Supply and Demand, a market concept that many of us studied in our first economics classes back in college. But never has this foundational economic fundamental meant more than in looking at how this impacts the year ahead in 2022. Take these few examples:
- While the economy was slowing beginning in 2018 followed by a Covid related recession in 2020, America’s fuel consumption slowed dramatically creating surpluses and driving the costs of fuel at the pump and to heat one’s home down dramatically. But in the fury of a rampant and quick economic recovery beginning in 2021, as Americans left their homes again to travel for vacations, shopping excursions, and for work, the supply of oil was not enough to meet the vibrant demand of a quickly expanding economy. Thus, prices rose quickly.
- In March 2020, the nation found itself in a national lockdown. People stopped working and all but necessary workers were sent home while the nation searched for a way to respond to the pandemic. But just as quickly as the nation stopped working, the recovery has been even stronger leaving employers short staffed to support the rapid recovery. This shortfall in the supply of workers combined with significant increases in consumer spending has affected everything from restaurants, to airlines, manufacturing, and more. The demand for goods and services globally has been met with this shortage in the supply side to support them.
- In housing, the nation was met in 2020 by the largest demand cycle of millennials hitting their early 30’s, the peak years for first time homebuyers. This millennial generation, the largest generation in the nation’s history, coincidentally hit their peak time to buy at a time when the supply of homes available for sales remained relatively flat. This surge in demand against a limited supply only intensified as the pool of buyers only kept growing. Prices surged and multiple offers helped inflate home prices to historic highs.
Mark Zandi, the Chief Economist at Moody’s Analytics recently testified to congress about inflation and the variety of supply and demand imbalances that have affected everything from car prices to food at the grocery store. In fact, as he pointed out in one example, the nation slowed it’s ordering out from restaurants as Americans were now heading outside to go shopping and this caught the food support industries with shortfalls in goods for grocery stores which drove prices up. But as Zandi also pointed out in his testimony, this inflation will all be short lived. Just as quickly as inflation has risen to the peak levels we are seeing now, most of these imbalances will subside over the next year.
For example, home price appreciation will slow as higher numbers of resale homes hit the market, especially in the spring. Over the past 2 years we did not see a normal spring market because Americans were home and masked in 2020 and 2021 during those peak spring months. Many potential sellers did not feel safe having strangers walk through their homes, nor did they feel comfortable going out to look at homes. Thus the normalized spring market trend was muted leaving the more limited supply to an ever increasing number of hungry millennial’s wanting to buy.
By all expectations, home price appreciation rates are expected to return to mid-single digit percentages, a very good thing for stabilizing the market. And while virtually all economists expect home price appreciation to continue amidst this record level of demand, it will slow as supplies of homes available improves.
Today’s housing market is very different from any other we have seen in history. The sheer number of millennials heading into their early 30’s is massive, larger than any generation in history. And there is no sign of this slowing. As Zillow points out, the demand will only grow over the next several years unabated by other market factors.
So as we look ahead at all of the market forces facing this nation, from home prices and interest rates, to gas prices and more, the theme of supply and demand is the explanation to most of these issues. But for potential home buyers the data is clear. Home prices will continue to rise in 2022, and the demand for homes will continue unabated by rates or other factors. So while the supply concerns will ease, the opportunity for homebuyers and sellers will be extremely positive going forward.
Supply and demand, economic variables that can help us all understand what is driving much of the economy today. And for housing and homeownership this is a very good thing.
David H Stevens, CMB is the CEO of Mountain Lake Consulting, Inc and an advisor to George Mason Mortgage. David was the CEO of the Mortgage Bankers Association in Washington DC and served as the US Assistant Secretary of Housing and Federal Housing Commissioner for President Obama.