Home sales in the U.S. have confounded buyers and sellers alike for the last three years. Prices have increased by double-digit percentages, leaving would-be buyers increasingly frustrated. When will home prices normalize?
Why home prices spiraled upward
Several factors have created a low supply and increased demand, which together have driven up home prices.
- Demographics. The millennial generation has entered the housing market in earnest. Many millennials had been shut out of home buying by the Great Recession and high levels of student loan debt, but now that generation is buying homes.
- Low Inventories. Aging baby boomers are either holding onto their houses or have already sold and downsized. Either way, their houses are not available for purchase as they historically were. Additionally, corporate real estate investors are buying up home listings to add to their rental property portfolios, reducing the supply of available homes. Meanwhile, many potential sellers became reluctant to list their homes, to hold on to 3- to 4% mortgage rates.
- Mortgage Rates. With rates at historical lows over the past few years, affordable monthly payments have made the dream of homeownership a reality for millions.
- Low Inventory. Supply chain issues caused building material prices for new construction to skyrocket. And many potential home buyers are working remotely, which has increased their desire for more space and a home of their own.
- Bidding Wars. Even as prices have shot skyward, homes stay on the market for fewer days than they once did, and bidding wars have erupted over the short supply of properties. Buyers have been frustrated, losing house after house to those who offer far beyond the asking price or waive all contingencies.
Buying frenzy may burn out
The buying frenzy has turned on itself. Some buyers have been priced out and withdrawn from the market. Sellers have realized they can cash in for handsome equity but must face the prospect of buying their next home in the same inflated market. Finally, general price inflation is forcing the Federal Reserve to raise interest rates. Rising mortgage rates could price more buyers out of the real estate market.
Given time, housing prices should stabilize and return to the days of normal home inventories, fewer bidding wars, and a more predictable market. If you have found yourself on the outs while trying to buy a home, new opportunities will likely emerge as the market returns to balance.
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