Why Are Home Prices Rising–Part Two

Last week – in part one –  we introduced statistics regarding rising home prices and introduced the first two reasons for this increase. These reasons included tighter inventory and an upward “bounce” from very low prices in certain areas of the country. This week we will present the second two reasons: economics and demographics. The economic rebound has been going on for years, but at a very slow place. However, this is the first year that the markets do not seem to be concerned with a threat of a double-dip recession. The rebound may not be strong, but it is enduring. This means that many families have seen their finances stabilize and confidence grow. Even more importantly, household formulation is up from recent lows and this causes increased demand for housing. Which brings us to the second reason–demographics. We will give you one projection released recently by the U.S. Census Bureau: The high series projects that the U.S. population will hit 400 million by 2044.

Today, the U.S. population is just over 315 million. So that means that as much as 85 million people will be added in the next 30 years, or close to one million per year. A perspective? In 1900 the U.S. population was approximately 76 million. So in 30 years we will have more growth than we had in the first 125 years. And while the economy was slumping, the population did not stop growing. This leads us to the final question — will home prices keep rising in the short run? As we have presented previously, the shortage of inventory will disappear as prices rise and more homeowners (and banks) realize that they can get more for their homes and thus will offer them for sale. Recent data indicates that is happening. With more inventory, we are expecting the rise in home prices to slow down. However, with increased demand due to population growth, increased household formulation and confidence — house prices could continue rising at a more sustainable level. Of a more immediate note, the employment report this week will be watched closely as the stock markets have experienced a wild ride while long-term rates have risen sharply over the past several weeks. We believe that the rise in home prices is actually very much related to the rise in rates. More on that next week.

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