A well-known economic theory – the law of supply and demand – explains what’s happening with prices in the current real estate market. When demand for an item is high, prices rise. When the supply of the item increases, prices fall.
Of course, when demand is very high and supply is very low, prices can rise significantly.
Understanding the impact of supply and demand can answer a few popular questions about today’s housing market.
- Why are prices rising?
- Where are prices headed?
- What does this mean for homebuyers?
Why Are Prices Rising?
According to CoreLogic’s latest Home Price Insights report, home prices have risen 18.1% since 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 compare NAR’s buyer activity data to the seller traffic during the same timeframe, we can see buyer demand continues to outpace seller activity by a wide margin. In other words, the demand for homes is significantly greater than the current supply that’s available to buy (see maps)
This combination of low supply and high demand is what’s driving home prices up. Bill McBride, the 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 the direction of prices over the coming months. Many experts forecast that 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 essential: slightly moderating home prices does not mean prices will depreciate or fall. Price increases may occur more slowly, but experts still expect them to rise. Five major entities closely following the real estate market forecast home prices will continue appreciating through 2022 (see graph).
What Does This Mean for Homebuyers?
If you’re waiting to enter the market because you expect prices to drop, you may pay more in the long run. Even if price increases occur at a slower rate next year, prices are still projected to rise. That means the home of your dreams will likely cost even more in 2022.
What Real Estate Pros Are Saying: Bottom Line
The truth is that high demand and low supply are driving up home prices in today’s housing market. And while prices may increase more slowly in the coming months, experts still expect them to rise. If you’re a potential homebuyer, let’s connect with real estate professionals in Chicago at KM Realty Group LLC today to discuss what that could mean for you if you wait even longer to buy.
