What Drives Home Prices?

What Drives Home Prices?

Despite a significant surge in interest rates in recent times, a curious trend emerges – home prices have not universally plummeted. This challenges the common belief that interest rates wield absolute control over pricing. In reality, the heart of real estate pricing lies in the fundamental principles of supply and demand.

How does it work?

Picture a balanced scenario with one buyer and one seller – a harmonious equilibrium. Now, tilt the scales with an influx of sellers outnumbering buyers, and prices decline. On the other hand, an abundance of buyers in a market with scarce sellers will inevitably push prices upward. It’s this delicate dance between buyers and sellers that truly shapes housing prices.

Do interest rates have any effect?

The impact of interest rates on prices is not direct but indirect. Higher interest rates can deter potential buyers, slowing down their entry into the market. However, the number of available sellers is equally critical. Even with a reduced number of buyers, if there’s still a shortage of sellers, prices manage to hold firm. Keep in mind that a lot of homeowners who locked in a low interest rate a few years ago are probably less likely to want to move right now. 

What’s happening now?

Certain markets are experiencing shifts due to changes in investor interest and moving patterns. Regions that previously attracted out-of-state buyers and investors are witnessing a change. As the supply increases in these areas, some markets are observing softening prices.

Only when there’s a substantial surge or a gradual increase in supply, or a continued decrease in buyer demand can we anticipate significant changes in home prices.