in the multi-millions over the last 10 years – and here too, investors are buying a significant percentage of units
The balance between supply and demand is continually shifting – sometimes subtly and sometimes very dramatically – due to a wide range of changing economic and demographic conditions, but, generally speaking, since the market recovery in 2012-2013, demand has increasingly and severely outpaced supply. Even after interest rates rose in 2022, significantly depressing buyer demand, by 2023, the supply of listings unexpectedly declined as much or more, renewing upward pressure on home prices and all these factors do not look to be changing anytime soon.