The real estate market is a complex beast, influenced by a myriad of factors. But one principle stands out: supply and demand. When there are fewer houses available for sale (low supply) and more people wanting to buy (high demand), prices naturally rise. This is a scenario that has played out in many markets across the country, but some areas are experiencing this phenomenon more acutely than others.
The San Francisco Bay Area is a prime example of a high demand, low supply market. Characterized by a strong economy, job growth, and a high desirability factor, the demand for homes has consistently outpaced supply. This imbalance has led to skyrocketing prices, making homeownership a challenging goal for many.
In contrast, cities like Austin, TX and Phoenix, AZ have experienced rapid population growth and economic expansion. While this has led to increased demand for housing, the pace of new construction has been more robust – with vacant land stretching for miles, and much easier and faster building permitting process, and lower construction cost. These represent modest demand, high supply markets.
Housing Permits
To understand the extent of this disparity, let's look at housing permits. These permits are issued for new construction, indicating future housing supply. In the Bay Area, the number of single-family home (SFH) permits has been consistently low and actually declined in 2024 compared to the previous year. This suggests that the region is facing a continued shortage of new housing units.
The number of SFH housing permits issued in Austin and Phoenix is significantly higher than in the Bay Area, with some estimates suggesting 8 to 12 times more permits. This rapidly growing housing supply – in both single family and multi-family - outpaces population growth and dampens housing price increases.
History of Housing Underproduction
And such disparity has lasted decades. In the “Housing Underproduction in the US 2023” report [1] published by the national member network “Up for Growth”, it estimates 881,000 underproduction of housing units in California in 2021; 306,000 in Texas; and 120,000 in Arizona.
Existing Home Supply
Existing homes account for a bigger share of the housing supply than new constructions. Before the pandemic, the Bay Area already had a lower inventory of homes compared to Austin and Phoenix. The pandemic further exacerbated this issue, with inventory shrinking across all markets. However, the situation has diverged since then. Austin and Phoenix now have significantly more homes on the market compared to the Bay Area, and the pipeline of new construction suggests that inventory will continue to increase in Austin and Phoenix.
What Does This Mean for Homebuyers?
Understanding supply and demand is crucial for homebuyers. In a tight market like the Bay Area, expect higher prices and fierce competition. But it also means your property might appreciate faster and hold its value better.
In a tight market like the Bay Area, it is important to buy as early as you can afford, for your wealth to compound through appreciation (similar to the notion of compounding interest).
In markets where home appreciation is barely keeping up with inflation, the compounding power of appreciation is less impactful.
In markets where the home prices are volatile, a market correction can eat away your equity, wiping out any appreciation you may have expected.
So Tell Me:
In your experience, what other markets are particularly volatile?
Feel free to share your experiences or insights in the comments section
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