Where are home prices heading?
Market prices for homes are controlled by several factors:
- The supply of homes listed for sale (on the market)
- The number of home buyers looking for homes
- The mortgage interest rate
- The general economy
- Buyer & Seller attitudes
Let’s look at each of these factors.
Supply of homes for sale (or inventory, as we in the business call it).
A “normal” or neutral real estate market has 5-6 months worth of inventory. That is, it would take that period of time to sell all the homes on the market if no other homes were listed during that same time frame. Under 5 months of inventory and it’s considered a buyer’s market, and over 6 months of inventory and it’s a seller’s market. Currently, we have less than 2 months worth of inventory
Number of buyers looking for homes
As the number of people looking for homes increases, the demand goes up. If you combine a large number of buyers with a low inventory, the demand is very high. When this happens sellers start receiving multiple offers on their properties and buyers start going over asking price in order to beat out their competition. This drives up sale prices and in turn, new home sellers start to list their properties higher.
You take the inventory of homes for sale and combine it with the number of people who want to buy a home, and you have the basic Supply & Demand law of economics.
But there are other factors that can influence the real estate market.
The record low mortgage interest rates we have seen during the last couple of years made owning a home affordable for many more people than in the past. Now that interest rates are climbing, the payments on a home go up. That makes a home less affordable and thus drives down the price.
The general economy affects home prices because if a potential buyer doesn’t feel confident about taking on a $1,500+ per month 30-year mortgage, (s)he is probably going to hold off until the comfort level returns. In a down economy, people are worried about losing their jobs, and they don’t want to add to their debt load.
All of these factors can affect one region of the country but not another because of local economic factors.