July 26, 2023
Home prices have risen to record heights across North America in markets large and small. What’s driving the trend and what can you do to secure the home you want today?
What's Causing Housing Prices to Rise? (And What to Do About It)
Home prices have risen to record heights across North America in markets large and small. What’s driving the trend and what can you do to secure the home you want today?
The last couple of years has seen record-setting increases in home prices in all types of markets at a variety of price points. It has made it difficult for buyers, who saw their buying power reduced during their home search. The increases occurred in all types of markets, from popular urban and suburban population centers to rural markets, which normally don’t see big jumps in value. Why are US house prices rising and will they ever stop?
The most basic law of economics is that when there is too little of something that a lot of people are looking for, prices go up in response. The last few years have seen unprecedented levels of demand along with significant disruptions to the market, making it practically inevitable that prices would rise.
One of the factors that led to increased demand was the coming-of-age of Millennial homebuyers, a massive demographic group. At the same time, another huge age cohort, Baby Boomers, began to reach retirement age and, instead of downsizing or moving out of their big family homes, decided to age in place, in many cases. This created housing shortages, especially in suburban enclaves where Boomers were staying put at the very same time that Millennials were starting to look for larger homes for their growing households.
On top of all of this, the pandemic created an urge to move out of more crowded cities and find homes with more interior and exterior space. Long-term work-from-home made this even more popular since many young professionals no longer had to commute to an office each day and could work from anywhere. At the same time, the shutdown itself impacted builders, meaning that even fewer new construction homes were going on the market during this time.
Another pandemic-related factor was the supply chain disruptions that slowed down builders even further, keeping them from obtaining the materials they needed to complete new homes. In some cases, this drove additional buyers into an already overcrowded real estate market, as they had to give up on new construction projects and buy an existing home.
As home prices rose, rent rates rose right along with them, making investment properties a popular hedge against the uncertainties of the pandemic economy. That meant that well-funded investors could compete with cash and drive up prices even further. At the same time, those who already own homes have been reluctant to put them on the market, due to the struggle they would face to find something comparable to buy. That desire for financial security kept many staying put, decreasing inventory alongside increasing demand and perpetuating a vicious cycle.
Not necessarily. While the pace of home sales may slow a bit (which is good news for frustrated buyers), the value that homeowners have gained in their homes doesn’t go away due to a rise in interest rates. More likely, homebuyers will simply end up paying more for their financing, pursuing alternative finance options, or waiting to put together a larger down payment before buying.
Home prices are forecast to continue rising, though not at the breakneck pace of the past few years. That’s because, even if demand declines somewhat, there’s still enough of it out there, and low enough inventory, to continue supporting the gains of the past few years.
Many people remember the 2008 mortgage meltdown and the crash in home prices that accompanied it. That has led some to speculate that rising home prices over the past two years were similarly unsupported and unsustainable and that eventually, the price bubble would pop.
In reality, however, the 2008 crash was an outlier among economic shifts, driven by institutional irregularities in the mortgage market itself. Since then, lending requirements have been strengthened and current valuations are based on a period of robust demand and a much firmer financial foundation.
In fact, even in the case of a recession, housing generally becomes more popular as a hedge against inflation and as a way to diversify investment portfolios. Historically, home prices have risen during periods of economic instability because real estate is seen as a more secure and stable bet than stocks or bonds.
The good news is that you can offset the effects of higher home prices by planning ahead and making good financial decisions at every point of the buying process.
The bigger your down payment, the less you’ll have to finance. The less you have to finance, the lower your monthly payment will be and the more equity you’ll have in the home from day one.
By getting pre-approved early in the process, you’ll have a better understanding of your budget right from the start of your search. That means that you won’t fall in love with a house, only to find out that you can’t afford it.
Similarly, being pre-approved before you identify the right home means that you’re ready to move forward with an offer. That gives you a better chance of avoiding multiple offer situations and bidding wars with other hopeful buyers.
Looking for a lower price to offset a rise in prices on homes in your target market? Consider changing up your search criteria in order to increase your buying power. Think about a fixer-upper or reevaluate your wishlist to see if you can be just as happy with a house that doesn’t have everything you initially thought you wanted on move-in day.
One of your most important allies during the process of looking for a home is your trusted real estate agent or broker. Not only can they offer guidance on neighborhoods and markets that fit your budget and your wishlist, but they will also have access to a large network of colleagues and homeowners, allowing them to identify homes that are going on the market before other buyers have them on their radars.
