Home Prices Still Hovering Near Record Highs

Home Prices Still Hovering Near Record Highs

Continuing the conversation… trying to figure out how home prices can still be hovering near record highs even after the market has had such a steady barrage of bad news over the last few years. 

If you recall, the bad stuff began in March of 2022, right around the time Russia invaded Ukraine. That’s when interest rates shot up into the stratosphere and almost doubled in the span of two months. Right on the heels of that came a series of other woes: (inflation fears, job worries, rising insurance costs etc etc et al).  But so far, despite all  the forces working to undermine them, prices have managed to hold their own.

So what’s holding them up? It’s never easy to figure out why the market does what it does but since the interplay between supply and demand is its most basic equation, let’s start there. In general, prices are shaped by daily battles between sellers and buyers, as transaction by transaction, the fundamental forces of supply and demand grind against each other and hammer out deals. 

Everyone  knows the market’s normal m.o:  When demand is high prices usually go up. When demand goes down, prices drop.  Conversely,  when supply is high, prices flatten. And when supply dips, prices tend to rise. 

But it’s not that simple is it?  Because it doesn’t take into account other outside factors that influence seller/buyer choices and disrupt the status quo. Or the fact that supply and demand fluctuate independently of each other but also together at the same time. Or that there’s an inherent dynamic between the two that simultaneously co-creates them both. 

For instance: An increase in supply precipitates an increase in demand because some sellers also become move-up buyers looking for more expensive homes. Not to mention aging sellers who downsize by buying smaller, less expensive homes.  Any decrease in supply can also mean less demand since most people can’t afford to move-up OR down the ladder of homeownership without selling their home first.

So perhaps we shouldn’t really be thinking in terms of how much supply or demand there is. Rather, we should be looking closely at the relationship between whatever the current supply and demand is: actual listings vs actual active buyers at any given time.

Demand has dropped significantly over the past few years since the bad news started. You can’t double rates and expect the number of buyers to stay the same. What has happened at the same time though, is that supply has dropped even more significantly than demand has. And as long as existing demand is greater than the active supply, the resulting competition will put upward pressure on prices.