U.S. Housing Demand Remained Strong in January 2018 Despite Record Inventory Declines

Despite a significant drop in the number of homes for sale, U.S. housing demand started 2018 at a robust pace, setting the stage for a highly competitive spring buying season. The Redfin Housing Demand Index, a key measure of buyer activity, reached 130.5 in January, marking a 0.5% increase from December 2017 and its highest level for the month of January since tracking began. This strength occurred even as buyers faced a 19.9% yearly decline in available inventory—the largest drop since at least 2014.

What Was the State of Buyer Demand in Early 2018?

The data from January 2018 revealed a market characterized by strong buyer enthusiasm amid growing challenges. The seasonally adjusted number of buyers requesting home tours held steady from December to January, while the number of buyers making offers on homes increased by 1.2%. When compared to January 2017, the number of buyers requesting tours was up a substantial 13.7%. However, the number of buyers successfully making offers actually decreased by 9.7% year-over-year. This divergence highlights a critical market dynamic: more buyers were actively searching, but fewer were able to submit offers, primarily due to the extreme shortage of homes for sale.

How Did the Inventory Shortage Impact the Market?

The primary factor shaping the market was a historic lack of supply. January 2018 marked the 32nd consecutive month of declining housing inventory. This prolonged shortage meant that the homes that were listed for sale, particularly in affordable price ranges, were selling extremely quickly and often for more than the asking price. In fact, nearly one in five homes sold above its list price in January. Redfin agents reported that the effects of this supply-and-demand imbalance were most acute for entry-level buyers, creating a highly competitive environment where swift decisions and strong offers became essential.

What Challenges Were Buyers Facing?

Buyers at the start of 2018 contended with a confluence of headwinds beyond just low inventory. These included:

• Rising Mortgage Rates: Increasing the long-term cost of homeownership.
• Tax Code Changes: The 2018 overhaul of the U.S. tax code created uncertainty about homeowner deductions.
• Stock Market Volatility: Which could impact potential buyers' down payment funds. Despite these challenges, strong local labor markets helped sustain buyer confidence and the overall desire for homeownership, according to Redfin's chief economist.

What Did This Mean for Prospective Home Buyers?

For anyone planning to buy a home in 2018, the January data signaled a need for preparation and resilience. With mortgage rates and home prices projected to continue rising, competition for a diminishing supply of homes was expected to intensify.

Prospective buyers were advised to:

• Get pre-approved for a mortgage before starting their search to act quickly.
• Be prepared to make competitive offers, which might include offering above the list price or having flexible contingencies.
• Focus on patience and realistic expectations, understanding that finding a home might take longer than in previous years.

The strong demand index reading of 130.5—where 100 represents the historical average for the 2013-2015 period—indicated that the fundamental desire to buy homes remained powerful. However, successfully navigating the market required being well-organized, financially prepared, and ready for a competitive process.