A decrease in housing supply, coupled with high demand for houses during the crisis has pushed housing prices up

Earlier today, the Wallstreet Journal reported the following,

The pandemic has aggravated the housing market’s longstanding lack of supply, creating a historic shortage of homes for sale.

Buyers are accelerating purchase plans or considering homeownership for the first time, rushing to get more living space as many Americans anticipate working from home for a while. Many potential sellers, meanwhile, are keeping their homes off the market for pandemic-related reasons.

The combined effect has created an extreme drought of previously owned homes for sale. At the end of July, there were 1.3 million single-family existing homes for sale, the lowest count for any July in data going back to 1982, according to the National Association of Realtors. In the week ended Sept. 12, total for-sale inventory was down 29.4% from a year earlier at the lowest level since at least late 2017, Zillow Group Inc. said.

“Every year we think, ‘We’re hitting new record lows, it can’t get worse,’ but then it does,” said Danielle Hale, chief economist for Realtor.com. News Corp, parent of The Wall Street Journal, operates Realtor.com.

The shortage has pushed home prices higher, stretching the budgets of many middle-class and first-time home buyers. The median existing-home price crossed above $300,000 for the first time ever in July, up 8.5% from a year earlier, according to NAR. Existing home sales and inventory figures for August come out on Tuesday.

Rapidly rising house prices are effectively canceling out the increased purchasing power that buyers are getting from lower interest rates, brokerage Redfin Corp. said.

The U.S. has had a shortage of housing for years. New-home construction dropped sharply during the 2007-2009 recession and has still not recovered to precrisis levels. Homeowners have also been staying in their homes longer than they used to.

Since the pandemic, the problem has worsened. At the July sales pace, there were 3.1 months of total existing-home inventory left in the market at the end of the month, down from 3.9 months in June and 4.2 months in July 2019, according to NAR.

The shortage of existing homes has been a boost to the home-building sector, which has posted strong sales gains in recent months. Single-family housing starts, a measure of U.S. home building, rose 4.1% in August from July to the highest seasonally adjusted annual rate since February, the Commerce Department said.

The housing market is not immune to the laws of demand and supply after all

When it comes to housing, people rarely draw a connection between the housing crisis and a lack of supply. For instance, a survey by Times and researchers from the University of Southern California asked 1,200 California residents what they consider to be the biggest cause of the housing crisis. Only 13% blamed the lack of housing supply. Instead “lack of funding for affordable housing” as well as “lack of rent control” were cited as big causes.

This same attitude is also often displayed by legislators. When it comes to solving the affordable housing crisis, legislators most often exclusively suggest increased funding or rent control. What they seem to ignore, however, is that the housing market is like that of any other goods. If housing supply falls down to a level lower than that of demand, prices are going to go high, and vice versa. And the current rise in housing prices due to the downward covid-19 induced supply shock is a testament to that phenomenon. The housing market, as it turns out, is not immune to the laws of demand and supply.