What’s Causing Ongoing Home Price Appreciation?

If you’re thinking about making a move, you'll want to know what the future holds for home prices. While experts predict that price growth will slow owing to a changing market, long-term appreciation is expected. This implies house values will not drop. Here are two key factors that experts believe will lead to continued price growth: supply and demand.

While Growing, Housing Supply Is Still Low

Despite the fact that inventory is increasing this year as the market moderates, supply is still limited. The graph below exposes why there aren't enough houses for sale today. The data in this graph come from the Census and show how many single-family houses have been constructed in the United States over time, starting in 1970.

The years leading up to the housing crisis in 2008 are shown by the blue bars. Right before the crash, homebuilding increased dramatically, as can be seen on the graph. That's because loose lending standards allowed more individuals to qualify for a mortgage, thus increasing demand. As a result of this overabundance, houses for sale fell during the recession, with some builders leaving the business or shutting down - and that resulted in an extended period of underbuilding of new homes. Even as more new homes are built this year and in years to come, this isn't something that can be addressed overnight. It will take time to build enough houses to make up for the deficit of underbuilding that occurred during the previous 14 years.

Millennials Will Create Sustained Buyer Demand Moving Forward

The market's exuberance during the pandemic was due to a lack of supply. This pushed house values up, as buyers competed with one another for available properties. While buyer demand has diminished today owing to higher mortgage rates, data suggest that demand will continue to be fueled by the large generation of millennials who are nearing their peak homebuying years (see graph below):

Odeta Kushi, Deputy Chief Economist at First American, explains:

 “. . . millennials continue to transition to their prime home-buying age and will remain the driving force in potential homeownership demand in the years ahead.”

That combination of millennial demand and low housing supply continues to put upward pressure on home prices. As Bankrate says:

“After all, supplies of homes for sale remain near record lows. And while a jump in mortgage rates has dampened demand somewhat, demand still outpaces supply, thanks to a combination of little new construction and strong household formation by large numbers of millennials.”

What This Means for Home Prices

Rest easy if you're worried about home values declining. Experts anticipate that house prices will continue to rise as a result of the persistent imbalance in supply and demand. As a result, home values will not go down.

Bottom Line

According to today's conditions that drive supply and demand, experts predict house price appreciation will continue. It'll just happen at a more moderate rate as the housing market continues its return to pre-pandemic conditions.