The Real Reason Home Prices are Increasing

The Eusea Team, Fort Collins, Home ValueThere are many unsubstantiated theories as to why the home value is continuing to increase, especially in Northern Colorado. From those who are worried that lending standards are again becoming too lenient (data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because of“irrational exuberance” (this is also untrue as prices are not at peak levels when they are adjusted for inflation), there seems to be no shortage of opinion.

However, the increase in prices is easily explained by the theory of supply & demand. Whenever there is a limited supply of an item that is in high demand, prices increase.

It is that simple. In real estate, it takes a six-month supply of existing salable inventory to maintain pricing stability. In most housing markets, anything less than six months will cause home values to appreciate and anything more than seven months will cause prices to depreciate (see chart 1).

Home Values - The Eusea Team, Fort Collins, CO

According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes has been below six months for the last four years (see chart 2).

Home Value - The Eusea Team, Fort Collins, CO

Bottom Line

If buyer demand outpaces the current supply of existing homes for sale, prices will continue to appreciate. Nothing nefarious is taking place. It is simply the theory of supply & demand working as it should. Colorado is no exception to this rule. There are far more people wanting to live along the Front Range in Colorado that available housing options. This creates an increase in home value.

The Eusea Team in Northern Colorado is well-versed in the ins and outs of the Colorado real estate market. We would love to help you leverage the equity in your existing home to move up or purchase your first home. Contact us today to get started.

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