Home Price Appreciation Is as Simple as Supply and Demand
Home price appreciation continues to accelerate. Today, prices are driven by the simple concept of supply and demand. Pricing of any item is determined by how many items are available compared to how many people want to buy that item. As a result, the strong year-over-year home price appreciation is simple to explain. The demand for housing is up while the supply of homes for sale hovers at historic lows.
Let’s use three maps to show how this theory continues to affect the residential real estate market.
Map #1 – State-by-state price appreciation reported by the Federal Housing Finance Agency (FHFA) for the first quarter of 2021 compared to the first quarter of 2020:As the map shows, certain states (colored in red) have appreciated well above the national average of 12.6%.
Map #2 – The change in state-by-state inventory levels year-over-year reported by realtor.com:Comparing the two maps shows a correlation between change in listing inventory and price appreciation in many states. The best examples are Idaho, Utah, and Arizona. Though the correlation is not as easy to see in every state, the overall picture is one of causation. The reason prices continue to accelerate is that housing inventory is still at all-time lows while demand remains high. However, this may be changing.
Is there relief around the corner?
The report by realtor.com also shows the monthly change in inventory for each state.
Map #3 – State-by-state changes in inventory levels month-over-month reported by realtor.com: As the map indicates, 39 of the 50 states (plus the District of Columbia) saw increases in inventory over the last month. This may be evidence that homeowners who have been afraid to let buyers in their homes during the pandemic are now putting their houses on the market. We’ll know for certain as we move through the rest of the year.
Local Market Outlook from the Cromford Report
Looking at statistics from the Cromford Report which only focuses on our market here in Great Phoenix, we are seeing appreciation rates of 38% if you use price per sq. ft. or 33% if you use monthly medians. Both of these are flattering because part of the rise is due to high end homes taking a larger share of the market than normal for June. But however you measure them, home prices are at extremely high levels and will continue to rise while supply remains dramatically below normal. Cromford is reporting that it is 76% below normal at the moment.
The period since June 2020 has been a painful 12 months for buyers and many are likely to be feeling bruised and beaten up. It would not be surprising if demand weakened further because of this, but withdrawing from the market is unlikely to be wise from a financial perspective. Prices still have a quite a lot of upward momentum and mortgage rates could easily move higher than today. Local buyers need to remember that to a buyer from California or Washington, Phoenix still looks like amazingly good value for money, even after another 20% price hike.
And what is your alternative - rents continue to climb at a steep rate and are unlikely to stop rising. At least if you buy a pricey home today you will benefit from the price growth tomorrow in the form of home equity. None of your rent payment will do that.
If you are interested in buying or selling a home here in the Greater Phoenix area, let's connect...602.362.5484. We are assisting sellers get TOP TOP dollar for their homes and still getting buyers under contract.
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