Why Are There So Many Homes For Sale?

Yesterday a friend of mine asked me, "Why are there so many homes for sale?". Now that's a very simple question, but it made me realize that not all simple questions have simple answers. And, asking it some two years after the peak of the housing boom, tells me that perhaps more people out there have similar questions. So, here it is in a nut shell.

The housing boom started in 1995. Homes appreciated significantly for a period of ten years until 2005, when the market peaked and home sales and prices started to decline. Real estate is a market just like any other market, based on supply and demand. The primary reason that homes appreciated so much from 1995-2005 was easy money, meaning interest rates were low and mortgages were easy to get. Normally a boom is associated with some economic growth to support it—-higher wages, better jobs, etc. But this boom was not backed by any economic growth; in fact, it was quite the opposite. It was caused by the Federal Reserve artificially lowering interest rates to keep the economy from falling into decline after the "dot com boom". With interest rates so low and mortgages easy to acquire, people thought they could afford bigger and better houses. This caused the price of homes to sky rocket, as banks gave out cheap mortgages with flexible financing deals, aka the ARM or adjustable rate mortgage. The euphoria lead to speculation, as buyers and sellers thought real estate was the investment panacea.

But what happens when the inflated value exceeds the actual value of any product, whether it’s homes, internet companies, or pork-bellies? People loose confidence in the market and want to sell for fear of loosing their investment. Soon, more and more people want to sell, causing a flood of homes on the market, which in turn causes home prices to decline, as they compete for fewer and fewer buyers. Thus, we have too many homes on the market and not enough buyers. This has caused the median home price to fall 1.3% for the first time in 50 years.

Unlike stocks and bonds however, homes are so much more complex—-we create emotional ties, build memories, and raise families in our homes. As home owners, we don't always pay attention to the laws of supply and demand. But laws they are and obey we must.