There 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 lenientÂ (data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because ofÂ â€œirrational exuberanceâ€?Â (this is also untrue as prices are not at peak levels when they are adjusted for inflation),Â there seems to be no shortage of opinion.
However, the increase in prices is easily explained byÂ 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 depreciateÂ (see chart below).
According to theÂ Existing Home Sales ReportÂ from theÂ National Association of RealtorsÂ (NAR), the monthly inventory of homes for sale has been below six months for the last five yearsÂ (see chart below).
If buyer demand continues to outpace 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.
Source: Keeping Current Matters