Much has been made of the drop in existing home sales this spring. The weather played a role in the Northern Midwest and Northeast and affordability concerns had a coast-to-coast impact, particulalry in the Western markets. However, inventories remain low with the months supply averaging six months or less for 20 consecutive months. All of these factors contributed to the decline in sales, but it is difficult to sell homes when you don’t have homes for sale.

What drives supply? Traditionally homeowner turnover and new construction. However, the number of owners who owe more on their home than their home is worth ballooned in recent years and stood at 6.3 million as of the first quarter of 2014. Though this figure is down from 11.8 million in the first quarter of 2011, it remains well above the historic norm, preventing some would-be sellers from entering the market. But these transactions would only add to inventory if the seller is downsizing or moving in with another household as the seller would otherwise buy another home. Foreclosures have also swelled inventories, but many of these have been absorbed by investors and converted to rental.

New construction, on the other hand, has been sluggish for several years. A simple measure of the impact of construction on supply is whether new construction has kept up with job creation. To this end, the ratio of jobs created over the three-year period ending in the first quarter of 2014 relative to new, single-family construction starts over this same period is graphed below. The disparity was greatest in Florida, Utah, California, Montana and Indiana, where job creation has been particularly strong.  In the chart below, 40 states as well as the Districut of Columbia have a ratio greater than 1, indicating that there were more jobs created over the last 3 years than housing starts; 32 states and the District of Columbia had a ratio greater than 1.5, the long-term average. Not all new jobs result in a new household and an increase in demand for housing, but that relationship is strong and the implication is that the lack of construction has hamstrung supply and thus home sales.

A lagging expansion of supply relative to demand growth implies price pressure. Indeed, over the last two years there has been steady price appreciation, but the current three-year deficit in the employment-to-starts ratio implies a continued imbalance. A simple analysis of the ratio of three-year employment gains-to-starts against REALTORS® price expectations for the next 12 months curried from the REALTOR® Confidence Index in the first quarter of 2014 suggests a correlation between stronger price expectations and the long-term imbalance between employment and housing starts. In short, REALTORS® see the tight supply and it impacts their expectations, which have had a strong relationship with realized price patterns.

While tight inventories will help to sustain price growth, it also limits turnover and could further erode affordability. Without a stronger response from home builders, particularly at the entry-level and mid-price tiers, consumers may struggle with options and affordability if income growth cannot compensate. Builders, though, face higher production costs, labor mismatches, and problems finding land that can be developed. It is difficult to discern whether builders can produce at a lower price point given frictions in the current market.

Ken Fears is the director of Regional Economics & Housing Finance for the National Association of REALTORS®.