What Causes Home Prices To Fluctuate?
Homes have no “true” market value. This is best evidenced by average home prices around the country. While the median home price in Los Angeles is $689,500, the median home price in Kansas City is a measly $101,200 by comparison. Are houses really that different, or is something else controlling home prices?
Real estate relies on a number of factors to determine the price of a home. Because of this, home prices can fluctuate from year to year – if not from month to month. Understanding the conditions that cause home prices to increase or decrease can help buyers get their dream home at their dream price while helping sellers maximize profits when moving. The following are four reasons that cause home prices to fluctuate.
Supply and demand
Just like goods and services, housing prices are also affected by supply and demand. Too many homes for sale with too few buyers leads to a buyer’s market in which prices drop and homes sit on the market longer. In areas where supply is low and demand is high, such as in the Bay Area, a seller’s market occurs; prices skyrocket and bidding wars and multiple-offer scenarios become common.
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The economy
The health of the economy can cause enormous fluctuations in the real estate market. In a thriving economy with low unemployment home prices tend to increase; buyers feel secure in the future – and in their future income – and are more likely to invest in a home. By comparison, prices tend to drop during downturns in the economy. As unemployment rates rise, buyers feel less financially confident and fewer people are able to afford mortgages.
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Interest rates
Interest rates – and therefore the affordability of mortgages – are directly tied to the economy. The Federal Reserve has the ability to raise or lower interest rates; this can trickle down to the mortgage rates that lenders set for their customers. The lower the mortgage rates the more affordable buying a home becomes. Likewise, higher interest rates can increase a buyer's monthly payment and make homeownership unaffordable.
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Location
The over $500,000 difference in median home prices between Los Angeles and Kansas City is a prime example of how location can affect prices. Pricing discrepancies can happen on the local level as well. An up-and-coming neighborhood can see an enormous price jump as stores, attractions, and restaurants move into the area. Likewise, prices can vary significantly in as little as a few blocks based on school boundaries, crime rates, proximity to highways, and more.
by Author, January. 30, 2020