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DECEMBER 2020 HOUSING MARKET COOLS DOWN, BUT IS NOT A CAUSE FOR ALARM

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Wednesday December 23, 2020
DECEMBER 2020 HOUSING MARKET COOLS DOWN, BUT IS NOT A CAUSE FOR ALARM

The red-hot housing market, while still extremely hot, appears to be cooling down. Specifically, the pace of new-home sales is decreasing nationwide; this is likely in direct response to the fact that housing prices have been skyrocketing. Homeowners should not panic or worry about a bubble – this is a normal occurrence.

As we have mentioned multiple times, price is largely affected by supply and demand. When demand outpaces supply on any item, the price of that item is increased; each increase in price reduces demand (demand decreases as people are priced out). In a perfect world, the price magically lands at a point where it causes demand and supply to match, but often, the price point overshoots the target mark, and supply becomes greater than demand. When supply is higher than demand, there is a surplus until the item’s price is reduced. That is precisely what has happened here – home prices have caused demand to fall below the supply and will have to decrease in price to match the market. All this means is home prices have capped for now.

New-home sales have decreased across the country, particularly in the Midwest. Nationally, we are seeing a 14% increase in supply (a 4.1-month supply, which is remarkably close to the 6-month supply that is believed to indicate a balanced market). Moreover, the median price of homes for sales decreased from October 2020 but remains 5% higher than November 2019. All of this supports what we noted above, prices appear to have overshot the equilibrium point between October and November 2020, which caused supply to outpace demand (thus the increase in inventory). When supply is higher than demand, prices drop to find the equilibrium (thus the decrease in prices from October 2020). None of this is a sign that the housing market is about to implode, it is simply part of the life cycle of any market.

At the Chernov Team we understand that knowledge is power, and knowledge of when the market is cooling naturally (as opposed to being the result of bad fiscal policy, and therefore a clear warning sign that a crash is coming) is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.

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