In 2016, home sales rose across the board, even in the face of lower demand in many major markets around the country. Even some real estate veterans were surprised by this market behavior; however, there are some explanations that may help to make sense of it. Here are some of the reasons that home sale prices in the United States are on the rise and looking up in 2016.
How much does buyer demand actually affect home sale prices?
Believe it or not, the supply and demand curve of the real estate market has less to do with the average home price in the United States than one might think. In 2016, buyers and sellers were frustrated by a relatively short supply of housing; however, housing prices still rose across the board in every geographic area in the US, except the west. According to National Association of Realtors chief economist Lawrence Yun, home prices will continue to rise throughout the rest of the year because of sustained growth of jobs, the improved overall economy, overriding demand from past months, and an improved real estate inventory. These factors have very little to do with the mortgage rates that people take on or the wages that supposedly drive people’s ability to buy homes.
In short, home prices do not need increased sales to rise: Home value is based on the economy, not the buyer. Getting away from the simplistic 101 class-level concept of perfect supply/demand curves with rising prices attributed solely to increased buyer demand is the first step to truly understanding the real estate market.
Does the buyer demand affect home sale price at all?
There is some effect that increased demand and limited supply have on the rise in home prices; it is just not the primary effect. Yun says that the housing market will grow by one to three percent because of the rise in mortgage rates, but this trend will stick because of the housing shortages that are currently the norm in many markets. This shortage has to do with the conservatism that home building developers showed over the past few years, and the effects of this less productive building season will show itself fully during the spring buying season.
Where did prices rise in the US and why?
Home values around the United States rose in 236 in 276 of tracked markets. The cities with the largest gains in home prices include Pittsburgh, Denver, Dallas, Miami, and Seattle. These areas shared the characteristic of hard-hit, weather-beaten locations where homes were still cheap in the first place. These cities also have relatively high median incomes and strong economies. Markets such as Miami are places in which people have the ability to build equity quickly, sell their housing, and trade up in line with market trends rather than personal need. There are many less entry level home owners with other concerns on their minds like school loans.
Why did home building slow down in 2015 and 2016?
Home builders cite a lack of skilled labor, no lots to build on, and less construction loans as the reason for less new home building in 2015 and 2016. Homeowners who are outside of the metropolitan areas mentioned above and those like it actually faced a problem of equity and mobility. Although underwater mortgages are decreasing slightly, these people still do not have enough money to expand their homeownership options.
What do these trends mean for the future?
Home prices will continue to rise even as buyers lose their ability to buy those homes, say Yun and real estate sites like RealtyTrac. 2016 will bring a further separation of those home buyers with the ability to expand their real estate portfolios and those that do not. The homes that sell will drive up the prices of homes in general and the equity that homeowners already have in their properties. Those without the ability to get into the home buying business will likely find it harder as the year goes on.
The market for entry level properties will most likely be propped up by government sponsored entities (GSEs) such as the Federal Housing Administration (FHA). The people who usually qualify for loans that are administered from program like these are lower income, bad credit buyers. This can be quite frustrating for the young professional with no credit history and an income that is above that which would enable him to qualify for one of these loans. There are some strategies that this person can employ, however.
Looking into setting up an IRA as a tax deferral down payment strategy is a great move, say many real estate investors. Although the federal government does not participate in any direct first time home buyer tax credits anymore, the government has removed the penalty for early withdrawal from an IRA for up to $10,000. Native Americans and other groups of Americans may also be able to take advantage of home buying programs that offer lower down payments and waivers on closing costs. Seek help on government websites from specific GSE sites such as HUD and the FHA home pages; they can direct you to state and lender resources to get you into this rising market.
2 Point Highlight
According to National Association of Realtors chief economist Lawrence Yun, home prices will continue to rise throughout the rest of the year because of sustained growth of jobs, the improved overall economy, overriding demand from past months, and an improved real estate inventory.
Although the federal government does not participate in any direct first time home buyer tax credits any more, the government has removed the penalty for early withdrawal from an IRA for up to $10,000.
