May 5 2015

Why Home Prices are Heating Up

Why Home Prices are Heating Up

Weather is not the only thing getting warmer this summer, so is the housing market. Starting in 2012, home prices started to rise, and by 2013 we saw double digit growth. While 2015 is at a slower pace than that of 2013, prices are still growing.

In the current market, it is common to see bidding wars and offers above asking price in many local markets. San Francisco’s current average median listed price is $1,099,000, yet 74% of homes are being sold within two months of being placed on the market. Some markets are exceeding prices of that during the housing boom, like Denver and Dallas. This may become an issue if home prices continue to rise while incomes and inventory stays stagnate.

Why are home prices increasing? The answer is simple: supply and demand. There are more homebuyers then homes available to purchase and current homeowners are not selling. In a normal real estate market, homeowners sell their homes to be able to move up or to downsize, creating inventory for first-time homebuyers. With little inventory of resale homes on the market, we see price increases in both resale and new homes for sale. 

Current homebuyers may be cautious to sell their homes for two reasons. One, they may be afraid they will not find a suitable new home available for purchase. Or, two, their current home may still be underwater or have low equity due to the housing market crash in 2008. Either way, without inventory on the existing side of home sale, first-time homebuyers are being shut out from the market.

Even if homeowners start to flood the market with “For Sale” signs, home builders are still not keeping up with demand. Builders are hesitant, and last year only one million new homes were built. A normal market will see around 1.6 million new homes.

When you combine rising prices with low inventory, you may have a formula for another housing bubble. Like in 2008, this new market is inflating from over demand and low supply. However, a major difference is, unlike the poor lending habits in the early 2000’s that allowed buyers to take on loans they could not afford, this market is backed by mortgages homebuyers can actually afford to pay off. Only time will tell if supply will be able to meet demand and if home prices will even out to a healthy market that both homebuyer and shoppers will benefit from.

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