Nowadays, it is quite typical for the majority of the people suspect bigger forces are at work behind everything that is happening to our lives that we do not necessarily want. The government, the 1% or simply big companies conspiring to make our lives miserable beyond belief. Recently, there have been rumors about why and what is causing the home prices to go up. Let’s shed light on this matter by reminding everyone about the law of supply and 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 greater than seven months will cause prices to depreciate (see chart below).
According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes for sale has been below six months for the last five years (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.