In the wake of the COVID-19 pandemic, housing prices skyrocketed. Limited inventory, ridiculously low interest rates, and new pressures to work from home encouraged millions of people to go out and buy the properties they’ve always wanted. At the end of 2022, the housing market took a sharp turn and prices began to decline. Now, real estate experts are suggesting that housing prices have bottomed out; in other words, these prices have sunk to the absolute bottom, and they have nowhere to go but up.
Hypothetically, this would make it a perfect time to buy a property. It’s also a sign of optimism for property owners all over the country.
But can we have confidence that housing prices have truly hit bottom?
Factors That Can Influence Housing Prices
There are many different factors that can influence the housing market overall, and even more factors that can influence the price of an individual house. These are some of the most important to acknowledge when considering the potential future of housing prices:
- Interest rates. Arguably the most important factor is Federal Reserve interest rates, and by extension, interest rates offered by banks. When the Federal Reserve increases interest rates, it increases the cost of borrowing money. When the cost of borrowing money is increased, banks are forced to increase interest rates for consumers. And when consumers face higher interest rates for mortgages, they’re less likely to buy homes – or are willing to pay less for the homes they buy. Conversely, when the Federal Reserve reduces interest rates, demand skyrockets and prices explode, which is part of what started the housing boom in the first place. The Federal Reserve has increased interest rates consistently over the last year or two, and it has some plans to continue raising interest rates in the future, though this is uncertain.
- Overall economic health. The overall health of the economy can also influence housing prices. If the stock market is up, unemployment is down, and people are generally optimistic about the future of the economy, people are generally more likely to buy houses. Higher demand leads to higher prices, making housing prices rise during times of economic prosperity. In the opposite situation, demand plummets, reducing housing prices.
- Government policies, regulations, and actions. Other types of government policies, regulations, and actions can also influence the real estate market. These can be very subtle; for example, during the pandemic, there was an eviction moratorium that may have played a role in influencing housing prices. If the government chooses to take a major action, like getting involved in a war, it could have dramatic effects on consumer sentiment, the economy, and of course, real estate prices.
- Demographic changes. Demographic shifts can also influence how housing prices develop. If the total population increases and more people are interested in buying homes, but inventory levels remain consistent, it’s only natural that prices rise.
- Supply factors. There are also miscellaneous supply factors that can influence housing prices. If new house construction picks up, flooding the market with new homes for sale, it can have a dampening effect on prices. If people are reluctant to sell their homes, it can reduce supply and cause prices to increase.
- Demand factors. On the other end of the spectrum, miscellaneous demand factors can influence prices as well. If a cultural, political, or superficial development makes people eager to buy houses, prices will rise.
- Localized factors. Keep in mind that general descriptions of the national housing market are just averages, and that there are localized factors that can influence prices in individual neighborhoods, and sometimes on individual streets. New employers, better schools, demographic shifts, and other developments can easily reverse momentum in a given neighborhood – regardless of what’s happening on a national scale.
The Dangers of Timing the Real Estate Market
If a real estate investor is able to buy low and sell high, capitalizing on momentum shifts in a hypothetically perfect way, they could stand to make a lot of money. But timing the real estate market is much more difficult than it might seem. It’s practically impossible to forecast the thousands of variables necessary to gain a true understanding of future housing prices – and those variables are different for every neighborhood.
The Bottom Line
The bottom line here is that while it does seem that housing prices have hit a low point and become steady, the housing market is inherently unpredictable. There are too many variables that can quickly and easily influence prices in the housing market, so it’s important to exercise caution and never take anything for granted. Do your own due diligence, calculate your risks carefully, and only move forward when you feel confident in your decision.
