Why Aren’t The Prices of Homes Increasing More?

Over the past two years, the prices of homes have increased by 5% year-over-year, however, according to Capital Economics, that number could be way off.

Capital Economics released an updated report on the new housing market where it shows that under the current housing conditions and in combination with past experience, the prices of a home should be raising at twice the rate, making it 10% instead of the paltry 5%.

Right now, the housing market is experiencing a shortage of available homes for sale, which means that there are more buyers who are looking for a home than actual homes that are available for purchase. In a situation like this, you would assume that this would drive up the purchase price of available homes.

Right now, as it stands there is about only five months’ worth of homes available on the market. When you look at previous data that would normally be associated with the growth of home pricing would be around 10% year-over-year.

So what is causing this curious difference? It’s the behavior of the home builders themselves.

Unlike home buyers, builders have much more of a reason to ensure a quick sale instead of holding out and hoping for a higher offer. Although new homes only make up about 10 to 20% of total sales in the housing market, they still have such a big impact on the pricing market.

Unlike sellers, home builders have to have a cash flow and when they are sitting on an empty house, it’s going to cost them a significant amount of money. To avoid this, they are much more willing to make deals with an interested buyer than someone who wants you to buy their home. As a side effect from this, Capital Economics believes it limits the extent of which home sellers can raise their asking prices on their own homes—even if the housing market is strained.

Oh, and let’s not forget that this isn’t the only area where builders have a big sway over the housing market. For the first time in the history of housing supply and demand, there is a whole generation of people that isn’t being serviced. Who is that generation? The Millennials.

Denver Nicks wrote an article for TIME that explains the situation and likens it to sort of “What came first, the chicken or the egg?” scenario.

Nicks posted the question, “Are builders not catering to first-time homebuyers because the nation’s young adults aren’t likely to be purchasing? Or are young adults unlikely to be buying partly because there are relatively few homes that match their needs?”

At the moment, home builders are building more homes than necessary. According to the Census Bureau report in April, housing begins at 1.7% below the 2015 April rate at just 1,172,000. In a revised estimate in March was 1,099,000, which was 6.6% lower. Be that as it may, it was still off from the 2015 April rate of 1,192,000.

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