Statistics
released this spring show that both new and existing home prices have risen
significantly over the past twelve months. For example, the census bureau has
indicated that the median price of a new home sold in April was $271,600, which
was 8.3 percent higher than the previous month and 13.1 percent higher than one
year ago. This is interesting news not only because it affects those in the
market to purchase a home, but the economy in general. Wealth is created
through rising home prices and this wealth has the potential to increase
consumer confidence and thus consumer spending. Two questions arise from
here--why are home prices rising and will they continue to do so? They are very
interesting questions because just a few years back many were predicting that
home prices would not recover for decades. In our opinion, it is also no
coincidence that rates are rising at a time when home prices are rising and the
real estate market gets stronger.
There
are four reasons that home prices are increasing. For one, home prices dove
down too low during the slump. In many areas the price of homes was below the
replacement cost of purchasing a home. With so many foreclosures on the market,
there was too much downward pressure on home prices. In addition, the cost of
owning came in significantly below the cost of renting --especially when record
low rates were factored into the equation. Investors across the nation
recognized these economics and came in to purchase excess inventory to lessen
the foreclosure issue and the equation quickly reversed. This caused the second
reason for higher home prices--a tightening of inventory caused the price of
homes being "bid up" in many cases. Across the nation, we have seen
evidence of multiple bids on properties up for sale--especially at the lower or
middle end of the market. This has created the opposite situation with regard
to why home prices dove due to bank sales. In essence, reasons one and two have
created a bounce in the market. The last two reasons? The economy and demographics.
We will discuss these in part two of this series, as well as the future outlook
for home prices.
Mike
Ervin
Senior
Mortgage Banker
NMLS # 282715
Office: 650-735-5261
Cell:
650-766-8500
mike@mikeervin.com
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