What's Causing Ongoing Home Price Appreciation?

If you’re thinking about making a move, you probably want to know what’s going to happen to home prices for the rest of the year. While experts say price growth will moderate due to the shifting market, ongoing appreciation is expected. That means home prices won’t fall. Here’s a look at two key reasons experts forecast continued price growth: supply and demand.

While Growing, Housing Supply Is Still Low

Even though inventory is increasing this year as the market moderates, supply is still low. The graph below helps tell the story of why there still aren’t enough homes on the market today. It uses data from the Census to show the number of single-family homes that were built in this country going all the way back to the 1970s.

The blue bars represent the years leading up to the housing crisis in 2008. As the graph shows, right before the crash, homebuilding increased significantly. That’s because buyer demand was so high due to loose lending standards that enabled more people to qualify for a home loan.

The resulting oversupply of homes for sale led to prices dropping during the crash and some builders leaving the industry or closing their businesses – and that led to a long period of underbuilding of new homes. And even as more new homes are constructed this year and in the years ahead, this isn’t something that can be resolved overnight. It’ll take time to build enough homes to meet the deficit of underbuilding that took place over the past 14 years.

Millennials Will Create Sustained Buyer Demand Moving Forward

The frenzy the market saw during the pandemic is because there was more demand than homes for sale. That drove home prices up as buyers competed with one another for available homes. And while buyer demand has moderated today in response to higher mortgage rates, data tells us demand will continue to be driven by the large generation of millennials aging into their peak homebuying years (see graph):

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

If you’re worried home values will fall, rest assured that experts forecast ongoing home price appreciation thanks to the lingering imbalance of supply and demand. That means home prices won’t decline.

Bottom Line

Based on today’s factors driving supply and demand, experts project home price appreciation will continue. It’ll just happen at a more moderate pace as the housing market continues its shift back toward pre-pandemic levels.

Top Sales for August 2022 in Coastal Boca Raton

The top sales in Coastal Boca Raton for the month of August 2022 saw the most diverse group neighborhoods with each sale from a different location. The top sale comes from Boca Raton Riveria — 485 Spanish Trail — which sold after just 2 days on the market for $7,950,000 or $1,098 per sqft. Our next sale came from Royal Palm Yacht & Country Club, a neighborhood that generally sees multiple sales on the top 10 list each month. The lone sale of 1430 Sabal Palm Drive for $6.1M came after just 12 days on the market. Rounding out the top 3, ALINA closed on the final residence in Phase 1 which was the only condo that made the list. Construction is well underway on Phase 2, with an expected delivery date in 2024.

485 NE Spanish Trail
5  beds |  9 baths | 7,299 sq. ft.
$7,950,000

1430 Sabal Palm Drive
5 beds | 8 baths | 5,797 sq. ft.
$6,100,000

200 SE Mizner Blvd #605
4 beds | 5.5 baths | 4,565 sq. ft.
$4,845,000

109 SE Olive Way
4 beds | 3 baths | 2,594 sq. ft.
$3,800,000

951 Sweetwater Lane
3 beds | 3.5 baths | 3,639 sq. ft.
$3,450,000

659 Boca Marina Court
4 beds | 4.5 baths | 4,434 sq. ft.
$3,400,000

430 NE 12th Street
6 beds | 6.5 baths | 4,233 sq. ft.
$3,395,000

820 NE Bay Isle Drive
5 beds | 4.5 baths | 4,917 sq. ft.
$3,250,000

4825 Sanctuary Lane
5 beds | 3.5 baths | 4,087 sq. ft.
$2,750,000

727 Coventry Street
4 beds | 2.5 baths | 2,450 sq. ft.
$2,550,000

Think Home Prices Are Going To Fall? Think Again.

Over the last two years, the rate of home prices appreciated at a dramatic pace. While that led to incredible equity gains for homeowners, it’s also caused some buyers to wonder if home prices will fall. It’s important to know the housing market isn’t a bubble about to burst, and home price growth is supported by strong market fundamentals.

To understand why price declines are unlikely, it’s important to explore what caused home prices to rise so much recently, and where experts say home prices are headed. Here’s what you need to know.

Home Prices Rose Significantly in Recent Years

The graph below uses the latest data from CoreLogic to illustrate the rise in home prices over the past year and a half. The gray bars represent the dramatic increase in the rate of home price appreciation in 2021. The blue bars show home prices are still rising in 2022, but not as quickly:

You might be asking: why did home prices climb so much last year? It’s because there were more buyers than there were homes for sale. That imbalance put upward pressure on home prices because demand was extremely high, and supply was record low.

Where Experts Say Prices Will Go from Here

While housing inventory is increasing and buyer demand is softening today, there’s still a shortage of homes available for sale. That’s why the market is seeing ongoing price appreciation. Mark Fleming, Chief Economist at First American, explains it like this: “. . .we’re still well below normal levels of inventory and that’s why even with the pullback in demand, we still see house prices appreciating. While there is more inventory, it’s still not enough.”

As a result, experts are projecting a more moderate rate of home price appreciation this year, which means home prices will continue rising, but at a slower pace. That doesn’t mean prices are going to fall. As Selma Hepp, Deputy Chief Economist at CoreLogic, says: “The current home price growth rate is unsustainable, and higher mortgage rates coupled with more inventory will lead to slower home price growth but unlikely declines in home prices.”

In other words, even with higher mortgage rates, moderating buyer demand, and more homes for sale, experts say home price appreciation will slow, but prices won’t decline.

If you’re planning to buy a home, that means you shouldn’t wait for home prices to drop to make your purchase. Instead, buying today means you can get ahead of future price increases, and benefit from the rise in prices in the form of home equity.

Bottom Line

Home prices skyrocketed in recent years because there was more demand than supply. As the market shifts, experts aren’t forecasting a drop in prices, just a slowdown in the rate of price growth. To understand what’s happening with home prices in our area, let’s connect today.