Item — HN Reader

If someone sells a house for less than they purchased it their equity available to purchase another house decreases. Since mortgage rates have increased that means they can only afford a smaller/worse house (because they have less money to make a down payment with). So why would they sell in that situation unless they need to? People sell when their homes have appreciated because they have positive equity and can get a new mortgage, so they can buy a better home by rolling their existing equity into the new home as a down payment (they also don't pay capital gains when doing this and the interest on the new mortgage is deductible, making it attractive from a tax perspective).

Edit: I think I see where the confusion is. You are right that the literal supply of houses doesn't increase or decrease unless people stop/start renting or new homes are built. But the supply of houses available for purchase depends on whether people want to list them right now or not. Which is influenced by current prices because most people won't sell at a loss unless they have to.

5 comments

In response to your edit, what you’re still missing is that a household that decides not to sell (and thus withhold inventory from the market) is also a household that is not entering the market on the demand side.

So, to a first order approximation, there is no change to ratio of supply to demand. The absolute level or supply is irrelevant. The absolute level of demand is also irrelevant. What matters is the amount of supply relative to demand.

It does not matter to the overall supply and demand picture if someone “can’t afford to sell” because they also can’t afford to buy. People who do have to sell will get fewer offers, and so people who are still in the market to buy have less competition.

What really matters is how many renters are converting to buyers, how many owners are dying or moving to nursing homes, and how many investors are buying or selling rental units. Higher interest rates tend to have little effect on mortality, but do discourage first-time homeowners and investors.

Yes I understand all that. My point is that both supply and demand are low right now because you can't trade up in this market unless you can pay cash. But low supply eventually leads to increasing demand which pushes prices back up. It leads to increasing demand because it takes about a year to build a new house and it's likely that developers will start fewer homes in the upcoming year due to increased rates, which mean they can't make their required profit unless prices go up.

I also understand that current sales will sell for less because there is less demand. That's why I mentioned that sales comps will be pegged to the few transactions that occur. But you have to look at the number of transactions, not just the most recent prices. In real estate you have a price cycle but also a volume cycle. Fewer transactions occur at low prices because sellers don't want to sell when prices are low. The exception would be if many people are forced to sell because they can't make their mortgage payments, but that doesn't appear likely at the moment.

Is this true if the price of all houses fall? In that case it seems like it's easier to swap up.

I mean, you could sell for less than you purchased (say you put 20% down) and buy a new home with 5% or 10% down.. so you take a haircut and increase your mortgage. People may do this if they have to move for a job.

They probably wouldn't sell at a loss, but they would sell if their profit is bit less than when the market was higher.

I think "inventory" = "supply of houses available for purchase [or sale being processed]".