A New Housing Supply and Demand Paradigm

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Although the traditional housing market measures still apply, here is an additional supply/demand measure that also needs consideration.

December 01, 2006

Housing market measures have traditionally fallen into three segments:

  • Housing demand: A calculation of the number of housing units needed based on job and population growth, as well as the demand for second homes and the need to replace aging housing stock
  • Housing supply: The number of homes being built
  • Home price: The equalizer: when demand exceeds supply, prices go up, and vice versa. Mortgage rate changes and investor activity also affect prices.

A New Paradigm

Although these measures still apply, we have introduced to our clients an additional demand/supply measure that also needs to balance. It is a measure of demand and supply from the consumer's perspective. Consider the following:

  • Housing demand: The number of people who: a) want to buy a home; b) can afford to buy a home; and c) will buy in your location. This calculation includes investors (who are disappearing or gone).
     
  • Housing supply: The number of new and resale homes available for sale in a buyer's price range and desired location.

For each of your communities, you should define the submarket where most buyers are considering purchasing and then determine how many transactions occur each month in your price range. That is the demand. Then, determine the number of new and resale homes available for sale. That is the competitive supply. Now, you are viewing the market as your buyers see the market.

Then address the next question: what is your monthly capture rate of these buyers? If it's 10 percent of the demand and you are only 5 percent of the supply, you are doing something right. However, if you need to be 15 percent of the demand to meet your business plan, you need to ask yourself why the other 90 percent of buyers are purchasing elsewhere and fix the problem if you can.

Phoenix Example

 

With 5 percent annual growth, the Phoenix job market continues to boom, adding 89,000 jobs in the last year. Based on Phoenix's historical ratio of 1.3 jobs per household, that implies a need for approximately 70,000 housing units. With 59,000 permits issued in the last year, it would appear that Phoenix's housing market should be strong. Phoenix builders, however, know the opposite is true.

Phoenix has two problems: the location of the supply, which is chiefly in very outlying areas, and the price of the supply, which rose nearly $90,000 over the last two years. With more new home communities opening up and investors trying to sell their homes, the supply has ballooned as well. Builders in the outlying areas of Phoenix are rapidly adjusting price, offering incentives, adjusting product, increasing advertising and doing whatever they can to sell homes. Over time, these outlying areas will become vibrant suburbs, but most builders can't wait for this to develop.

Top 20 Metro Areas
Employment Affordability Permits
Short-Term Outlook/Grade Buyer/Seller Imbalance 1-Year Payroll Employment Growth 1-Year Growth Rate Unemployment Rate Median Resale Home Price Resale Housing Costs as % of Income Housing Cycle Barometer 12-Month Single-Family Permits 1-Year Single-Family Growth 12-Month Total Permits Total Permits as % of Peak Permits
1 Atlanta B 54,100 2.3% 4.5% $174,060 28% 5.4 60,503 4% 74,559 100.0%
2 Houston A 65,400 2.8% 5.1% $151,600 26% 5.2 55,172 13% 68,079 90.6%
3 Phoenix B+ ã 88,500 5.0% 3.1% $264,000 41% 6.6 50,078 -17% 59,259 85.6%
4 Riverside-SB D ã 36,200 3.0% 4.9% $387,750 67% 9.5 41,278 -5% 47,357 82.1%
5 Dallas A ã 52,400 2.7% 5.0% $160,400 25% 4.2 31,546 2% 39,619 53.6%
6 Chicago B ã 44,900 1.2% 4.4% $256,000 42% 6.9 26,966 -5% 45,581 100.0%
7 Las Vegas B ã 51,200 5.9% 4.1% $306,000 49% 7.2 26,840 -7% 40,302 100.0%
8 Orlando B+ ã 37,600 3.6% 3.2% $250,000 44% 7.5 25,563 -3% 34,521 95.5%
9 Tampa B+ 27,600 2.1% 3.4% $200,200 39% 7.0 23,410 -10% 27,621 72.8%
10 Charlotte B+ 10,800 1.4% 4.8% $165,000 27% 3.0 20,779 17% 24,246 100.0%
11 Austin B 19,400 2.8% 4.2% $180,000 31% 5.2 19,353 23% 27,882 100.0%
12 Fort Worth B ã 16,600 2.0% 4.9% $118,400 20% 5.1 18,697 14% 21,942 57.0%
13 Fort Myers C+ ã 10,200 4.6% 2.8% $250,000 44% 6.7 18,484 -16% 25,011 85.3%
14 Washington, D.C. C+ ã 58,600 2.5% 3.3% $420,615 51% 9.2 18,429 -24% 26,527 69.8%
15 Denver A ã 22,600 1.9% 4.8% $249,900 38% 5.8 15,906 -11% 20,138 70.5%
16 Jacksonville C+ ã 17,900 2.9% 3.6% $189,900 32% 6.2 15,067 -14% 20,953 83.5%
17 San Antonio B 15,400 2.0% 4.8% $143,400 28% 5.2 14,916 7% 20,969 94.0%
18 Minneapolis B+ ã 46,800 2.7% 3.3% $250,000 33% 6.1 14,433 -19% 19,118 67.9%
19 Nashville A 18,100 2.5% 4.7% $160,000 29% 5.5 14,202 3% 15,739 85.7%
20 Raleigh-Cary A+ 19,700 4.2% 3.5% $182,000 28% 2.9 13,779 3% 16,977 100.0%
* Annual Mortgage Costs + 17 of the down payment divided by income
** Proprietary affordability scale, with 0 meaning most affordable time since 1983, 5 meaning median affordability, and 10 meaning least affordable time.
** Peak activity since 1985.
Sources: Bureau of Labor Statistics; Census Bureau through the month ending August 2006; John Burns Real Estate Consulting



Author Information
John Burns helps many of the largest companies in the industry with strategy and monitoring market conditions. He can be reached at jburns@realestateconsulting.com.


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