We have seen the disappearance of negative equity in all but a few remaining MSAs by the artificial increase in home prices caused by the scarcity of supply. Ask any Realtor who will tell you their buying clients dash to each new listing within hours of its MLS posting since an early offer can win the day. Waiting until Saturday to tour eight houses is a bygone day. Instead bidding wars break out for houses we would not have considered so competitive simply because nothing else like it is available to purchase. The tightest segment of the market is for first-time home buyers where the demand is strongest.
Capital Economics correlates the 5-month supply of houses on the market (in some cities as low as 3-months) to YOY increase in home prices of 10% not the roughly 5% we are witnessing. So it could be we are seeing a delay to the prices reaching double digit gains, a catalyst for buyers to step up. One factor cited is the relative absence of new home builders from the entry level home construction market and the homes they do build are on much more costly lots due to higher development and compliance costs. Without new inventory to capture a part of the demand, the resale market alone is the supply constrained by sellers are reluctant to risk failing to replace their current house. A cycle of scarcity distorts the market from the equilibrium of supply and demand that rationalizes prices to their norm.