Over the past 25 years, nationwide home prices have appreciated about 3.8% per year. During the past year, the average price for a home is up 9.6% in Metro Denver. Nationally, homes appreciated at 9.5%, according to the CoreLogic Case-Shiller U.S. National Home Price Index.
When people see numbers like that, the natural inclination is to think growth like that is unsustainable. The truth is, appreciation of 9% per year IS unsustainable.
Is this a bubble, though? Will prices “pop” and begin to fall?
No one expects appreciation to continue at this pace. The National Association of REALTORS expects home prices to grow at 6% over the next year, while the Mortgage Bankers Association expects 5% growth. CoreLogic expects 2.9% appreciation.
If interest rates stay low and there’s a continued lack of inventory, we’ll continue to see rising appreciation.
If inventory increases slowly, prices will rise, but at a slower pace.
Inventory has gone down and prices have gone up during the past 11 years. As more homes go on the market and interest rates go up, the rate of appreciation will start to slow.
A bubble pops suddenly. What seems likely is slowed growth in home prices.
Take a look at these graphs. They show the inverse relationship between prices and inventory. As inventory has gone down, the average closed price and the average price per square foot have gone up.
In 2008, there were 11 months of inventory for sale! In other words, if no new homes came on the market, it would take 11 months to sell them all! Right now, we have about 1 month of inventory. If the number of homes on the market were to suddenly spike – and it would take a very large spike – prices could level off or decrease.
Anything less than 5 months of inventory is considered a seller’s market, while 5 to 7 months of inventory is considered balanced. More than 7 months is a buyer’s market, where buyers have more negotiating power and prices can be driven down or stay stable.
The number of homes on the market is likely to rise, but it’s unlikely we’ll suddenly see the type of surge in the supply that could drive prices down.
Various estimates show that more than half of all homeowners have at least 50% equity in their homes. Even if prices dropped, a large number of homeowners wouldn’t owe more than their homes are worth. It’s unlikely these people would sell in a panic if prices fell or leveled off. In 2006, sub-prime mortgages made up about 20% of the market. Although we are seeing some “nonprime” mortgages now, lenders have made it harder to get a mortgage, not easier. So we’re also unlikely to see the number of foreclosures we saw back then.
The law of supply and demand will continue to be the main determiner of home prices. Without a huge number of homes hitting the market suddenly, prices are likely to continue to rise, just not as quickly as during the past year.