New Fed Paper Finds Surging Home Prices Driven by Demand — Not Supply

The degree to which higher prices have been driven by supply shortages versus red-hot demand is one of the biggest questions in markets. Raising interest rates can be used to bring prices down if demand is too high because tighter policy will cause unemployment and people to have less money to spend. If supply is too tight, then raising interest rates won't make a difference. Higher interest rates don't increase the number of oil rigs or couches.

The question of supply versus demand has been pressing for home prices as they have shot up in the years since the global Pandemic. Concerns over home affordability and a new bubble in the housing market have been raised.

A new Federal Reserve working paper attempts to disaggregate the impact of supply and demand on short term fluctuations in home prices. The authors looked at two decades worth of individual property listings from Corelogic and created a model that captures the flow of new homes coming onto the market and the influx of prospective buyers.

The paper finds demand to be in the best interest of the paper.