Three years ago, home prices were increasing at a brisk pace due, in large part, to a lack of inventory. Suddenly, a modest supply of homes hit the market in May and June, and the upward pressure on prices abated somewhat.
Home buyers in 2017 are hoping a similar relief valve will present itself once again to help alleviate the current upward pressure on home prices.
The most recent S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index (for the end of March, 2017) reported the strongest growth in home prices in 3 years, with an annualized increase of 5.8%. This was on the heals of a 5.7% increase for the prior month.
This is good news for home sellers. Obviously, good news for sellers is bad news for home buyers.
The upward pressure on home prices is being driven by three factors:
- a continuing shortage in new-home construction
- a lack of inventory of existing homes on the real estate market
- a steady increase in job supply and personal income
The first two factors account for the lack of supply we are experiencing… the last factor has prompted more Americans to buy houses – often for the first time. The basic economic principle of supply and demand teaches us that the intersection of diminished supply and increased demand will lead to higher prices.[NOTE: According to the National Association of Realtors, the normal level of home inventory across the nation is a ‘six-month inventory’. To determine one month’s inventory, you divide the number of active listings on the market by the number of homes sold per month (on average) during the previous 12 months. According to the NAR, there is currently just a 4.2-month inventory of existing homes for sale… that is down nearly 10% from a year ago (when it was 4.6 months)]
Market conditions in 2014, 2015 and 2016 – with the exception of a lull in the summer of 2014 – led to a consistently strong increase in prices (in the vicinity of 5% annually) from mid-2014 through mid-2016. But, the U. S. economy has improved at an increasing pace since the middle of last summer and, as a result, home price are increasing at an accelerating pace.
Item of Interest: This week, the government will release “end of May” figures for both existing home sales (WED, 6/21) and new home sales (FR, 6/23)