The Key to Housing Prices: Supply and Demand

US house prices have increased over twice the amount of inflation this past year and are projected to repeat that feat this year. According to multiple reports, housing has increased over 6% last year (year over year percent increase) and is expected to rise nearly as much this year (5.7% projection by Case-Shiller). These amounts are more than double inflation (2.5%) and pay increases (2.8%) expected this year. In addition, National averages of house price increases haven’t been this high since the housing boom of the early 2000s (over a dozen years ago).

What is driving these prices ever higher, even with the challenge of higher interest rates on mortgages, due to interest rate hikes by the Fed? The biggest challenge facing home buyers (the demand side of the equation) today is the lack of inventory (the supply side). Existing home sales data shows that inventory has been decreasing for 35 straight months – almost three full years. Supply of homes available for sale at the end of May was down to 2.5 months, whereas a six-month supply is considered normal. In addition, that number is expected to further decrease over the next year.

One of the causes of lower availability of existing homes for sale, is that the Boomer generation is staying in their homes longer than prior generations. In prior generations, the typical retirement couple would “downsize” – sell their family home (cash-out) and move into a condo or smaller house to live out their retirement. Today, seniors are working longer, are living healthier lives, and are enjoying their “castles” a few more years (80 is the new 60). Another effect is the children of boomers (the X-generation and Millennials) are staying at home and living with their parents longer than prior generations.