Everyone knows the pandemic housing market went absolutely bonkers, but a new report from the U.S. Federal Reserve suggests the craziness was virtually all due to a jump in demand, and not — as the conventional wisdom suggests — a dearth of supply.

The report, published late last month, specifically argues that while there was a drop in supply at the beginning of the coronavirus pandemic, that drop was actually “a minor factor relative to increased demand in explaining the tightening of housing markets.” Eventually, strong demand overtook supply issues as the “main factor” in the market.

“By the middle of 2021,” the report adds, “the contribution of reduced supply has disappeared and higher demand can explain essentially all of the decrease in months’ supply since March 2020.”

Interestingly, the report also suggests that there was little hope new construction would have been able to keep up with this rising demand.

“We find that a 30 percent increase in the monthly number of homes coming on to the market would have been necessary to keep up with the pandemic-era surge in demand,” the report notes. “Since new construction typically accounts for about 15 percent of supply, our estimates imply that new construction would have had to increase by roughly 300 percent to absorb the pandemic-era surge in demand.”

The report further suggests that demand for housing is even more sensitive to rising mortgage rates than is perhaps widely appreciated. If rates rise just one percent, the report explains, that lowers demand by 10.4 percent. That’s more “than evidence using purely observable housing market variables suggests.” And the report goes on to note that mortgage rate policies are consequently an “effective way to influence short-run fluctuations in the housing market.”

The report is surprising because while everyone in the real estate industry understood that demand surged during the pandemic, the prevailing wisdom was also that a shortage of supply was a major part of the story. These new findings, then, seem to challenge that wisdom and lay far more blame on the wildness of the last two years on the demand side of the equation.

Economists who spoke to Inman about the report had a mix of responses.

Matthew Gardner, chief economist for Windermere, agreed that demand surged during the pandemic thanks to factors such as very low interest rates and “a soaring equity market.”

However, Gardner also wasn’t “sold on their conclusions” about the relatively small role of a supply shortage in the pandemic housing market.

“I do find it difficult to argue that a lack of supply had little to do with the significant price growth that the country experienced,” he said.

Gardner pointed to data from the National Association of Realtors on bidding wars that appears to highlight a genuine supply shortage, and further noted that there has been “under building over the last decade” that has resulted in millions fewer homes than needed right as millennials and Generation Z are entering the market.

Taylor Marr

On the other hand, Taylor Marr — deputy chief economist at Redfin — said that the report’s authors appeared to be “on the right path.” He acknowledged that during the pandemic there has been a popular narrative about a lack of supply. But he said that overall the level of homes coming onto the market each week has been “very stable, even during the pandemic.” However, thanks to the spike in demand, a “snapshot” of the market taken at any specific moment would make it look like there was less supply than normal.

“The supply shortage that has been talked about during the pandemic era,” Marr explained, “that’s really only true in the lens that demand sped up the housing market and that increased speed made it appear as if there’s fewer homes for sale. The increase in demand is really what’s driven that supply shortage narrative. Once you kind of control for that dynamic it really is all about demand.”

The points made by Marr and Gardner, however, aren’t necessarily mutually exclusive. While Marr was pointing out that supply was relatively constant over the course of the pandemic and relative to the period preceding the crisis, Gardner’s point was more about a deeper issue of building shortfalls that has been growing for years.

Danielle Hale

And Danielle Hale, chief economist of Realtor.com, said that shortage does appear to be real. Though she said the report was right in saying that “the housing market craziness has been driven more by demand than supply,” in 2019 there was already a 3.8 million home gap between how many houses were needed and how many existed. That’s a gap that resulted from not building enough as the number of households increased.

In other words, spiking demand is responsible for the shorter term trend during the pandemic, but there’s still a longer term problem related to not building enough homes.

“There was an existing gap that was sizable,” Hale explained, “and it got worse during the pandemic.”

Email Jim Dalrymple II