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Housing Desire is Not Housing Demand

Posted: 26-12-2008 | Views: 221

The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people's inability to distinguish between desire and demand. Most people want a house. About 65% of Americans own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market that is unable to obtain home ownership due to the cost of housing and a lack of available credit.

True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand. When realtors make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.

Residential real estate markets are completely controlled by loan terms and the availability of credit. When credit terms are restrictive, when 30-year fixed-rate conventionally-amortized mortgages are the only available financing product, prices reflect the amounts of money people's incomes can finance under those terms (as they were before the bubble). When credit terms are loose, when stated-income, Option ARMs, low interest rates, high DTIs and other terms and conditions allow people the ability to borrow two or three times the amounts available under restrictive terms, prices in the residential real estate market will be reflective of those terms (as they were in the bubble). Local supply and demand issues may temporarily halt the rise and fall to a new equilibrium level, but supply analysis alone completely fails to predict this new equilibrium or explain how prices got there.

There are always people who want to own a home. There is probably 95% of the populace that is desirous of real estate, but only 65% of households that actually own. This 30% represents the pent up demand that realtors insist will save the housing market. However, since this 30% lacks the ability to finance the transaction and sustain ownership, this pent up desire does not translate into pent up demand.

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