Why home prices are climbing again, and what you should do about it

Chances are home prices in your neighborhood have been rising lately. Strangely enough, that only made the news when, for last November, Standard & Poor's Case-Shiller index of home prices in 20 top cities fell the grand total of 0.1 percent.

The Federal Reserve tracks a national composite home price index for the country, which looks like this:

Home price index since 1987 (all data available)

Is this good news or bad news to you? That may depend on whether you own your home or not. If not, and you're saving up to buy, that's disheartening, as you see your dream slipping out of reach. If you do own, odds are you're pleased to hear news like this.

Of course, not everyone is sharing equally in this bonanza. Metropolitan centers like New York and San Francisco are experiencing sharper increases, while other locations have more moderate increases or even no increases at all.

Why Are Home Prices Rising?

The glib answer would be something like: “Well, it's about time the market caught up with itself again!” The reality, though, is there is no such thing as normal home prices. When they go up, some complain, saying that's inflation, pricing newcomers out of the market. On the other hand, when home prices drop, all hullabaloo breaks loose and it's the end of the world. You can't please all the people all the time, as the saying goes. Politicians (and the Federal Reserve) have figured out most people want home prices to rise slowly over time, and that's what they generally have done in the past.

We all know about the housing bubble which engulfed us as the new millennium started, and its subsequent pop. The chart above shows those two events clearly. We know why the housing market crashed: the explosion of the Wall Street collateralized-mortgage-securities debacle.

But why are home prices rising again? Many reasons have been suggested.

Low Interest rates

In its attempt to stave off the threat of deflation, the Federal Reserve lowered interest rates to record low levels. Many people point to those low interest rates as an impetus for rising home prices. True?

Home prices and interest rates for the past 20 years

The data suggests not. Interest rates have been dropping steadily for the past 20 years, and dropped sharply in 2009/10, but the housing market didn't pick up until 2012. Something else has to account for the rather sharp increase in home prices.

Dropping Unemployment

The Great Recession killed a large number of jobs and the resulting unemployment caused many thousands of foreclosures and bankruptcies. Homeowners generally resorted to two alternative housing strategies: move in with relatives or rent. As America went back to work, people earned more money again and were able to afford to buy homes again. The data bears out this explanation:

Home prices vs. the unemployment rate for the past 20 years

You can see home prices come back to earth as unemployment rose, and take off as the unemployment rate dropped.

Inventory

Despite the dark warnings of a “shadow-inventory overhang” of unsold homes threatening to glut the housing market and keep prices down forever, the reality turned out to be a shortage of inventory of homes for sale.

Housing inventory and home prices for the past 15 years

The inventory of existing homes for sale seems to have returned to pre-bubble levels. Many of us have heard stories of acquaintances who put their homes up for sale and were ecstatic when it sold in a week or two, but then they had a devil of a time finding another home to buy.

Eligibility

The record number of foreclosures, short sales and bankruptcies meant that record numbers of people who prefer to own homes rather than rent were shut out of the mortgage market during the time needed to “rehabilitate.” As those people become eligible to qualify for home mortgages again, they are re-entering the market and adding to the number of buyers … at a time when the inventory of unsold houses shrank and interest rates kept on dropping.

Tight inventory and more people working have definitely combined to drive up home prices.

What Should You Do?

1. Don't trade up now

As has been pointed out before, the best time to trade up is when home prices are down. It may feel good to know the equity in your home has improved; but that's not a good time, or reason, to trade up. If you want to trade up, this is the time to save up, so you can pounce when home prices drop in the next recession.

2. Don't sell before you have another home lined up

If you absolutely have to make a change, keep in mind that your home will probably sell quicker than you expected, and you will have a hard time finding something you like. Therefore, your best bet will be to line up the place you want to buy first.

3. Pre-qualify if at all possible

One of the outcomes of the housing bubble is what seems to be a doubling of the paperwork and hassle of getting a home loan. Several friends have told us recently of the ordeal — one took three months to get their home loan lined up, and this with help from the builder.

