Supply or Demand: What's Driving the Price of U.S. Housing?

Today, we’re going to do some quick, back-of-the-envelope style economics to answer the question of whether the supply or the demand for new homes is what is behind the recent falling trend for their prices. First, let’s visually establish that yes, both average and median U.S. new home sale prices have been falling since October 2014:

Next, lets tap the Federal Reserve’s Economic Data to see how the monthly supply of new homes has been changing, as measured by the number of months it would take for all new homes to be sold at their current rate of sales:

Here, we find that the supply of new homes has been rising since February 2015. We now have the information we need to use our tool for telling whether supply or demand factors are behind the change in the prices for new homes in the U.S.

What we find is that the prices of new homes have been falling because of an increase in their relative supply. As for the current state of the U.S. home builders, we find that the industry’s market capitalization has been increasing, although the most recent data suggests its growth may be starting to decelerate.

After adjusting for inflation, as measured by the Consumer Price Index for all urban consumers in all U.S. cities, it would appear that the U.S. new home market has recovered approximately to the level it was in 1994 and 1995, when it last rose to surpass a market capitalization of $14 billion in terms of June 2015′s U.S. dollars.

Data Sources

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 24 July 2015.

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 24 July 2015.

U.S. Department of Labor Bureau of Labor Statistics. Consumer Price Index, All Urban Consumers – (CPI-U), U.S. City Average, All Items, 1982-84=100. [Online Application]. Accessed 24 July 2015.

Federal Reserve Economic Data. Monthly Supply of New Homes. [Online Database]. Accessed 24 July 2015.