3 Things that Can Slow Surging Home Sales Prices

Sometimes, it seems as though a surging housing market will never slow down. The real estate bubble that burst in 2007 and led to a global financial crisis taught otherwise. Generally, what goes up must come down.

And though some might have expected a global pandemic to slow what was a booming real estate market in the United States, it never did. More U.S. homes were sold in 2020 than in any year since 2006, despite a shortage of inventory of homes for sale in many metro areas.

Home sales prices rose rapidly throughout 2020 and beyond. By late spring of 2021, the median sales price for an existing home was 20.6 percent higher than a year earlier, according to the National Association of Realtors (NAR).

A combination of factors drives surges in prices, and it usually takes a similar combination to cool the market off. Here are three things that could slow surging home sales prices.

Higher interest rates

Mortgage interest rates were already low, but the pandemic sent them to rock bottom, and they’ve hovered near historic lows since. Low rates add to buyer demand, which further tightens markets that are already tight because of inventory constraints.

Typically, hikes in the long-term federal funds rate – which drives mortgage interest rates – resulting in a dip in demand for homes. Slight hikes tend to decrease demand slightly, and drastic hikes tend to decrease it more drastically. Either way, a change in interest rates almost always affects housing markets.

The return of sellers to the market

Despite the volume of home sales in 2020 – about 6.5 million homes were sold in the United States – the year ended with historic lows in terms of homes available for sale and the number of months’ worth of inventory, according to the NAR. That suggests that some would-be sellers sat out the 2020 ride.

In just about any market, if sellers who take a wait-and-see attitude collectively decide to finally put their homes up for sale, it helps stabilize prices. Unlike the bubble of the early 2000s, the post-crisis real estate price surge has been driven by the fundamentals of supply and demand.

Whenever the level of inventory of homes for sale approaches historical norms – a six-month supply is considered healthy – prices have returned to earth in most markets.

Normal material prices

One aspect of the 2020 real estate boom that’s sometimes overlooked is the spike in prices for building materials. For example, from the start of the pandemic in the United States to a year later, the price of lumber tripled. In the United States, it cost about $33,000 more on average to build a new home in 2020 compared to 2019.

The rise in the cost of building materials slowed the construction of new homes, which further drove up the demand for existing homes. And existing homes for sale were already in short supply. Without competition from new homes in 2020, existing home prices soared even higher.

A return to normalcy in the cost of building materials would be expected to stabilize the new construction industry. Historically, when more new homes are being built, the demand for existing homes levels off.

The bottom line

They say that everything that goes up must come down, and history has demonstrated it over the years with bull and bear markets. Home prices went on a bull run for years, but a few key market conditions usually can slow down surging home sales prices.

About Summer House Realty

Summer House Realty is one of the largest real estate brokerages in Amelia Island. With years of experience and intimate knowledge of the local market, we have helped thousands of homeowners accomplish their goals of both buying their dream home and selling their existing home. If you are in the market to either purchase your dream home or sell an existing home, contact Summer House Realty today at (904) 557-3020 for all your real estate needs.