A lot of people feel that the current rise in housing prices is a bad thing.
They claim that only banks and investors will benefit from these prices. After all, those who already own homes will be encouraged to release the equity in their home, thereby getting into more debt, and those who don’t yet have a home will struggle to purchase one. However, it seems that this is actually a false truth.
What drives house prices is the sales to inventory ratio, and it is this ratio that will tell you whether house prices are fair (and thereby affordable) or not. “The existing house sales, the for-sale listings and the ratio between the two are back to the healthy levels that existed prior to the housing bubble and the subsequent Great Recession and bubble-burst.”
Hence, house prices are indeed up, but spending power is up at the same rate. Supply and demand is once again balanced, which means the prices are right. As such, those who are saying that the rise in prices is actually damaging the economy’s recovery may just be completely wrong.
What Is the Sales to Inventory Ratio?
The sales to inventory ratio is closely linked to supple and demand. When the housing bubble burst, prices were driven down because there were too many houses available on the market and not enough buyers. Added to this, the houses were all going up for quick sale, because banks wanted to recoup their money rather than make profits. All of this has once again changed, which has changed the ratio as well.
“The inventory-to-sales ratio (I/S) measures how quickly the market can absorb the current stock of homes for sale at the given sales pace. Historical data has shown that when an I/S measure is near seven to eight months, real home prices grow at the rate of inflation.
That is, when supply equals demand, home prices are bid up at the same rate as inflation or the cost of construction. Data also show when I/S is greater than seven months that real home prices fall and, when I/S is less than four months, home prices rise very quickly.”
Are Housing Inventories Low?
So, if house prices are on the rise, does this mean housing inventories are low? This is actually a very complicated question because of the recent recession. For several years, we had hundreds of thousands of homes that were incredibly low in price. These were homes that had been up for foreclosure. These homes were driving the median price (the average home price) down, but didn’t actually give a reflection on real prices.
The prices that should be looked at are those for new build homes, or at the very least desirable homes. The housing inventory for foreclosed properties is indeed low now, but so are the sales. Hence, we should no longer look at these properties, but once again identify the median home for what it really is: a decent, well-constructed and maintained, family or starter home. Plus, we need to consider who wants to sell and why, which is likely to change in the near future as well.
“Inventories of homes for sale have been slow to bounce back since the 2007-09 recession, despite steady house price appreciation since January 2012. One probable reason why many homeowners are not putting their homes on the market is that their properties may still be worth less than the value of their mortgages, which would leave them owing additional money after a sale. In other cases, homeowners may simply be hoping that house prices will continue to rise, allowing them to recover lost equity.”