What's Behind The Absurd Rise of Home Prices

• Author: Jeffrey Simmons
• Posted: 2024-04-12

If you have attempted to purchase or sell a house in the past few months, you have unquestionably seen it: Home prices are through the roof. Indeed, according to a new survey, home prices have risen 20% compared to the same time last year. This has resulted in a monstrous boom of $2 trillion in home equity, benefiting homeowners but hurting those who are just trying to get into the market. This has had some positive economic effects, including increased consumer confidence and creating a cycle of increased demand for people trying to get into the market. However, it has also led to major fears that we are in another housing bubble.

Yes, it's COVID...

There is no question that COVID played a role in the home situation we are currently in. When COVID first hit, many states shut down their real estate market, while many delayed moves, fearing that doing so during the pandemic would be too difficult. The market reopened and people slowly began to move again, but inventory was pushed to a record low - a low that it has since largely stayed at. Additional fears - like waling into new environments and having strangers traipse through someone's house - also played a role in keeping people off of the real estate market. So did the economic devastation that followed: Moves were canceled across the country as people lost their jobs, businesses shut down, and the world essentially entered economic hibernation.
As the housing market began to reopen, more and more people began to snap up houses, and this kept housing inventory at record lows. Indeed, inventory is still nowhere near where it was at the same time two years ago, continuing this cycle of demand.

...but That's Not All

However, it would be foolish to assume that COVID is still the only factor playing a role in the current state of the real estate market. For example, the improving economy has also led to increased home sales. Unemployment has partially bounced back and the United States economy is growing, allowing many to purchase homes again and giving homeowners the confidence to increase bids as they make them. The stimulus payments of a few months ago have also made down payments more affordable.
At the same time, investors have sensed the opportunity to purchase homes, flip them, or rent them out, as rent prices have also increased. In some markets, the role of investors has almost doubled. This, in turn, has made it even harder for regular people to make bids that are competitive in the current market.
It's also worth noting that inflation is increasing across a variety of areas as well, including food, building supplies, and more. All of this, in turn, has helped to boost the price of housing and is putting upward pressure on the market overall.
At the same time, interest rates remain low, allowing homeownership to be more affordable than ever. As long as getting a mortgage is as inexpensive as it currently is, the market demand will likely continue.
Last: Rental prices are also increasing, showing higher growth than what we have seen in years. This is pushing more people out of the rental market and into the homeownership market.

A Bubble Ahead?

The fears of a housing bubble continue to grow with prices and demand, and at some point, housing market experts are worried that the bubble will pop, and homeowners will be left holding the bag for homes that they overpaid for.
If there is a bubble - as there have been in the past - then many homeowners will live in homes that are no longer worth what they paid. This, in turn, could dramatically slow the housing market, and it may take years before it hits equilibrium again.
However, a bubble is defined by both supply and demand, and there is one thing that is very different than the housing bubble of the 2000s that led to the Great Recessions: Mortgages are not nearly as easy to get. Credit checks are stiffer and mortgage rates are much lower. As such, some have come to the conclusion that the market will unquestionably return to earth, but foreclosures and evictions like we once saw will not happen again.