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Fed: Rising Prices Are More Demand than Supply

JULY 11, 2022



Why are housing prices rising quickly? A Federal Reserve study found supply-side challenges less influential than ongoing and strong buyer demand.


NEW YORK – A new U.S. Federal Reserve working paper translated individual property listings from CoreLogic covering 2002 to 2021 into a model “house search” measuring the influx of new listed homes and that of prospective buyers.


The goal: To see how much buyer demand is fueling a surge in prices in the short term.


“Fluctuations in housing demand explain much more of the variation in home sales and price growth than do fluctuations in housing supply,” writes Fed board economists Elliot Anenberg and Daniel Ringo.


“Fluctuations in demand explain essentially all of the variation in home sales – and 80% of the variation in prices – between 2002-2021.”


Although listings tumbled at the start of the COVID-19 pandemic when potential buyers and sellers were fraught with uncertainty, the authors contend that within months, strong demand surpassed tight inventory. And demand roared back so strong that it could not have been countered by new housing supply.


“We find that a 30% increase in the monthly number of homes coming onto the market would have been necessary to keep up with the pandemic-era surge in demand,” says Anenberg and Ringo. “Since new construction typically accounts for about 15% of supply, our estimates imply that new construction would have had to increase by roughly 300% to absorb the pandemic-era surge in demand.”


The duo call that “a very large, unrealistic impulse to housing supply in the short-run, suggesting that policies aimed at reducing bottlenecks to new construction would have done little to cool the housing market during COVID-19.”


The data also gives credence to the Fed’s decision to target home prices by hiking interest rates. The authors calculated that every 1-percentage-point gain in the mortgage rate cuts housing demand by 10.4%.


Source: Bloomberg (07/07/22) Alloway, Tracy


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