What’s behind rising home prices?

CORY FAST
Published on February 7, 2022

What’s behind rising home prices?

If you’re in the market to buy a home you know what we mean when we say “Yikes!” First, there are so few homes available, especially in the more popular price ranges (such as those for first-time buyers) that those in good condition sell quickly, sometimes with multiple offers.

A tight inventory of available homes drives up prices. Now, if you’re a homeowner considering selling your home, this is good news because you’ll get top dollar (again, if your home is in good condition). For homebuyers, however, it’s beyond frustrating.

So, how long is this situation going to last and what needs to happen to stabilize this market for buyers?

One thing that would help is for builders to build more new homes. “Single-family home construction is running at the slowest pace since 1995,” says Diana Olick at cnbc.com.

“More housing construction will help — and it has been increasing — but the United States has been underbuilding for so long that it’ll take years to meet demand, according to Emily Badger with the New York Times.

So, why aren’t they building?

There are a number of reasons that developers have backed off residential construction. Money, of course, is at the root of most of them, but effects of the pandemic, such as the supply chain crunch are certainly contributing factors as well.

“Builders report shortages of windows and doors and flooring and appliances, and I’ve even heard stories of garage doors that are not going to arrive for months,” Robert Dietzhe with the Home Builders Association tells marketplace.org’s Mitchell Hartman.

Add a worker shortage to the supply chain issues and it’s understandable why the pace of new-home construction isn’t anywhere near where it should be.

“As more skilled workers retire from the industry … not enough young people are coming in,” Ed Brady, CEO of the Home Builders Institute tells Amy Scott at marketplace.org.

Additional challenges to the construction industry include “The pandemic, … growing inflation, … and the potential passage of all or part of the Build Back Better legislation …”  could have a dramatic impact on the construction sector this year,” said American Institute of Architects chief economist Kermit Baker.

Then, there is the existing home market.

When will prices come down?

Most of the factors that are encouraging a rise in home prices interact. So, if one factor changes, it may help the others to loosen their grip on the market. These factors include (but aren’t limited to):

  • Not enough homeowners selling their homes
  • Soft supply of newly constructed homes
  • High demand for homes
  • Low mortgage rates
  • An improving labor market

The factor with the most impact right now is that there aren’t enough homes for sale to meet the demand. Even with the expected mortgage rate hikes this year, there won’t be homes to meet the demands of homebuyers left in the market, according to Ally Yale with The Motley Fool.

“… it’s likely that price growth will start to taper off as we get further into 2022,” she notes. “Make no mistake, though: Prices aren’t suddenly going to drop,” this year.

As you can see, when home prices will reverse their ascent is anybody’s guess. There are just too many variables to allow for an accurate prediction. Since we keep our eye on the economy, however, keep checking back for updates.

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