The Real Reason Home Prices are Increasing

There are many unsubstantiated theories as to why home values are continuing to increase. From those who are worried that lending standards are again becoming too lenient (data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because of “irrational exuberance” (this is also untrue as prices are not at peak levels when they are adjusted for inflation), there seems to be no shortage of opinion.

However, the increase in prices is easily explained by the theory of supply & demand. Whenever there is a limited supply of an item that is in high demand, prices increase.

It is that simple. In real estate, it takes a six-month supply of existing salable inventory to maintain pricing stability. In most housing markets, anything less than six months will cause home values to appreciate and anything more than seven months will cause prices to depreciate (see chart 1).

The Real Reason Home Prices are Increasing | Simplifying The Market

According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes has been below six months for the last four years (see chart 2).

The Real Reason Home Prices are Increasing | Simplifying The Market

Bottom Line

If buyer demand outpaces the current supply of existing homes for sale, prices will continue to appreciate. Nothing nefarious is taking place. It is simply the theory of supply & demand working as it should.

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We are ethical, educated, experienced full-service real estate agents, affiliated with award-winning customer service brokerage RE/MAX Gateway, serving communities in DC, MD and VA.  We represent buyers, sellers, investors (including "flippers"), landlords, and tenants.  We have experience in home renovations.  With a background in law and mediation, we are high-level negotiators and strategists in real estate transactions.  We know our markets and get the best results for our clients.  Integrity, knowledge, and exemplary customer service are the keys to our business success.

 

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"Wendy and Brian are one of the most professional and hard working realtors I have ever dealt with. They were always communicating with me in a ... more "
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by tbonfiglio
2260359
"A must hire!!! Wendy and Brian were an absolutely outstanding real estate team. Their knowledge of the market and professionalism made them the ... more "
5.0/5.0
by ericaswift4
2245254
"Last week, my husband and I successfully sold our lovely little bay-windowed condo overlooking Rock Creek Park in Georgetown, Washington DC. We can’t ... more "
5.0/5.0
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