House prices are determined by housing supply, housing demand and housing affordability.
Housing Supply: What’s the Outlook?
Here is a chart illustrating the supply of homes for sale as reported by the US Census Bureau. This measurement of housing supply illustrates how many months it would take to sell all the houses currently listed for sale, at the current pace of home sales. For example, if there are 400 homes currently listed for sale, and an average of 100 homes are selling each month, there would be a 4-month housing supply. This is because it would take 4-months to sell all the homes currently listed for sale.
As you can see from the chart, housing supply hit a peak of 12-months back in 2010. This means that it took many people nearly a year to sell their homes and even then, the sales price was likely to be lower than the list price because there was so much housing supply available for buyers to choose from. As the housing market improved, housing supply went down steadily.
Throughout 2014, housing supply was relatively balanced at 6 months on a national level. While house prices stabilized in many parts of the country, we didn’t see as big of price increases as what we saw in 2013 when housing supply was closer to 4 months. Today’s numbers resemble 2013, with housing supply running at 4.7 months on a national basis. This is indicative of a seller’s market. In many parts of the country, buyers are competing with multiple offers… in some cases dozens of offers on the same house. This tells us that house prices are scheduled to go up significantly in the next several months.
Housing Demand: What’s the Trend?
Housing demand is usually created when:
- People have jobs and are employed;
- Real estate investors are optimistic about purchasing houses as an investment; and,
- Homebuyers are confident enough to jump into the market and purchase a home.
We expect housing demand to increase from current levels throughout the spring of 2015 because the jobs market and overall economy is improving.
As you can see from the chart, the housing affordability index was generally between 70 and 110 in the 1980s. People were really struggling to afford houses!
In the 1990s, the affordability index was generally between 120 and 140. During the housing bubble, the affordability index hit a low of 100. All this makes today’s reading in the 170 range VERY affordable by historical standards.
We expect the housing affordabilty index to go down from it’s current level as house prices increase from current levels. Also, keep in mind that housing affordability in your situation could be higher or lower depending on the amount of your down payment and the mortgage strategy you choose.
Conclusion: we anticipate an increase in house prices over the next several months because housing supply is likely to remain low, housing demand is likely to increase, and houses will continue to remain affordable for most buyers. Please contact me for specific information on housing supply, housing demand and housing affordability in your local market.
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