DeeJayOh Argues that the Problem is Still Inventory, not Demand

Every month, Redfin publishes a newsletter about real estate prices out to a few hundred thousand people. A few hundred write back. The tone of the responses depends on the tone of the original newsletter. If we argue that the market will improve over the next year, as we did in Southern California at the end of 2008, we are crucified, even though we turned out to be right. If we argue that the market will decline, as we did yesterday, we are praised, even though we may turn out to be wrong.

I try to answer every email. It usually takes a few hours. One or two have complaints about our service, which I try to resolve. Some have questions about very specific areas like northwest Washington DC or a neighborhood in San Diego, which I can’t answer without the help of one of our agents. Whenever we mention interest rates, I get political rants, often about immigrants too (I am the grandson of immigrants who were very lucky to be allowed in, so I never know what to say).

And we always get parents trying to help their children, usually by complaining about the decisions made by a son-in-law, as in: “My son-in-law sold my daughter’s NYC apartment to buy Phoenix houses at the peak. What should I do?” For some reason, I enjoy answering those the most.

Almost every month, someone offers better insight on the market than the original newsletter. For example, when we argued yesterday that demand was weakening even as distressed inventory declined, Dennis Oldroyd, aka deejayoh at Seattle Bubble, wrote back to argue that the inventory was also limiting demand. It was such a good argument that I asked Dennis if we could publish his comments, and he graciously granted our request. Here’s Dennis’s email:

Hey Glenn –  Enjoyed the newsletter today. One quick thought for you on demand. I think too much is being made of the drop in new home sales as being indicative of a major drop in demand.

The issue with new homes is not demand, it is supply. See the attached chart from Calculated Risk – the ratio of sales to starts is very high. Housing starts are at a ~40 year low — so given that it looks like the market is clearing everything that is being built, I am not sure how the market could service any more demand.

Overall demand may have slowed – but that doesn’t appear to be the core issue driving down new home sales.

Also, if you look at the ratio of sales to starts going back for the last couple years, it is clear that the market has been drawing down inventory of unsold houses over time. What I have read in other places is that the inventory of unsold homes is quite low. Given you have the bully pulpit of the blog, I thought I’d share my viewpoint.

Thanks Dennis! I agree that stale inventory or limited inventory is part of the problem, but still think demand is weak too.


  • TRL

    It is a vicious cycle. Prices are down, so people don't want to sell. The market uncertainty keeps people from moving up, which decreases demand further.

  • Ken Brand

    Here's something I woke up thinking, so I'll share it here and ask a question.

    So, mortgage rates are at historic lows, maybe they'll go even lower, anyway, for buyers today, and all the people who will or have refinanced in the 3.75% to 5% range, looking down the road, say 3 years, 7 years, etc., assuming mortgage rates rise to what today we might call normal low, say 7% or maybe 8%. What would motivate these 100's of 1,000s of homeowners to sell their current property (3.7% to 5% mortgage) to buy something else with a 6% to 8%, or heaven forbid, 10% mortgage rate?

    If they did and the rate was only 30% higher, say from 4% to 5.2%, to buy the same thing they have would increase their payments 30%, plus if they moved up in price if 20% or 30%, then their monthly payment would go up over 50%….just to move up slightly. Imagine having a 4.5% rate today and rates are at 8% then. To move would into the same priced house would double your payment, add a modest 20% move up in price and the payment goes up 120%.

    I was wondering what kind of impact that might have in a few years?

    • GlennKelman

      That's a really insightful comment Ken, especially considering the refinancings…

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  • Guest

    Deejayoh's comment is really quite silly. New home building is down because prices are falling and builders are losing their shirts. They are currently unloading inventory that they built for a different, higher priced, market. Here's business 101 — you build a product if it's profitable to sell it. You don't build it if demand is weak and you will just get stuck with a big construction loan eating away at your company.

    Look at the stock charts of the major builders: bhs, mth, bzh, mdc, tol, len, phm and hov. I'll save you the trouble. All down 70-90%.