December 2016 Homebuyer Demand Hit 3-Year High Amid Record-Low Inventory

Homebuyer demand in December 2016 reached its highest level in three years, driven by a significant surge in home tours and purchase offers, even as the number of homes for sale continued a steep, 18-month decline. This combination of intense buyer activity and chronically low supply created one of the most competitive markets in recent history, with one in three homes selling within two weeks.

What Drove the Unprecedented Demand in December 2016?

The key factor was a renewed sense of urgency among buyers. Compared to December 2015, there was a 36.4 percent increase in buyers requesting home tours and a 10.2 percent rise in those making offers. This resulted in a 26.3 percent overall increase in homebuyer demand for the month. Seasonally-adjusted data showed an 18.7 percent monthly increase in tour requests—the highest such jump in three years—and a 9.9 percent increase in offers. Economists attributed this spike to growing concerns over rising mortgage rates, which motivated buyers to enter the market before their purchasing power diminished.

How Did Record-Low Inventory Impact the Market?

The intensifying demand occurred against a backdrop of shrinking supply. The number of homes for sale in December was down 12.6 percent compared to the same month in 2015. There was also a seasonally-adjusted 17.1 percent decrease from November 2016. This marked the 18th consecutive month of annual declines in inventory. The severe shortage meant that well-priced homes sold quickly, creating a fast-paced environment where buyers had to act decisively.

Which Metro Areas Experienced the Highest Demand?

While nearly all major metropolitan areas saw increased demand, a few hotspots exemplified the national trend. The Redfin Demand Index, a metric where a level of 100 represents the historical average for 2013-2015, highlighted extreme activity in specific regions.

• Orange County, California: The Demand Index hit an unprecedented 208, a 91.6 percent year-over-year increase. Local agents reported that soaring rental costs and fears of rising interest rates pushed renters into the buying market, creating a "perfect storm" of competition even during the holiday season.
• Seattle, Washington: With an index level of 135, Seattle marked its 25th straight month of above-average demand. The market was characterized by well-qualified buyers and foreign investors competing for limited inventory, leading agents to predict 2017 would be one of the most competitive years on record.
• San Francisco, California: After a volatile period, demand normalized with an index level of 102, a 114 percent increase from 2015. Stabilizing home prices and post-election interest rate spikes inspired buyers who had previously been hesitant to make more aggressive offers.

What Was the Market Outlook for Early 2017?

Based on market activity and seller inquiries, industry experts anticipated a strong start to 2017. An increase in new listings was expected in the coming months. Furthermore, buyers demonstrated a new willingness to consider older inventory—homes that had been on the market longer—suggesting that sales activity would remain robust. “With new listings on the way and this year’s buyers willing to take a look at older inventory, we anticipate that sales in early 2017 will be strong,” stated Redfin chief economist Nela Richardson.

For buyers in a competitive market, the key takeaways are to get pre-approved early, be prepared to move quickly on new listings, and consider homes that may have been overlooked by other buyers.