Housing inventory shortage - what drives supply and demand?

[Marcus Auerbach]

I would like to put my theory out for a test and see if you guys can shoot some holes into it.

Here it is:

1.) Real Estate Prices are mostly a function of supply and demand. There are some other factors that play into it short term like interest rates, elections, pandemics, speculation - but it seems to me they have only superficial short term impact, like throwing a rock into a wave. There are lots of examples: when interest rates were around 15% in the early 1980's people were buying houses and prices went even up despite the rates. When someone decides to buy a new house, it is usualy because of a life situation, a birth, a death, a marriage etc - they may hold off for a few months, but in the end they will buy/sell regardless of the external circumstances, because the decision is based on life events. In the end demand (and supply) override all other circumstances.

2.) Demand is mostly driven by demographics. Migration is an obvious factor, if more people move to a country or a city demand for housing goes up. Or down, if they move away. But that is usually a low single digit percentage, like 2% or 5%. Now we have Millennials entering the demand side and they are about 25% of the US population. 40% of all deals currently involve a Millennial. The oldest Millennials are now 38. There are many more to come and gen Z is right behind them. This dwarfts any demand change based on employment opportunities or other reasons for migration. And so far we have seen only the oldest Millennials buy, so it seems like this is the beginning of a tidal wave.

3.) Supply has two main sources: people dying and new construction. Migration is a third one, and is becomming a factor in super expensive cities like San Franciscon and NY as working from home opportunities grow. But not a factor for most of the country, certainly not for Milwaukee. If people move within town it's a net zero exchange to inventory. People tend to live longer and they like to age in place, so housing is not being vacated as it used to be. This is limiting supply of affordable homes. New construction is very expensive; in the Milwaukee market it is more then 2 times the median home price, so unavailable for most. The only option I see are high rise condo's for a reasonable cost, but that will take 5-10 years before significant volume is available. 

My conclusion: the inventory shortage is chronic - a huge wave driven by demographic demand and no real relief on the supply side. With 3 to 5 buyers for every seller and existing inventory being less than half of new construction we will continue to see prices (in the midwest at least) go up for years to come.

There you have it - what does everyone think? Where am I wrong and what am I overlooking?