Normal… What’s normal when it comes to real estate investing? When will housing prices in the US market go back to normal? A question asked by so many; yet no concrete, reliable answer has been found. Home prices are rising more and more each year, especially after the burst of the housing bubble in 2008, but the US housing market has not yet recovered. Price growth in most markets is so slow that it will take years for the US housing market to recover fully. What is the future for home prices? And what are the factors that cause home prices to increase? Read to find out!
The US housing market has been known to be like a roller coaster ride. Rising and falling, rising and falling over and over again. Here are the main key factors that affect home prices.
1. Supply and demand
We all know from basic economics that when there is high demand for something and supply of it, the price of this thing will increase. In real estate, if the supply of real estate properties is limited, home prices are inevitably set to rise. The same holds true when demand is large. So for example, if you’re looking to buy an income property in a new hip neighborhood, the supply of good properties within it may be limited, while demand is expected to be skyrocketing. With low supply of properties in a certain area and a lot of buyers looking to buy these properties, sellers will request a higher price, and buyers will have to oblige. These are the basics of a seller’s market. Limited supplies of homes that are so desirable tend to attract buyers to the market who are willing and able to pay exceptional prices, much higher than in close-by neighborhoods or cities.
2. Employment market factors
Another factor which determines the demand for housing – and thus property prices – is the job market (employment versus unemployment) and the average level of income. Employment factors affect the US housing market and home prices greatly. With strong economic growth and rising incomes, people will be able to spend more on real estate properties, thus increasing demand and pushing prices up. Falling incomes, on the other hand, will mean people can’t afford to buy a home, while those who lose their job may fall behind in their mortgage payments and end up with their home being repossessed. Income and employment rates have a direct effect on home values.
3. Interest rates
Interest rates also affect the cost of housing indirectly. How? Well, interest rates have an effect on the size of the monthly mortgage payments. A period of high interest rates will increase the cost of mortgage payments and will push the demand for buying a house downward. Consequently, high interest rates make renting relatively more attractive than buying, which is great news for those real estate investors who already have an income property or two. The magnitude of the effect of interest rates increase in cases in which real estate property owners have large variable mortgages. All in all, housing prices tend to increase when interest rates fall.
The future of home prices
So many things have changed over the years in the US housing market. The biggest factor for change so far this year is President Donald Trump. A rise in mortgage rates was observed after Trump’s election. So, unless Trump creates some sort of stability in the US housing market, home values are going to continue to go up. As far as the US housing market is concerned, with the strong dollar and high inflation which have become apparent, home values are set to keep going up greatly. Home prices in the US should continue to increase in the coming years. Zillow reports that “home values have increased 6.2 percent over the past year with the national median home value at $191,200. And there is still more to come for the future”.
“Can we expect housing prices to fall back to normal and when?” is a question that is very difficult – if not impossible – to answer. We have to take into consideration so many factors beyond the obvious one – interest rates. In specific, we need to consider whether wages are rising or going down, and whether banks are easing or tightening credit availability. So, even the biggest experts can never know with certainty when exactly prices within the US housing market will go back to normal because our economy changes so quickly without giving any warnings. Thus real estate investors cannot expect any concrete answers when it comes to housing prices in the future and should not rely on mere speculations. Our housing situation is definitely one to watch. Moreover, real estate investors need to keep in mind that there is no universal US housing market; every location – every city and every neighborhood – is a different real estate market with different forces pushing property prices up and down. That’s why the best piece of advice to new and experienced real estate investors is to familiarize themselves with the markets around them in addition to out-of-state markets (which can often be more profitable) and understand their specific state in order to make the right investing decisions. Be sure to check out Mashvisor for the best places to invest in real estate and for concrete properties available across the US.