4. Don't pay any attention to any of this if you don't absolutely have to move

When you hear how the value of your home is going up, there's a psychology that takes hold. It feels good to hear the value of something you own is going up. (Same with your 401(k) plan value.) It makes you feel rich and proud. But then the reality hits: You can't eat it, wear it, or drive it (as my friend Pammy loves to say). Isn't that just the pits? You have this rich feeling, but it doesn't put any cash in your pocket. In the past, that's what drove many people to go out and refinance their homes, as happened on a massive scale during the Big Bubble. We all know how that turned out.

The psychological thing is real. The safe response is to be aware of it and then try to ignore it. My wife and I tune out all conversations and media reports about home prices rising. We have no plans to move, and therefore the value of our home is irrelevant (except, of course when the local greedy county assessor uses that to squeeze more property taxes out of us).

The biggest class of consumer debt is home mortgages. As home prices recover, expect more and more junk mail as banks pitch home equity lines of credit or more refinancing to you. That's what those workers are paid to do. Ignore them. They are looking out for their best interests, not yours.

If, on the other hand, you've been sitting on the fence about refinancing, be aware that interest rates have bottomed out. It can only get worse as rates increase in the future.

More about...Home & Garden

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
32 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
lmoot
lmoot
6 years ago

I’m curious, is anyone expecting another recession anytime soon? I often see it casually mentioned but I’m interested in hearing some theories. Of course there will be one eventually, but in the next 10-20 years? My strategy is to check Zillow everyday or at least weekly. Even in a seller-strong market there will always be that house that is foreclosed, being short-sold, owner just needs to get rid of it, estate sale etc etc. As long as you move quickly and you are prepared (already qualified with a set amount, and have the cash available to bring to closing), a… Read more »

William Cowie
William Cowie
6 years ago
Reply to  lmoot

If you look at the charts above, those gray areas are recessions. In the past 100 years, we’ve never gone more than 10 years between recessions. The last bottom was 2009. The intervals between the recessions in our lifetimes has been 7-10 years. Previous ones had shorter intervals, not longer. Nobody knows the future. But, based on that track record, and given that it’s already been 5 years since the last bottom, how long before we hit the next bottom? Oh, and remember, the downturn happens about two years before we hit bottom. Hopefully that answers the question why some… Read more »

lmoot
lmoot
6 years ago
Reply to  William Cowie

But, if I’m interpreting the graph correctly, it doesn’t seem like the any of the previous recessions had a major or any impact on home values. Not until we get to “the one” which was mainly blamed on, and therefore impacted the real estate market the most. So perhaps only certain recessions impact certain industries, and the longer or stronger the recession, the more overall impact it has. I think with stricter mortgage laws in place, and banks less willing to take on risk (both b/c of future concerns, and because of still recovering from the last one), a housing… Read more »

Becky @ Runfundone
Becky @ Runfundone
6 years ago

We recently bought, so I’d love to see home values rise…or at least remain steady. We live near a military base, so I imagine that if the military downsizes as it looks like will happen, our housing market will change, and our home will lose value. 🙁

lmoot
lmoot
6 years ago

If you start saving now for the down payment on your next home without relying on the sale of this one, you can just rent it out through a reputable property manager and you won’t have to be fazed by a downmarket. Let someone else pay the mortgage. In fact a downmarket would be in your favor b/c you could refinance before moving, you could get a deal on your next place and most likely more people will be renting so your tenant pool would be abundant (though if you’re near a base I’m sure that would always be the… Read more »

Laraba
Laraba
6 years ago

My husband and I bought our current home in 2005, almost certainly for more than we could sell it for now. We talk about that sometimes, and agree that the purchase price is largely immaterial. Yes, it was expensive and we would pay less for it now. BUT we also were able to sell our previous home quickly and at a good price, so it kind of “came out in the wash”. We have every intention of staying in our current home for more than a decade (barring some unforeseen life change) so rising home prices only serve to increase… Read more »

William Cowie
William Cowie
6 years ago
Reply to  Laraba

You hit the nail on the head with “came out in the wash.” If you replace one home with another, it never matters if the market’s up or down. All that matters is those expensive transfer costs (commissions, etc.) which just eat out your equity.

Marie
Marie
6 years ago

We want to refinance, so apparently now is the time? Guess I better go scan the article archive for info on that process.

