Thousands of people want to buy houses right now, but affordable homes can be hard to find. Everything from demographics and consumer sentiment to interest rates play a part.
One of the top reasons for high demand is that owning a home can be a great investment. It's one of the best ways to build equity and grow your net worth over time.
Demographics
Factors such as how many people live in an area, how old they are, and how big their households are all impact supply, and you can learn more about that in part two of this series. Each of these elements also impacts demand.
In an area with a lot of young professionals looking to buy, for example, it’s likely that prices for condos and townhomes will go up. In a neighborhood where young families purchase family homes recently abandoned by retirees, prices for those homes will go up as well.
When you add in natural population growth and immigration, it's no surprise that demand is high.
There are also second homes and vacation homes to think about. A lot of older Americans with financial reserves are investing in these properties, making demand even greater across the board.
Investor activity
It’s still true that most homes in the U.S. are owned by people who live in those homes, but investors are increasingly buying single-family homes with the hopes of either renting them out or fixing them up to sell at even higher prices. Investors can also buy up land in anticipation of future sales, and it all drives prices skyward. This can have a big impact on a local level.
Local rental prices
Another factor that can increase home prices is the cost of rent. In an area where it’s cheaper to rent than to buy, housing prices are likely to stay lower because more families will choose to rent. If rents are higher than a typical mortgage payment, on the other hand, you can expect home demand (and prices) to increase.
This can spell trouble for low-income families and anyone still renting—if you can’t buy and you can’t afford to rent, where are you supposed to live? But that’s a subject for another day.
Consumer sentiment
This one’s a bit wibbly wobbly, but it’s important to keep in mind. If people expect homes to hold their value, prices will stay high. The average Joe is more likely to expect this if the economy is good and jobs are stable. But if people are afraid they’ll lose their jobs or their investments will lose value, home prices usually drop.
It’s kind of a self-fulfilling prophecy, but that doesn’t make it any less real. On a national level, economists track what are known as consumer confidence indexes to better understand this factor.
Home financing
No discussion on the cost of housing would be complete without a thorough analysis of financial factors.
Interest rates are probably the biggest piece of the puzzle. When rates are low, it costs homeowners less to borrow money to buy a house. That decreases the total cost of housing over time and can mean more loans (and more homes sold) economy-wide.
Other financial factors include investor overlays, the number of loan products available, and the availability of credit (how many people meet qualification standards). Technology also plays a role. When mortgages are easier to get because of faster applications and easier access to financial data stored in the cloud, more homes will sell.
If there aren’t enough houses for sale to meet increasing demand from all these factors, it makes sense that home prices go up.
The home price rollercoaster is trending up
If you look at the change in home prices for just a few years at a time, you’ll see prices going up and down pretty dramatically. If you zoom out and look at several year's worth of data, however, you’ll see a steady upward climb in values.
If you’re renting now but interested in buying a home in the future, check out our rent vs. own calculator. If you’re looking to sell, read about how to find a great real estate agent.
When you’re ready to buy (whether or not you’re also selling), contact your loan officer early on to craft a strategy that wins bidding wars in a seller’s market. Getting pre-qualified early on can help improve your chances, too, whether you're looking for a primary residence or an investment property.
This article is part three of our series about how home prices are decided. To learn about how prices are set for specific homes, read part four of the series.
