Average Housing Prices-
By Jared Diamond
The great recession of 2008 has been a source of enormous anxiety in the financial world. The American economy survived a total meltdown, but just barely. As American society struggles to recover, a major beast looms on the horizon: inflation. There are already increases at the gas station and the possibility of a poor harvest could result in skyrocketing food prices. The housing industry has been buffeted by the financial whirlwinds and is only now beginning to recover from years of deflated prices. Even though average housing prices have dropped along with sales, there still is a question about whether or not housing will experience a near future spurt in inflation.
It may seem almost unfair to point yet another finger at the housing industry, but a rising cost of housing has always been considered a sign of inflation. It is beginning to appear that the price of housing has bottomed and is now starting to rise again. CoreLogic has reported that nationwide average housing prices have risen 2.5% from this time last year and no less than 6% for the previous quarter. Freddie Mac has confirmed that prices have gone up 4.8% in its second quarter report. The obvious question is what caused it. It certainly isn’t a boom in housing construction. (Which would increase supply and thus put downward pressure on prices).
Instead, it is a shortage of properties for sale coupled [fewer houses being built] with an increase in demand. This shortage is part of a redefinition of houses as an investment. As average housing prices fall and rental returns increase, people who once bought homes with the idea of flipping them are now content to rent them out [rental demand is high as all those people who were foreclosed need a place to live].
Due to the extremely bad media coverage related to all the foreclosures, banks are not moving as quickly to foreclose. These and other factors are creating a situation where inventory of housing is lower than the demand, hence prices are beginning to increase. Housing prices ordinarily follow inflation movements and the Federal Reserve is confident that inflation will continue to stay in check in the short-term.
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Editor’s Note: The housing industry is a major part of the American economy and plays a significant role in the ongoing recovery. The main reason we had a housing bubble in the first place was loose lending policies on the part of federal agencies like Fannie Mae and Freddie Mac combined with an inflationary monetary policy after the Dot Com bust and again prior to Y2K.
The 9/11 terrorist bombings were deflationary as they caused a panic which resulted in a market crash which eliminated Billions of dollars of value from the stock market. So, once again the FED followed a loose money policy which flowed not only into the stock market but also into the housing market. So the loose money combined with loose lending policies inflated the housing bubble. Like the mixture of Drugs and Alcohol, this toxic combo was combined with derivatives which multiplied the effect of the bubble by thousands of times in effect creating a “super bubble” driving prices to the point where the average family could not afford to buy a house but that is reversing now as foreclosure sales drove prices back down to more normal levels.
Average Housing Prices Affordability?
Housing affordability is based on three factors. Obviously as the average price of a house increases, it squeezes more and more people out of the housing market. So price is the first factor and housing prices have fallen considerably since 2008. But because almost everyone finances their home purchase, interest rates are also a factor in the overall monthly cost that a homeowner pays. Thus interest rates are the second factor in housing affordability and currently they are at historical lows. See our Mortgage Payoff Calculator to see the effect of changing interest rates.
As housing prices fall more people can afford them but low-interest rates also make them more affordable. But the third factor in the ability to buy a home is lending practices. Prior to the housing crash down payments required were miniscule if not non-existent. So as banks have become more cautious after the crash, down-payment rates have returned to more normal levels putting somewhat of a damper on the total package cost of purchasing a house. So in the housing affordability sector two out of three of the factors are promoting affordability while the third is limiting purchases to people with some sort of savings. Other factors in housing affordability are maintenance and insurance costs.
The cause of the crash as we said, was federal policies that allowed people with poor credit to buy houses in the first place. Allowing people who have no savings buy a house may put their financial situation into jeopardy at the first unexpected setback. So increasing down-payment requirements will actually lend stability to the overall housing market and prevent future foreclosures.
- Inflation-Adjusted Housing Prices
- What is the Real Mortgage Rate?
- Home Prices vs. Home Values
- The Housing Bubble Revisited
- Inflation and Housing Prices
- Who Killed the Housing Market?