HOME PRICES - ECON 101

HOME PRICES - ECON 101

HOME PRICES - ECON 101 it really is that simple if one grasps the law of supply and demand.  There are several factors that continue to drive up home prices. For those who OWN a home (or have a home and a home mortgage), the market is great. For those in the home buying market it is frustrating to say the least. 

When will home prices come down? Why are home prices going up? Does waiting for lower home prices make sense?  So many questions.

One primary answer to the questions is Econ 101- supply and demand.  Home prices went up when the demand was greater than the supply. Builders have been ramping up new home builds. That is helpful, but not enough.

Another factor in the short supply is lower rates of 2020 to 2023.  Rates dropped into the 2's. Many folks took advantage of refinancing saving thousands, they are reluctant to leave their homes now that rates are higher. 

Baby boom in the 80's.  There was an increase in births 1986-1989. Those babies (millennials)  have been in the home buying market for several years, increasing demand due to more home formations.  They are as frustrated as anyone about supply and prices.

Investors saw an opportunity to snag homes with cash purchases, overriding the competing buyers who were financing.  Home sellers are told, whether right or wrong, that a cash buyer is best.  Cash gets them to closing quicker. 

Paying over asking price.  Recent sales have all but tossed out the basis of a home is worth what similar homes that have sold is worth. Now appraisers rely heavier on the demand factor - what a willing buyer is will to pay a willing seller. 

INVENTORY - In 2007 there was about 4 million homes available.  Then we had a housing collapse - reducing demand.  Builders cut back on building.  In 2020 we had 1 million homes available.  This explains supply.  Housing formations on the other hand nearly tripled from 2007 to 2020. 

All these factors for higher home prices are reasons. Econ 101 is how every aspect of the economy works.  If there is not enough then people pay a higher price. 

When will home prices come down?  Home prices usually don't come down.  Reviewing home prices since 1942, only 6 years did prices come down (2007-2011 accounts for 5 of those).  Five years had 0 increase in value.  Other than these years all other years saw an increase in value that compounded for as long as one owned the home.

If you are reading this, it is probably not making you feel better about home prices and inventory, but I hope it helps explain why.  Owning a home is one of the best if not the best wealth building block.