Volatility in Home Sales and Prices: Supply or Demand?

We use a housing search model and data on individual home listings to decompose short-run fluctuations in home sales and price growth into supply or demand factors, defined as the number of new sellers and buyers entering the housing market, respectively. We find that fluctuations in the number of buyers demanding homes explain much more of the variation in home sales and price growth than do fluctuations in the supply of homes for sale. In our preferred paramaterization, fluctuations in demand explain essentially all of the variation in home sales, and most of the variation in prices. We consider two implications of these results. First, we show that reduction of supply was a minor factor relative to an increased number of buyers in the tightening of housing markets during COVID-19. New for-sale listings would have had to expand 30 percent to keep the rate of price growth at pre-pandemic levels given the pandemic-era surge in demand. Second, we estimate that the number of buyers demanding homes is very sensitive to changes in mortgage rates, even more so than comparable estimates for home sales, suggesting that policies that affect housing demand through mortgage rates can influence housing market dynamics.