Over the last decade, home values have experienced wild rises and falls. A financial crisis, and the burst of the real estate bubble in 2006 led to a quick decline in real estate prices, with the Case-Shiller Housing Index losing 33% between 2006 and 2010. Soon after the fall, however, real estate investors realized they could buy at low prices and turn a nice profit when the market recovered. Between 2010 and 2012, the real estate market showed prices growing at about 10% per year.
There are three main reasons why real estate experts across the country predict real estate prices will continue to rise: reduced inventory of houses for sale, reduced new construction, and strict lending practices.
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Reduced Inventory of Houses for Sale
Fewer homeowners are listing their homes for sale, as they aren’t actively looking to trade up to a larger home. In the past, many new homeowners would buy a “first house” with plans of upgrading later to a larger home when finances allowed. With more buyers remaining in their first house long term, there are fewer homes on the market for new buyers to choose from.
Homeowners who may have considered selling their homes might be underwater on their mortgage or in a low equity situation where it doesn’t make sense financially for them to list it for sale. With fewer homes on the market, prices of available homes for sale will continue to increase, according to David Crowe, chief economist at the National Association of Home Builders.
Reduced New Construction
In a normal housing market, David Crowe says 1.6 million new single and multi-family homes are built each year. Last year, single-family homes made up just 700,000 of new construction homes when normally over a million are built annually.
Builders are still being cautious during the lengthy recovery of the real estate market and are simply not building as many homes annually as they used to, further contributing to a lack of inventory for new homebuyers to choose from and the increase in real estate prices.
Total home inventory is 9% lower than it was last year according to Zillow, even in areas where low inventory has not been a problem in the past. Nashville, Kansas City, and Raleigh are all showing lower inventory.
Strict Mortgage Lending Practices
Before 2008, banks were giving out mortgage loans to just about anyone who applied for them. While this contributed to the housing crash, the emergence of stricter lending practices and underwriting standards have made it harder for new home buyers to get approved for a mortgage loan.
A combination of reduced existing houses for sale reduced new construction and strict mortgage lending practices will continue to drive home prices up in most areas. A tight housing market drives prices up. In 2015, the Case-Shiller 20-city index shows home values rose 5.7%. The National Association of Realtors is calling for existing-home prices to increase 3.4% in 2017, while financial strategists and economists estimate total growth for 2016 to be in the 4-5% range.