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What Causes the Ups and Downs of Home Prices?

If you're considering buying or selling a house, understanding some primary variables that drive home prices to change is critical. Although some of the reasons for fluctuations in reasons home prices can be confusing, understanding them can be extremely beneficial.

In general, folks want to buy houses before prices rise and exit when they believe property values have peaked, but this may be extremely difficult because there are other factors to consider other than the present situation of the local market.

Buying your first home in your early years after school will likely make you a homeowner for most of your life. Over such a long period, there will surely be ups and downs in the real estate markets where you've put your dough. Historically, real estate prices undergo more and larger gains than losses over long periods. Consequently, you shouldn't worry about timing your purchase.

So why do home prices rise and fall over time?

There's no easy way to predict the price of real estate in a certain area over time. Prices and demand for homes in a neighborhood, city, town, or state are largely determined by:

Economic change

The economic strength and vibrancy of a community impact demand for and pricing for housing. People are attracted to neighborhoods with great job opportunities, low crime, excellent education, and social amenities.

Generally, home values will appreciate in cases of:

  • Job Growth - A city can have millions of jobs, but house prices will fall if the job market is weak because people won't be lining up to live there. See where the point is headed? Always check the job rate of a place when examining its real estate market.

  • Job Diversity - Now, job growth doesn't matter if there are no diverse industries. A place with diverse job opportunities is the best because people keep coming in, and up goes the demand for housing, and thus, their value.

  • Job Quality - Areas with employment opportunities in technology and entertainment are better for real estate prices than areas that rely on farming, small retail, or government or because not all jobs are created equal

You can get insight into an area's employment opportunities and, therefore, economic health by looking at the US Bureau of Labor data.

Available housing

Job opportunities influence the demand side of the housing market, while the number of houses available is the supply side of things. Jobs may be growing in an area, but don't expect prices to rise if there's an oversupply of houses. Conversely, employment opportunities may be low, but prices may skyrocket if houses are in short supply.

You can get insight into available housing by looking at vacancy rates, the number of building permits, and the amount of developable land available. Low vacancy rates mean fewer units available to rent, i.e., most people are likely to buy than rent. The opposite is true: higher vacancy rates mean more units available to rent, and thus, people are more likely to rent than buy; this reduces the demand and, therefore, prices of houses.

The other factor is the number of building permits issued. If there's an increased issuance of these permits, there'll likely be an oversupply of houses soon. Still, if there's limited land to develop, there's not going to be an oversupply anytime soon. Learn more about the housing demand here.

Sunset over Destin city Florida

Inventory of homes for sale and actual sales

The number of property listings affects the prices of houses too. If there are more sellers than buyers, the buyers have the power. They can be picky about what they buy. It's called a buyer's market. As many sellers compete for fewer buyers, it exerts pressure on the prices, leading to low housing prices.

The opposite is true; fewer listings mean multiple purchase offers and rapid sales, usually higher than the list prices. A sellers' market is characterized by multiple offer situations, bid wars, and constant price increases.

Interest rates

When it comes to interest rates, you should know that the Fed reserves the right to adjust interest rates at specific times throughout the year, based on current economic data. Yeah, that's pretty much what happens, the institution lowers or raises rates accordingly, and the banks generally follow suit.

When interest rates are low, housing may become more affordable since low rates mean low monthly mortgage expenses and, therefore, more renters can own homes. When this happens, two things are possible:

  • Asking prices may rise due to increased demand for houses
  • Asking prices will decline if more investors take advantage of the low-interest rate to build more homes at lower costs

For example, in the late 200s, interest rates in the US were falling, but some areas of the country experienced a decrease in home prices too. The same was seen in the late 1990s when home prices soared even though interest rates were on the rise.

Therefore, when it comes to interest rates, better not let what's going on or what you think will happen with the rates sway your decision to buy or sell a home. Keep learning about interest rates here.

A note on timing

While its true housing prices fluctuate due to various factors, as seen above, history shows that over the long term, the growth is larger and more than the declines.

This table showing median sales prices for homes in the United States since 2016 proves it.

Month of Observation Median Home Price (NSA)
1/1/16 $213,044.08
6/1/16 $224,741.03
12/1/16 $226,288.45
1/1/17 $225,384.99
6/1/17 $238,437.13
12/1/17 $240,455.50
1/1/18 $241,474.30
6/1/18 $253,574.93
12/1/18 $253,853.66
1/1/19 $254,497.61
6/1/19 $265,944.67
12/1/19 $268,818.45
12/1/20 $300,401.18
1/1/21 $303,034.68
6/1/21 $335,520.87
12/1/20 $300,401.18

Get more data here for a clearer picture of things

Parting shot

Various factors influence housing prices; while some act in isolation, others influence each other. Identifying them is essential to getting the best price for a home. Generally, you'll see larger and more upswings than downswings in the long term, so the shorter the amount of time you plan on keeping your house, the more serious it is to pick the right time to buy.

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