Is NAR Ignoring Real Estate Supply And Demand

Real estate supply and demand seems to be ignored when many "real estate professionals" provide a forecast for the housing market. While I have not studied the US housing market data as much as I have the Tallahassee real estate market, it seems to me that the single most important fact about our current housing crisis is being ignored.

The National Association of REALTORS® just released it's 2010 National Association of Realtors® Profile of Home Buyers and Sellers and it is loaded with a lot of good information. But the interpretation of the survey by NAR appears to be missing something that I would love to see addressed, and that is how all of the findings work in conjunction to the current state of real estate supply and demand.

Real Estate Supply And Demand Cannot Be Ignored

When NAR addressed the results of this year's survey, they were quick to point out that nearly 1/2 of homebuyers over the past year were first time home buyers. The summary stated:

First-time homebuyers accounted for half of all home sales from July 2009 through June 2010.... That's the highest share of first-time-buyer purchases in the history of the survey, which dates back to 1981.

OK, so the Homebuyer Tax Credit pulled future homebuyers into the market last year, but we are now seeing the housing market drop since the tax credit ended. This should make everybody wonder about the overall strength of the market. Pending home sales nationally dropped 25% (from Sep 2009 to Sep 2010) so we know that the market is still heading downward.

The NAR survey is a great study of recent actions by homebuyers and homesellers, and NAR does not do the study to determine the strength of the housing market, but rather to determine trends occurring among both buyers and sellers of real estate in the US. These consumer trends are critical for practitioners to understand, but we study real estate supply and demand to forecast future movements in the housing market.

But NAR does use the results to put a slant on our perception of the strength of the housing market. It is a worthwhile read to examine the survey, just ensure that you stay weary of interpretations that lead to the belief that the market is strengthening.

The Totality Of Real Estate Supply And Demand

So here's the million dollar question:

"If first time homebuyers represented 50% of the buyers in the housing market last year, where did they come from? Were they living with their parents, living in the streets, or were they tenants in the same market area?"

If they were tenants, then we will see no change in the supply and demand for housing in that local market area. If they lived with their parents or on the streets, then they do represent growth in demand. While it is great to see that the tax stimulus pulled many new first time homebuyers into the market, we must acknowledge that for two very important reasons, it will have very little impact on improving the future of Tallahassee real estate supply and demand.

Some of the first time homebuyers would have bought in the future, but moved-up their plans to take advantage of the stimulus. The future markets should expect to see a reduction in first time homebuyers because of this.

The demand side of real estate includes both tenants and owner-occupants, so first time homebuyers who were tenants have zero impact on reducing the glut of homes in a market area. The totality of the supply and demand must consider rental units as well as units for sale.

Our current market is seeing a return to pre-Tax Credit times, with pending home sales reports showing a year-over-year decline of 25% already. I suspect this is confirmation that we consumed most of the first time homebuyers out the market last year, and must now move forward with just repeat homebuyers.

Finally, we must consider that over-supply has lead to falling prices, and this has lead to falling equity. The report explained

The median downpayment of all home buyers was 8 percent, ranging from 4 percent for first-time buyers to 14 percent for repeat buyers.

So from previous discussion we know that our market must consist of repeat buyers, but where will they get a 14% downpayment? Historically, this would come from the equity in their existing home ... but that is gone now for anybody who has purchased or refinanced in the past ten years. This is why the market is stalling and this is the real estate supply and demand bottleneck that must be resolved.

Advice For Home Sellers

As we continue to state, values are falling and the best price a home seller is likely to see will occur now. As we progress down the path of falling prices, future offers will certainly be lower. The best advice for homeowners is to plan on staying in your home 7 to 10 years until population growth pushes demand past current supply imbalances, or sell immediately to get the most for your home.