Chart Of The Month: Housing Markets Are Price Elastic

Our Managing Principal of Advisory, Tim Sullivan, works with clients across the country and noticed the big shift towards average sales price (ASP) becoming the focal point for homebuilders in 2018. Most major housing markets have seen sustained price increases over the last five years, which has led to weakened affordability. Builders are focused on lower ASPs because it is a risk mitigation measure in two ways: the lower the price, the larger the pool of consumers that can qualify to purchase, and as a result, the lower priced product sells faster, offering another risk mitigation measure by limiting the probability of standing inventory.

The vast majority of US housing markets are price elastic, but a few counter examples exist where prices tend to be inelastic. This typically takes place in regions with a diverse job base, high incomes, massive wealth, the presence of international buyers, and a limited supply of land (think San Francisco or Manhattan).