An interesting article in Mortgage News Daily puts forward the idea that more people will buy homes if prices are going up. The article is based on an economic letter produced by two senior economists from the Federal Reserve Bank of San Francisco.
Apparently it’s not so much that higher prices will prompt more buyers to purchase property, but that the situation could lead to more sellers listing their property, helping to increase inventory levels. In spite of the fact that home prices have been increasing steadily since last year, inventory levels are still low, leading the two economists to surmise that property prices haven’t yet reached heights sufficient enough to entice sellers to list their homes. For some this could be due to the fact that the value of the home is still less than the outstanding mortgage, while others may not feel they have sufficient equity to motivate them to sell their property.
Selling a home can be a costly business as it might be necessary to make repairs or cosmetic changes to the property before listing, and brokerage fees can be high. This is one of the reasons that economists view listings as being proof of a strong will to sell. The real estate market always has some level of inventory, as people may be forced to sell for certain reasons not associated with the market. However the authors of the letter do point out that inventory levels can rise and fall cyclically. Some of these fluctuations are down to credit conditions, but apparently the most important variable is the level of house prices.
Data from the Census Bureau shows a correlation between the number of homes for sale and inflation adjusted house prices, and as house prices rise so do inventory levels. This change may not be immediate as inventory levels can be affected by other economic factors, something that is borne out by what has happened recently. Even though house prices have been recovering since last year, inventory levels have been declining and have only recently begun to increase. It is thought the link between house prices and inventory levels may have been affected for an extended period of time as households recover from the boom and bust.
During the boom years there was an unprecedented increase in the number of younger households buying property, and the lending conditions allowed less qualified buyers to borrow large sums of money. During the bust, there were more homes for rent as inventory levels of homes for sale declined. This decline is only just being reversed. The article continues on in some detail so to read more click here.