Nate's Nerd Talk | April 2021 | Demand is Dropping

Dated: April 13 2021

Views: 94

Demand is dropping!

But, who would know?

For the last several months, it seems that the only side of the supply & demand balance we’ve focused on has been the supply side (homes for sale), and that’s certainly understandable.  We’ve been contending with a market the likes of which we’ve never seen before that is being driven by a chronic lack of supply.  Well, let’s look at the other side of this and focus on demand, which is measured by For the last several months, it seems that the only side of the supply & demand balance we’ve focused on has been the supply side (homes for sale), and that’s certainly understandable.  We’ve been contending with a market that we’ve never seen before that is being driven by a chronic lack of supply. 

Well, let’s look at the other side of this and focus on demand, which is measured by pending & sold listings.  To fully understand the market is to understand the BALANCE of the market.  Understanding this balance means that we know who is in the driver’s seat on negotiations, and it also tells us whether prices will continue to go up, level off, or go down.

On a daily basis, I have conversations with prospective buyers & sellers about our market and the most common question is, “where are all of these buyers coming from?” This question implies that our market is being driven by a mass of buyers and that our low supply is a result of those buyers scooping up all of the available properties for sale.

Many people think that the flood of “cash rich” Californians (which is real, btw) and the migration from many other states is causing us to be overrun.  It’s not to say that there isn’t truth in any of this, because there is.  As of 2020, it is estimated that we are adding somewhere around 200-250 new residents per-day to the Phoenix valley.  This influx of new Phoenicians does, without a doubt, contribute to our current housing issues, but what I want to make clear is that this is NOT the CAUSE.  If you look at the graph below, you can see that our demand has actually been dropping since the beginning of the year and, as of today’s writing, our demand index is actually within the range of what’s considered normal.  Even with the wave of new residents, we do NOT have a rush of buyers to the market… no more than we typically see this time of year, anyways.

So, what’s going on, then? Why do we have multiple offers and bidding wars on nearly every listing that comes to market?  BALANCE…the answer is balance, or lack there of.  Even with our demand at normal levels, we simply do not have enough homes to supply the buyers in the marketplace, and therefore, buyers still outnumber sellers about 6 to 1. 

What this means is that even if our demand drops in HALF, we will still not have enough for sale, and we would still be in what’s considered a strong sellers’ market.  This is, of course, assuming that supply hasn’t gone up during the same period.  In order for our market to truly calm down and for prices to level off or even begin to drop, we’d have to see a flood of new listings coming to market *and* a dramatic drop in buyers searching for homes. 

Reversal of the supply / demand curve so we have balance between sellers & buyers, will eventually happen. But, it’s likely quite a ways off.  So, we can expect our prices to continue to rise for some time, but change is already happening. If demand continues to drop, life should get at least marginally better for buyers, as sellers will not have quite as much power to ask for pretty much anything they want. 

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