Why Home Prices Keep Going Up
If you've ever contemplated the idea of purchasing a new home or upgrading from your current residence, you're likely familiar with the emotional rollercoaster that fluctuating home prices can unleash. It's a journey filled with financial aspirations, moments of uncertainty, and a touch of anxiety that many can relate to.
However, if you've postponed your plans out of concern that home prices might take a nosedive, it's essential to recognize that this fear may be unfounded. In fact, quite the opposite is happening. National data from various sources consistently indicates that home prices have been on the rise this year (as illustrated in the graph below).
This graph provides a clear picture of the situation. In the first half of 2022, home prices saw a significant surge, represented by the green bars on the left side of the graph. These increases were sharp and, some might argue, unsustainable.
Consequently, in the latter half of the year, prices experienced a correction, with a slight dip (depicted in red). However, these declines were relatively shallow and short-lived. Unfortunately, the media predominantly fixated on these drops in their headlines, leading to a surge of fear and uncertainty among consumers.
What hasn't been sufficiently emphasized is that, in 2023, home prices are once again on the rise, but this time at a more normal and sustainable pace (represented by the green bars on the right side of the graph). After the lofty price gains and subsequent corrections in 2022, the fact that all three reports now point to more typical price appreciation this year is indeed good news for the housing market.
Orphe Divounguy, Senior Economist at Zillow, explains the changing home prices over the past 12 months as follows:
"The U.S. housing market has surged over the past year after a temporary hiccup from July 2022-January 2023. . . . That downturn has proven to be short-lived as housing has rebounded impressively so far in 2023. . ."
Looking ahead, it's typical for home price appreciation to ease during this time of year. As that occurs, there's a risk that the media may misinterpret slowing price growth (deceleration of appreciation) as home prices falling (depreciation). But it's crucial not to be deceived; slower price growth is still indicative of growth.
So, why are home prices on the upswing once again? One significant reason is the persistent shortage of homes available for sale to meet the demand from eager buyers.
While higher mortgage rates do temper buyer demand, they also lead to a decrease in the supply of available homes. This can be attributed to the "mortgage rate lock-in effect." When interest rates rise, some homeowners are hesitant to sell their current homes and relinquish their low mortgage rates, especially if it means taking on a higher rate for their next property.
Therefore, with rising mortgage rates influencing both buyers and sellers, the dynamics of the housing market's supply and demand have been affected. However, since the number of potential buyers continues to outweigh the available homes for sale, prices persist in their upward trajectory. As Freddie Mac explains:
"While rising interest rates have reduced affordability—and therefore demand—they have also reduced supply through the mortgage rate lock-in effect. Overall, it appears the reduction in supply has outweighed the decrease in demand, thus house prices have started to increase . . ."
So, how does this development impact you?
If you've been hesitant to enter the housing market due to concerns about potential depreciation, the knowledge that home prices are once again ascending should provide a measure of comfort. Purchasing a home presents an opportunity to own an asset that historically appreciates over time.
If you've been holding off on selling your property out of apprehension regarding fluctuating home prices, now might be the right time to collaborate with a real estate agent and list your house on the market. There's no need to delay further, as the most recent data indicates that home prices have shifted in your favor.
If you've postponed your moving plans due to worries about a decline in home prices, the data underscores that home prices are, indeed, rising across the country. Consider reaching out to a local real estate agent to gain insight into how this trend is manifesting in your specific area.