William Cowie
William Cowie
6 years ago
Reply to  Marie

If, after you refinance, the principal and the term stay the same, do it now. So, the only reason you’d want to do it is to lock in a lower interest rate and end up with a lower payment for the same term you have remaining now (or shorter, of course). On the other hand, if you want to refinance to “get some equity,” don’t. That’s just a euphemism for incurring more debt. And now is the absolute worst time to add debt. The fact that it’s become easy may look like it’s a good sign, but it’s not —… Read more »

Matt YLBody
Matt YLBody
6 years ago

I’m not completely sold on all of this. Especially a “recovering economy” that the government is keeping artificially afloat. In a lot of places, middle class families can’t afford to buy homes. The only people buying them up are investors or foreign investors; and paying in cash where a middle class person can’t compete.

I’m also not sold on the jobs data…

ajnmm
ajnmm
6 years ago
Reply to  Matt YLBody

Exactly!

Bob Parr
Bob Parr
6 years ago
Reply to  Matt YLBody

I don’t buy any of these arguments and grafts. The unemployment screams the loudest, use real numbers of employed. Housing prices should fall every year due to depreciation of the structure. Land prices should not appreciate above inflation without improvements to the area. Fighting against these natural forces are market manipulators who benefit from higher prices. The Govt in terms of higher property taxes. The Realtor in terms of higher commissions. The banks in terms of higher debt to issue. The land lords in terms of higher rents. The Fed and artificially low interest rates are the single biggest reason… Read more »

Paul in cAshburn
Paul in cAshburn
6 years ago
Reply to  Bob Parr

Once again, we have a topic which is complex enough that you have to hold two ideas in your head simultaneously – even though they appear to be in conflict. 1. Now is the time to rent. 2. Now is the time to buy. They are both true, depending on the specific property and the specific buyer/renter. Renting makes more sense when you may move, when you cannot afford a 20% or more down payment, or when your income isn’t rock solid for at least five years. Buying makes sense when the converse is true – AND – the property… Read more »

Clay
Clay
2 years ago
Reply to  Matt YLBody

I agree with what you’re saying. The market in America is open to all. Rich people from Asia are driving housing prices up because they are all moving here. Meanwhile, new houses aren’t being built at the rate needed. This is a result of collusion between banks, politicians, and investors. In addition, much of the land has been shut down to development because of environmental policies. The reality is that there is much land that can be developed. This needs to happen in order to keep the American dream alive. Old hippies of the past are in charge now and… Read more »

Sarah @ Little Bus on the Prairie
Sarah @ Little Bus on the Prairie
6 years ago

We purchased a plot of land almost a year ago for pretty much a rock bottom price (for southern california). We are planning to build this year so we’re hoping that we’ve gained more equity over the course of time to give us more of a down payment for our project…

Triple E
Triple E
6 years ago

Oh good, in that prices never really dropped much anywhere desirable to live in the DC area, this is pretty much what I didn’t want to hear.

Yay, I’ll never afford a house I want in a place I want to live around here. I’ll either need to throw money away to a landlord forever, get used to living in a shoebox, or have a beautiful house that I never see because I’m always commuting.

Thank you free market economy!

(Said with tongue only partially in cheek.)

William Cowie
William Cowie
6 years ago
Reply to  Triple E

Having live in Orange County, CA, I hear you! You do have options, though. Math says if you invest the difference between your rent and what you would have paid to own (including repairs and those other money pit expenses) you come close to breaking even. It’s only when you rent and don’t invest the rest that you lose. It’s the “not investing” that causes the loss, not the rent per se. For example, you could buy a place somewhere affordable and rent it out. The rent you collect offsets the rent you pay (more or less) and in time… Read more »

Triple E
Triple E
6 years ago
Reply to  William Cowie

Very true, hence tongue only partially in cheek. Our money is pretty well invested (we’re often over savers. . .) and our rent has been relatively well controlled over the years. It would cost us money to downgrade at this point. We’ve definitely talked about having a rental property (probably a condo or something cheap yet stable in another area) once we save up enough to have a down payment worth our while. So yeah, mostly commenting on the philosophical part of this, with an add-on that national statistics aren’t always relevant to local areas. Some places are always relatively… Read more »

sunnyb
sunnyb
6 years ago
Reply to  Triple E

Triple E, I will rent out my Fairfac Co. dining room to you for $800/month!!! 🙂

Carla
Carla
6 years ago

Great, now rentals will continue to increase as well. So glad I got in (my beautiful apartment in a desirable neighborhood) during the middle of recession when landlords were practically giving them away.

