Understanding the Direction of Home Prices

Supply and demand, the well-known economic theory, drives the real estate market’s ups and downs. Put simply, when demand for an item is high, prices rise. When the supply of the item increases, prices fall. There’s a common agreement among experts and analysts that it’s the principal reason explaining what’s happening with prices in the current real estate market. When we see the market conditions that have persisted over the past year (demand is very high and supply is very low) prices can rise significantly.

With the market having seen such harsh conditions in the previous 12 months, there are a few popular questions about today’s housing market on the top of everyone’s mind:

  • Why are prices still rising?
  • Where are prices headed?
  • What does this mean for homebuyers?

Why Are Prices Still Rising?

According to the latest Home Price Insights report from CoreLogic, home prices have risen 18.1% since this time last year. But what’s driving the increase?

Recent buyer and seller activity data from the National Association of Realtors (NAR) helps answer that question. When we take NAR’s buyer activity data and compare it to seller traffic during the same timeframe, we can see buyer demand continues to far outpace seller activity by a wide margin. The maps below show a shaded comparison, state-by-state, of just how stark a difference exists throughout the country for the month of August:

What Do Supply and Demand Tell Us About Today’s Housing Market? | MyKCM

This combination of low supply and high demand is what’s driving home prices up. Bill McBride, author of the Calculated Risk blog, puts it best, saying:

“By some measures, house prices seem high, but the recent price increases make sense from a supply and demand perspective.

Where Are Prices Headed?

The supply of homes for sale will greatly affect where prices head over the coming months. Many experts forecast prices will continue to increase, but they’ll likely appreciate at a slower rate.

Buyers hoping to purchase the home of their dreams may see this as welcome news. In this case, perspective is important: a slight moderation of home prices does not mean prices will depreciate or fall. Price increases may occur at a slower pace, but experts still expect them to rise.

Five major entities that closely follow the real estate market forecast home prices will continue appreciating through 2022:

What Do Supply and Demand Tell Us About Today’s Housing Market? | MyKCM

What Does This Mean for Homebuyers?

If you’re working with clients who have been waiting to enter the market because they want prices to drop, that most likely will not happen anytime soon. Even if appreciation is occurring at a slower rate next year, prices – and interest rates – are still projected to rise. That means affordability will decrease, and the homes that seemed obtainable for them this year are suddenly out of reach.

Bottom Line

High demand and low supply are driving up home prices in today’s housing market. And while prices may increase at a slower pace in the coming months, experts still expect them to rise. Work with your buyer clients to understand the larger headwinds and how if affects your local market.

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