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