Kristin Wong
Kristin Wong
6 years ago

The selfish part of me was, as William writes, disheartened reading this. We’re renters saving up for a down payment. Just several months ago, we found options in our neighborhood that were relatively realistic! We were excited to find that, hey, maybe we aren’t THAT far from our home ownership goal. But now…well, this article says it all. On the other hand, it’s nice to see that the increase isn’t due to any Federal Reserve flubs and is instead because the unemployment problem is getting better. That softens the blow a bit. And, the other bright side is that, if… Read more »

Sue Smith
Sue Smith
6 years ago

“(except, of course when the local greedy county assessor uses that to squeeze more property taxes out of us)” This statement is ridiculous! The county assessor is elected and can be un-elected. He operates by set rules. If you don’t like these rules do something to change them. Another part of the solution is to not vote more taxes in.

Money Saving
Money Saving
6 years ago

One thing to try if an option for some folks is to sell there house and move in with parents/inlaws for a couple months while you track down your dream home. This has a couple of advantages: 1) You can move yourself (storage) 2) Takes pressure off of buying a house – more room to negotiate 3) Save a ton of money on mortgage/utilities for a couple months We did this for 3-4 months and it ended up working really well for us. We saved $2K-$3K a month and found an awesome home at a good deal. I’ll leave it… Read more »

Nick Maddox
Nick Maddox
6 years ago

William – your article makes a lot of sense…..except for your last comment about the “greedy tax assessor” squeezing more taxes out of people. You like firemen and their public service? You like police response to crises? You like 911 available 24-hours a day? You like good schools for kids? You like a nice neighborhood or local park? ETC. There is no need to degrade your own ideas by taking a cheap shot at the reality of taxes since we are all going to pay for everything one way or another, sooner or later and with reluctance. Just give advice… Read more »

Simple Money Concept
Simple Money Concept
6 years ago

I’m not sure if this housing boom is a good thing. Depending on where you live, your house may be worth more than what you paid for before the housing bubble, but the economy is still not where it was at that time, although the stock market is.

Those charts are very encouraging, but this low interest rate environment is helping investors more than people who are trying to buy a house for the first time. The unemployment chart is somehow misleading as a lot of people stopped looking for jobs (that made the numbers look better).

Cas
Cas
6 years ago

Yeah this isn’t a good for those who live near military area. According to overview market trend this will continuous going towards downwards and impact on loss home values.

Tomaz
Tomaz
6 years ago

Inventory, interest rates, unemployment…and…what about QE?? Prices only go up when there is money flowing in…

Nancy
Nancy
6 years ago

I live in West Los Angeles, and the value of my home has gone up $100k since I bought it in 2012. I know I should be thrilled, but this scares me, and makes me want to sell. Of course, part of it is that my lifestyle used to be so carefree, and I miss my downpayment. I’m doing ok, but I am afraid that a massive downswing in prices will make me stuck. As it is, I can not even afford to buy a house like the one I’m currently living in. That bothers me tremendously. Advice?

ISuggest
ISuggest
6 years ago

Nancy this is what i suggest. We are in another bubble that is going to burst soon. Sell now, take that $100K and save it. Get best rental you can or live with relative like some prefer to do. (Id get a decent rental 🙂 Then in 2 or 2 1/2 years when prices have dropped 20% purchase your new home. Remember, the real reason for this second bubble is the cash investors that have been driving the prices up. Sell now and take your profit. Those cash investors are starting to disappear because their margins are too small now.… Read more »

Carla
Carla
5 years ago
Reply to  ISuggest

@ISuggest – I hope the bubble bust in Portland big time, its getting insane here.

John
John
3 years ago

Houses in Dallas area a few years ago were around 100,000 to 130,000 for a regular house but now the minimum is 200,000. I am going to wait and see if the housing prices come down.

John
John
3 years ago

My apartment complex was just bought by investors and now they are of course raining the rent sky high!!!!

shares