In our May 2021 blog post, Professor David Clark talked about appreciable and depreciable assets. For many of us, our largest asset is the purchase of a home or primary residence. And currently, home prices have been on the rise.
What are some of the current drivers behind increasing home prices? Let’s take a look.
Lower interest rates
Interest rates are at historic lows. With lower interest rates come increased buying power. Lower interest rates translate into a lower monthly mortgage payment and the ability for more home buyers to meet the lender’s debt-to-income limits. Lower interest rates increase the demand for housing because more people are able to qualify to purchase homes.
Unspent stimulus money pads the bank accounts of potential home buyers. Over the past several months, I have overheard the conversations of three random strangers, each loudly proclaiming that they know of someone who is using stimulus money towards a down payment on a real estate purchase.
Increasing costs related to building materials
A local home builder recently claimed that the price of wood has more than doubled. Similarly, according to a recent Fortune magazine article (see Lambert, 2021), the price of wood in 2021 has been very volatile. Because of the increased costs of building materials, home builders are forced to choose between raising new home construction prices or earning less net profit. Some builders may elect to build smaller homes because if home prices continue to increase, many people may find they have lost the ability to pay for a larger home.
We have excellent education opportunities in the local area. West Texas A&M and other higher education institutions supply an educated workforce for the Panhandle’s growing economy. An educated workforce attracts business and higher-paying jobs. The increased earning potential improves the buying power of those living in the area.
Higher home prices in other locations
A home located in a top school district near Monterey, California, costs a fortune. During the summer months, the cheapest 3-bedroom, 2-bath home was about $1,360,000, and it wasn’t anything spectacular. The taxes were comparable to another house payment. People who sell their highly appreciated homes in places like California and Colorado often find they have significant purchasing power in the Texas Panhandle.
Supply and demand
Basic principles of economics teach us that as either supply decreases or demand increases, prices trend upward. Amarillo is experiencing housing supply shortages and an increase in demand for housing because of its steady population growth. Along with its population growth, Amarillo has a constant influx of people because it is a natural destination and stopping point for interstate travelers.
Supply chain delays
Another potential cause of home inventory shortages may be attributed to Covid-19 supply chain issues. Major home appliances are often out-of-stock. And when purchased, put on backorder for months. For example, I tried to buy a fridge from a home improvement store and was informed that it was on backorder and would not arrive for about a year.
These are some reasons home prices have soared over the past year. Prices have been rising quickly, and if you happen to own a home already, at least you are benefiting from the increase. Remember, though, that current trends can’t predict the future. And what goes up can come down.
Dr. Dallin Smith
Assistant Professor of Accounting