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Home Price Appreciation Is as Simple as Supply and Demand

Home Price Appreciation Is as Simple as Supply and Demand

Home price appreciation continues to accelerate. Today, prices are driven by the simple concept of supply and demand. Pricing of any item is determined by how many items are available compared to how many people want to buy that item. As a result, the strong year-over-year home price appreciation is simple to explain. The demand for housing is up while the supply of homes for sale hovers at historic lows.

Let’s use three maps to show how this theory continues to affect the residential real estate market.

Map #1 – State-by-state price appreciation reported by the Federal Housing Finance Agency (FHFA) for the first quarter of 2021 compared to the first quarter of 2020:Home Price Appreciation Is as Simple as Supply and Demand | Keeping Current MattersAs the map shows, certain states (colored in red) have appreciated well above the national average of 12.6%.

Map #2 – The change in state-by-state inventory levels year-over-year reported by realtor.com:Home Price Appreciation Is as Simple as Supply and Demand | Keeping Current MattersComparing the two maps shows a correlation between change in listing inventory and price appreciation in many states. The best examples are Idaho, Utah, and Arizona. Though the correlation is not as easy to see in every state, the overall picture is one of causation.

The reason prices continue to accelerate is that housing inventory is still at all-time lows while demand remains high. However, this may be changing.

Is there relief around the corner?

The report by realtor.com also shows the monthly change in inventory for each state.

Map #3 – State-by-state changes in inventory levels month-over-month reported by realtor.com:Home Price Appreciation Is as Simple as Supply and Demand | Keeping Current MattersAs the map indicates, 39 of the 50 states (plus the District of Columbia) saw increases in inventory over the last month. This may be evidence that homeowners who have been afraid to let buyers in their homes during the pandemic are now putting their houses on the market.

We’ll know for certain as we move through the rest of the year.

Bottom Line

Some are concerned by the rapid price appreciation we’ve experienced over the last year. The maps above show that the increases were warranted based on great demand and limited supply. Going forward, if the number of homes for sale better aligns with demand, price appreciation will moderate to more historical levels.


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3 replies
  1. James Andrews
    James Andrews says:

    Map 1 is a comparison of 1st quarter 21 to 1st quarter 20 home appreciation.
    Map 2 refers to year-over-year and Map 3 refers to month-over-month.
    Can you explain in more detail the comparison basis, is Map 2 March 21 vs March 20.
    And Map 3 March 21 vs February 21?
    Thank you.

    Reply
    • KCM Crew
      KCM Crew says:

      Thanks for your thoughtful question! The inventory maps are based on the most recent data from realtor.com, which updates at the beginning of each month. As a result, the year-over-year data reflects May ’20 to May ’21, while the month-over-month map reflects April ’21 to May ’21. While the year-over-year map isn’t an exact timeframe parallel with Q1, that inventory data has been very consistent this year. However, if you would like a copy of the year-over-year inventory map for March ’20 to March ’21, we’re happy to share it – feel free to reach out to us at kcmcrew@keepingcurrentmatters.com for that map or with any other questions you have.

      Reply
  2. Paul McPherson
    Paul McPherson says:

    Is the house shortage that low? I thought there were millions of empty houses in the US. Still, I hope the American real estate market manages to get through that bottleneck and can finally enjoy the rebound that’s already described about Europe…

    Reply

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